Friday, March 3, 2017

Sixteen Candles

Well .. more than that actually. The S&P500 2-Hr Chart that we showed yesterday is now out to 114 candles, and will likely make the typical 120 - 160 candles before a fourth wave, minuet (iv) attacks the lower trend channel line. For consistency, here is a repeat of that chart.

SP500 2-Hour Chart with 114 Candles

Of interest, prices have traded below the mid-channel line, which is a likely sign that wave minuet (iv) has begun. And in the bottom indicator panel, the Elliott Wave Oscillator continued to decline. Since the peak of the EWO was about 30 - 31, we would expect the final value of the EWO to be between +10% to -40% of peak. And that means anywhere between about +3, and -12 in terms of the raw indicator value.

In the upper indicator RSI(14) panel, we see that the RSI made a lower low which is "confirmation of a lower low" only. Today's low was lower than yesterday's. It really doesn't tell a lot yet.

In the very choppy decline, downward so far, it is "likely" only three-waves down or a part of three waves down have been made, so far, as it is very difficult to count the downward wave using The Eight Fold Path Methodology. If it turns out to be three-waves down that ended today, then it could be the sub-minuet 'a' wave of a flat. And the 'b' wave of a flat must go back to within 90% of the high of wave ((iii)). And, this 'b' wave could go as high as 138.2% times the height of the 'a' wave; yes, over the prior high, before it's 'c' wave came tumbling down to attack the lower channel line.

It turns out that a 38.2% retrace on wave minuet (iii) would take prices back down to the 2350 level. And, we are nowhere near there yet. The 'c' wave of a flat could easily do that.

The second potential path is that the choppy downward waves are really a "five", or just part of a "five" and this would allow three weak waves upward, before another "five" down to complete a larger zigzag which would only be the first 'a' wave down of triangle. This second path is slightly less favored, and may be needed to waste time until the Federal Reserve's interest rate announcement this month. We'll see,

Fourth waves are tricky. They are like teenagers at the age connoted by the title. It is why I have coined the term "The Fourth Wave Conundrum" for these waves. It is because there are so many styles of flats, triangles or combination waves that can happen in this position before the final top that it makes it inherently difficult to predict the exact top. You thought it was you? No, the difficulty is inherent in wave theory itself.

If you are interested to see a 'b' wave that goes exactly to 138.2% before reversing, it just so happens I counted this one out in the live chat room today. It's on the March, 2017 US Dollar Index Futures (4 Hour) chart. And, the picture of it is below.

US Dollar Index Mar '17 Futures (4 Hr) - b wave at 138.2%

After the peak of the wave on Feb 15th, there is an 'a' wave down, and then there is a clear three wave sequence upward (it actually counts as seven waves which is still not impulsive). It hits the 138.2% mark like there was a target on it, and after the reversal, there are now downward overlaps of both wave peaks - which pretty much seals the deal.

There are some who say regular Elliott Wave analysis is not good enough. They say it is not predictive enough. Well, for me it is good enough that I showed the Fibonacci ruler before the top was ever made! Further, I made up this special template for a Fibonacci ruler, specifically, for B waves of flats. Therefore, the only points that show are the ones governed by the rules of regular Elliott wave. The B wave of a flat must travel within 90% of the start of the a:3 wave.  So, that is the 90% mark. For an expanded flat, the B wave must travel over 105% of the a:3 wave. So, that is the 105% mark. And, then, in a regular or expanded flat, the common limit of travel of B waves is 138.2%, and so that is the 138.2% mark.

So, this chart makes a specific prediction, and that prediction is that the a:3 wave will be exceeded lower by the c wave of the flat. What other methodology do you know that .. when used properly .. makes specific predictions that you can test to see if they come true?

The question is, "Is that methodology not good enough for you?!" I know what it's reputation is. And I know why. But I do hope you'll at least keep an open mind.

P.S. I know people read blogs and get confused easily. There is nothing about what I am saying about the dollar chart that says that the b wave of the flat in the S&P 500 must "go over the top, or go to 138.2%". Clearly, if a flat is made it must at least go to 90%; that's all. It could go to 138.2%. And nothing says an up couldn't stall at the 78.6% level or thereabouts, and create the b wave of a triangle instead. Both are still equally likely. That's what makes fourth waves so insidious.

