Saturday, March 3, 2018

How You Can Tell

In Thursday's post, we said the market could make one more wave down to burn off the overnight excess. That did occur on Friday, with the S&P500 opening gap down and trading down to 2,647 before reversing 44 points to end the day at 2,691. Quite the intra-day move, demonstrating our overall theme of the volatility at this point in time.

Still, I said in Thursday's post, "As I spoke about in my YouTube video, A Critique of Elliott Wave for Trading, it's at times like this while the market is mid-range between a major all-time high and a recent significant low that people want to know what the wave count is." 

So, we're going to show you some of the most likely scenarios and try to help show you how to tell the difference between them! Let's get started.

S&P500 Cash - Daily - Two of Four Scenarios

Impulse

In the first scenario, favored by Elliott Wave International, by the way, wave Primary [5] ended at the January high, and there have been five waves down to wave (i), in an impulse down to the Feb 09 low, and three-waves up to (ii) which is just beyond a 62 - 70% retracement of the down wave. Simple enough. But, how can you tell if this scenario will actually be the case? Remember Neely's guideline that no part of a third wave should exceed a line from 0 to (ii) ? Well, that would apply here. If the downward sloping trend line is broken, and especially if full daily candles are printed above it, that would severely limit the likelihood of the downward impulse case. One might also note in the cash market that we should now be in a third wave down (iii), and it did not start with a gap. This is some of the evidence that says to 'respect' this count, but not to close one's mind to all others.

Deep Triangle

The second case suggests that only Minor 3 ended at the high, and there are three waves down to a Minute (a) wave of a triangle. Further, while the Minute (b) wave of the triangle retraced 62 - 70%, a deep triangle often retraces 78%. So, this count suggests we have had the a, wave up of the minute (b) wave, and the b wave down has taken the form of a FLAT. Then, a c wave up, in five waves, would finish the Minute (b) wave at the 78% upward retrace level. After that, a long and complicated Minute (c) wave down of a triangle would continue. 

The objective of this count is simply to take more time as it deepens the triangle. For this count to be the case, an uptrend line from the Feb 9th low, to Friday's low must hold. As we have commented in the past without a triangle a Minor 4th wave is too long - longer in points than Primary [4] at the February 2016, low.

S&P500 Cash - Daily - Scenarios Three and Four

Impulse Up 

The third scenario would say the three waves down to the Feb 09 low are a-b-c of a completed wave Minor 4. This scenario however, is slightly less favored because Minor 4 in absolute points traveled would be greater than Primary [4] to the 2016 low, in length. Once again, that would seem to violate degree labeling. None-the-less, there is a possibility the upward waves since Feb 9th are five waves of a minute (i) wave up. and it is possible we have made only the a wave down of minute (ii) as shown above. The objective of this count is to get the c wave down to extend minute (ii) to a 62% retracement on minute (i). It is short of that retracement at this time. And, yes, such an impulse, if it does form, can truncate.

Shallow Triangle 

This fourth scenario says that after the Feb 9th minute (a) wave of a triangle had formed, the upward retracement that was 62 - 70% of the (a) wave down was sufficient to form a triangle's minute (b) leg upward. Then, there should be a symmetrical minute (c) wave down to a similar 62 - 70%, which is not complete yet. Only the minuet a wave is complete, with minuet b & c to go. Similar to the very first scenario, the upper trend line again must hold, at least until the minute (c) wave down is fully formed - precisely because it will be a triangle trend line. Once the minute (d) wave of a triangle forms, then the (d) wave may form it's own anchor point for the (b)-to-(d) trend line.  

The Fourth Wave Conundrum

These then, seem to be the most common alternatives in true Elliott Wave Theory, and how you can tell them apart as they are forming. Even though we appreciate the real nature of The Fourth Wave Conundrum, we would rather leave you with some guidance on the various wave pattern possibilities as opposed to leaving you with nothing. Remember, we don't provide trading or investment advice.

The clear difficulty here is that the downward, and upward waves 'can' be counted in two fashions. This is clearly not always the case. But it is now. More waves are simply needed to clarify their momentum, catalog their distances traveled, and clarify their third wave nature from the size and positions of any gaps created.

Hope this helps, and have a great weekend!
TraderJoe

 

34 comments:

  1. Hi. Perhaps Minor 4 would be in violation degree only if it would be bigger than Primary [4] in %, not in absolute points traveled.

    That way, we could have the downward move from the all time high as being an impulse for Minute [a], followed by a three wave correction for Minute [b], so now an impulse to the downside as Minute [c] would complete a zigzag or even a double-zigzag for Minor 4.

    In the futures market, Primary [4] was 15,42%, so now Minor 4 would have more room to fall into circa 2435.

    Sizes in % appear to me to make more sense than in absolute terms.

    mikeoakster

    ReplyDelete
    Replies
    1. Of course, for Minor 4 to be a double-zigzag we would have now an ABC to the downside rather than just an impulse.

      Delete
    2. So, this is a very long topic to debate on here. Of course, I know that percentages work 'within' waves. After all that's what Fibonacci rulers are for. A 62% retrace in wave 2, is often the same point length as a 38% percent retracement for wave 4.

      Where this is the subject of much study is in waves which, for lack of a better term, are 'exterior' to the current one.

      If we just ended a SuperCycle, and it is still an IF, then imho, there is no wave to compare it to except 1929 (SuperCycle II). Do you see the difficulty?

