Saturday, February 4, 2017

Ninety Percent (90%) Rule Activated

We want to use this post to remind all that the Elliott Wave "rule" (not guideline) for a flat states that the wave B in a flat wave must retrace at least 90% of the former three-wave sequence lower. Well, that did occur in Friday's session, but are we calling it a flat wave, yet? Not so fast. Let's review the SP500 30-minute chart below and see exactly what we can see, and see if it tells us anything specific.


SP500 30-Minute with 90%+ Retrace

If we consider the wave downward from the high on 26-Jan to the low on 31-Jan, then the upward retrace to Friday's high - and we don't know the up wave is concluded yet - has indeed retraced more than 90% of the down wave as shown by the Fibonacci ruler.

So, here is what we know, as facts, thus far. We know the 26-Jan wave ended in a diagonal, but it may not completely be an "ending" diagonal because it was not fully and completely retraced in less than the time it took to build it. We know it is a diagonal, by measurement, as it did not exceed the 2301 limit that we had calculated - precisely so. So, it is possible the end of the 26-Jan wave is just as likely a "c" wave, as it is a "v" wave.

We also know for a fact that the Dow made a new low on 31-Jan where the S&P500 did not. From this fact, we conclude that the S&P500 also finished it's three-wave sequence lower in a slight truncation on 31-Jan, in a wave that would be the truncated fifth wave (v) of a contracting ending diagonal c wave, downward to end a :3 wave sequence overall. The a & b of that wave occurred on 26-Jan, and 27-Jan.

We also know for a fact that the potential triangle forming on 1-Feb and 2-Feb was quickly invalidated at the open on trading on Friday, 3-Feb as the result of the employment report.

We also know for a fact that on 2-Feb, the c wave of a zigzag ended precisely at the 78.6% Fibonacci retracement level of the wave now shown with a question mark (?) in the above chart. We also know two other facts.

First, within the tentative green channel upward I have sketched in, we know that a potential third wave upward (tentatively shown as iii) has traveled just slightly beyond a 1.618 Fibonacci extension on the wave i within that channel. That measurement is not shown on the chart, for clarity, but it was measured so on Friday during live chat.

Second, we also know that the wave ii within the channel is a very nice sharp zigzag - which was formerly a zigzag portion of the former potential triangle.

Adding these facts together, we can see we are in a potential impulse wave upward, and, with the marginal new high after wave iii, can now potentially be in the wave iv, downward of such an impulse wave - as a flat or triangle within it's own channel.

As such, the chart now provides us with a very specific downward invalidation point: any movement below the top of this prior wave i, below the 2283.97 level, shown as the red-dotted line, would mean that an upward impulse wave is invalidating, and another wave structure downward is beginning. In order to alternate with the sharp for wave ii, as noted above, wave iv should be a flat or triangle.

On a five-minute chart level, this upward impulse is currently following The Eight Fold Path Method for counting an impulse. But that method also tells us, that if a downward wave iv invalidates before the new high is made, then we simply accept that i, ii, iii is just a,b,c instead. No fuss, no muss. They are equivalent until they are not. But, if a wave iv holds, then it is likely we go over the top is some fashion in a wave v, upward.

Let's assume for a minute we go up over the top. All well and good. Then the next challenge becomes what to label that wave shown only as ? on 1-Feb. Right now, I can make a good case to label that wave as either a larger 1, or an A, or even a W wave, upward. And a good case can be made to label that c = 78.6% downward wave as a larger 2, or a B or even an X wave downward. It depends on whether the structure of that upward wave is also either a :3 or a :5! Clearly, the downward wave is a sharp three-wave sequence ending at that c = 78.6% level. Again, one of the zigzags that was part of the former potential triangle.

So, if an impulse upward seems to be in progress, why do I even mention the 90% level? Because whenever I see that level reached in real-time I always make the same notation: "The 90% level has been reached and is either the B wave of a larger flat, or the next impulse in progress."

That means that if the current downward wave iv is invalidated, we could legitimately be in a larger Intermediate (4) flat wave, downward. But not until or unless that happens. Otherwise, we are in that next impulse upward.

In this manner we are able to turn what looks like a mish-mosh of wave shapes into some very specific and useful information, providing you with a very specific invalidation level.

Cheers and enjoy the weekend.
TraderJoe

9 comments:

  1. Thanks Joe for taking time out of your schedule to post this. Really appreciate what you do!

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  2. Hi Joe, thank you for the updates! really helpful.
    I have one question: if we have an impulse like you mention, how far do you think we can go on the SPX? do you still have the 2320ish or much higher? thanks

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    1. See previous posts. Wave Minor 5 is still limited to 2346, because Minor 3 is shorter than Minor 1.

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  3. Extremely useful.
    Many thanks, Joe!

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  4. Hi, first post, I think I've been following you now maybe a month... gee, has it been a month already? ;)

    Anyway, I'm not much of an EW person but anything to get a leg up in trading is my motto. To my point, what do you think of labeling the first HI a 1 followed by a then (now) b with a potential of a c lower from here to complete a 2 for a start (1 - 2) of a 5 wave ending diagonal; you may have already touched on this, not sure. Thanks for you good work.

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    1. Hello. Glad you're here, but please assign a screen name to your Google account so we can follow your thoughts. I read your comment but have already addressed the situation. We are in minute iii of Minor 5 upward, until or unless there is invalidation as shown by the red line. Until then, there is no evidence on which to base downward alternatives.

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  5. Thanks Joe. Interested to see that invalidation of wave iv would also close a gap. Something that has happened within a few days recently.

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