Cheers and I hope your weekend starts off in the best of ways.
TraderJoe






8 comments:

  1. Thanks Joe. Great stuff as always. No one explains the process in such meticulous detail better than you do. Is there an absolute EW rule about the limit of travel of B waves in an expanded flat, or B waves in a running triangle? I frequently see the terms "normally" or "common," but I don't recall ever seeing a hard and fast absolute limit. (it's been decades since I read Prechter's book and Neely's book, so it's possible that I simply forgot.)

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    1. I see EW as laying out a roadmap for the market. If you know where you've been and how you got to where you are now, then it increases the odds of knowing where you're going in the future. As we all know, though, there can always be forks in the road up ahead, and even though you know the fork is there, you can't always be sure which path the market will choose.

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    2. So, 138.2% is the typical limit for an expanded flat. Some have gone to 150%. But when one sees 161.8% as a three-wave structure, above a previous high, then it is time to think of a "running" correction of some type. This could be a running triangle or a running flat. Neely says when a b wave is at 161.8% or beyond, this almost "guarantees" the 'c' wave won't travel beyond the end of the 'a' wave.

      The best example of a running flat I know of is the S&P500 Index from 2010 to 2011. The (B) wave is exactly 161.8% of the (A) wave, and the (C) wave of the running flat does not break the low of the (A) wave. It is this measurement that gave me the confidence to call for Primary IV, and a Primary IV where the (B) or (X) wave 'would not' make a new high - for alternation with the 'running flat' Primary II.

      As you know, this prediction - made in advance - came true; while others were thinking "bear market".

      Again, if Elliott Wave is not going make predictions which can be tested to see if they will come true, why use it at all?!

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    3. Joe, in regards to your statement about Primary IV alternating with Primary II in SPX, by not making a new high, that wasn't the case in NDX. In that market, the November 2015 and December 2015 highs did exceed the previous high by more than 105% (although just barely.) So, whether you count Primary IV in NDX as a running flat or a running triangle, it was a running correction either way, which means that both wave II and wave IV were running corrections in that market. Right?

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    4. The NDX has just a few peculiarities which require it to be counted "on it's own". The major stock indexes had a lower low in 2009 than in 2002. The NDX did not. That's different! It possible the NDX finished it's ending diagonal in late Nov, 2016 with the marginal higher highs. Then, made only one zigzag down to Feb 2016 alternate with the Flat. Triangle or diagonal; you be the judge. It would probably be best to see all the indexes sequenced at the lows in Feb 2016 - but that is just my 'opinion'.

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  2. Thanks Joe. You mentioned expanded flat twice. Noted the change in words. "Must" go to 105% and "common limit" of 138.2%.
    1. Were you simply implying min and common limit to the expanded flat?
    2. How many types of flats are there. I thought 3. Flat, Expanded/Regular and Running.

    Thank you

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    1. In a regular flat the 'b' wave must, as a rule, go to 90%, and allowed up to 105%. In an expanded flat the 'b' wave must, as a rule, go to 105%, and can go to 138 - 150%. In a running flat the 'b' wave is typically is 161.8%, but Neely reports 'some' of 261.8%. I haven't seen one of those.

      There are many types of flats. There is a regular flat which is 3:3:5 and labeled as a:3, b:3 and c:5, but there is also 3:3:3; which is labeled as w:3, x:3, and y:3. In this type of flat, the 'x' wave must meet the same requirements as a 'b' wave.

      There is an expanded flat which is usually 3:3:5, and is labeled as a:3, b:3, c:5. I have not yet seen an expanded flat that ends in a three-wave sequence instead of a five-wave sequence.

      Then, there is the "double flat" and the "triple flat" which are somewhat more rare.

      Still, in terms of fourth waves, there are more combinations (besides the types of triangles) which start out as flat. There is flat-x-zigzag and flat-x-triangle both of which I have seen. And these made fourth waves that much more of "conundrum". Luckily, these latter types are a little more rare and only occur when time targets have been met, but price targets have not.

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    2. Thanks Joe. Really appreciate you taking the time to response as you have.

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