      Delete
    3. If that's the case, then this area of EW analysis sure gets difficult to accomplish...

      By the way, regarding the lack of a RSI divergence at the all time high, could it be 'explained' by Minute [v] having been extended? (sorry if I missed previous comments of yours on this topic).

      Final word to acknowledge your uniqueness in the world of quality EW analysis blogging.

      Delete
    4. Let me ask one more question in regards to the limit of the size of minor 4. If 2135-1810 was counted as Primary (2), rather than Primary (4), would minor 4 still have to be smaller in size than Primary (2)?

      Delete
    5. In the 1937 Fifth Wave Extended Wave (x5), and there are not a lot of these go on, the Weekly RSI was at maximum for the move. I showed this chart in the chat room to make that case.

      Delete
    6. mblcta. A Primary (2) is even a more speculative count without a new high. Remember, the adv-dec line is just now starting to diverge. Let's discuss Primary (2), if and when there is a new high. In my view, there is no point until then.

      Delete
    7. Joe, my question really was just a general hypothetical question about the degree rule. It makes logical sense that a minor 4 of 5 can't be larger than the previous Primary (4), but does a minor 4 of 3 also have to be smaller than a previous Primary (2)?

      Delete
    8. Yes, I think 4 larger than (2) is a problem. What else is the defining point between a minor wave and a primary wave, if not it's size?

      Delete
    9. Also. Please see Sunday's further update.

      Delete
    10. Joe, in regards to defining points between a minor wave and a primary wave, the term "size" is relative, as it could be measured in absolute points, percentages, or time. Nevertheless, for now, I'm focusing on percentages, which means if SPX prints 2435 before making new ATHs, then it will exceed in percentage terms the decline from 2135-1810, and therefore mean that THE TOP of primary 5 is in.

      Delete
  2. Thank you again Joe!!!
    And I was relieved to hear you had jury duty...I feared you were ill when you hadn't posted for a few days.

    ReplyDelete
    Replies
    1. Yeah. It's good to be done. And thanks!

      Delete
  3. Once again very informative analysis Joe, thanks for listing out how these two possibilities might play out.

    ReplyDelete
    Replies
    1. Welcome. Four possibilities we're shown.

      Delete
    2. Also. Please see Sunday's further update.

      Delete
  4. Very much appreciated Joe! I look for your comments every day as I try to get some clarity on the S&P direction.

    ReplyDelete
    Replies
    1. Welcome. Please see Sunday's further update.

      Delete
  5. I'm glad you're posting again too. I was having TJ withdrawals! Thanks again for all your posts and excellent analysis.
    rose

    ReplyDelete
    Replies
    1. Welcome. Please see Sunday's further update.

      Delete
  6. Glad you're done with jury duty, Joe. Your daily posting was missed. I'm still hung up on the futures making a higher low on 2/9. To me, that rules out the impulse, the deep triangle, and the shallow triangle. It doesn't rule out the DZZ, and it doesn't rule out the expanded flat that I've described before.

    ReplyDelete
    Replies
    1. In the expanded flat: that count can work in cash only. In futures, the ES and YM never made the lower lows required for the (b) wave of an expanded flat. In cash, it, the expanded flat, now has exactly the same trend line requirement as the Impulse down, but it's wave (iii) would not have started with a cash gap either, at least according to the daily chart above. I am still trying to see how the futures not making a new low rule out any triangles for them.

      Delete
    2. In the futures, I would call it an extended flat. In regards to triangles, just like you never see a truncated 5th in a wave 1, I don't think I've ever seen a truncated wave c in the A wave of a triangle.

      Delete
    3. mblcta .. we'd agree on the extended flat terminology for the ES with the equal low. The YM and TF would need further review.

      Delete
    4. Please see Sunday's further update.

      Delete
  7. Following my favourite index; the DAX, a 62% retrace did not occur, the chance therefore for a triangle scenario is quite small. The impulse down could be A, the retrace B and the impulse downward seems to be wave 1 of C.... However in my opinion it looks less complex as far as the German index is concerned...Let's see.Cheers

    ReplyDelete
    Replies
    1. I am not looking for the DAX to be the exact copy of the S&P. Nor do I expect it will necessarily provide a wave-for-wave warning of what will happen in the U.S. the next day. It's is own market and reflects Europe's fear-and-greed. The DAX never made a lower low in 2009 like the S&P did, so factors like that must be considered.

      Delete
    2. I'm agree, and euro/dollar value influences differently.

      Delete
  8. Thanks TJ.
    Can you put % to 4 scenario's except 25 % each..what you favor the most..

    ReplyDelete
    Replies
    1. I 'like' the triangle idea best because this wave might end a wave series, and triangles usually come before the last wave set in a series. But I have a lot of 'respect' for the EWI down count at this time. If the declining daily trend line breaks, it gives more evidence for the triangle.

      Delete
  9. Hi ET
    I like the idea of triangle looking at ES 9th AC bar today. Also looking at Fridays closing top 3rd of price range. Momentum is to the down side but it doesn't look strong.
    I tried to post earlier but google ate it, sorry if it double post

    ReplyDelete
  10. Joe, this is great work. Thanks for sharing

    ReplyDelete
    Replies
    1. Welcome Adam. And please see Sunday's post.

      Delete