Preparation of a Good Alternate

U.S. equity prices - using the daily chart of the ES futures - look weird and feel somewhat similar. When you look at the chart below, you might see why. Although nothing in the main count, lower, has invalidated yet, it seemed helpful to at least look for an alternate. Now when an alternate is developed, we don't just pick any labels we feel - like a large W-X-Y with internal (w)-(x)-(y) structure as some sites are showing. No, such a structure would be bizarre in Elliott Wave, because it is too complex and may not even follow the rules for wave construction.

Rather, we try to use measurements and objective criteria. You'll see how we have done that below. Again, the following chart is an alternate at this time because nothing in the larger three-of-three count lower has invalidated yet. But it could.

ES Futures - Daily - Possible Alternate

In this alternate, we base it on 1) the number of daily candles, now over 120 since the all-time-high, 2) the Elliott Wave Oscillator (EWO) and its divergences, and 3) the measurement of 3 = 1.618 x 1. Just for information, the number of daily candles is now 132 to be specific, and well in the range of 120 - 160 recommended for using The Eight-Fold-Path Method for Counting an Impulse.

To explain more thoroughly, we note that there is a location for wave 1, that provides a 1.618 measurement for wave 3. So, we can back this wave location up to the January low rather than the February low. What this does is serve to make wave Minor 2 more complicated in structure and longer in time than its corresponding wave Minor 1. Otherwise, if the February low is the low of wave 1, then wave 2 is shorter in time - an anomaly I have been looking sideways at since the decline began.

Now if we do that, we see that the lowest low for the Elliott Wave Oscillator is on wave (iii) of 3, as per The Eight Fold Method for Counting an Impulse. Then, wave (v) of 3 occurs on the divergence. As such it may explain the EWO heading towards the zero line for a wave 4.

This alternate suggests that wave Minor 4 could be a triangle OR a simpler zigzag, and one that breaks the current line of declining tops.

The key issue is that we don't know yet. No one does. Prices could gap down Sunday night & keep going Monday to better establish a larger third wave. But, what if they don't? The very reason that a good alternate is developed is to keep the trader unruffled and fully prepared in the face of a different market movement than currently expected.

But, again, not any alternate will do. One simply cannot just paste letters and numbers anywhere on a chart and expect success. As we have done above, it should be based on the significant measurements of price length, time and momentum that best agrees with the written Elliott Wave Rules and Guidelines (and perhaps with The Eight Fold Path Method if an impulse is to develop). 

And so, if the upper downtrend line is broken, then it will suggest that prices may better form a parallel trend channel. I don't know if others may have reached this conclusion or not. I don't follow the work of other wave analysts or services at this time. And this study was independently arrived at last night after blog reader and contributor marc asked, "and what happens if the down trend line does break?"

In this alternate, a larger wave 4 must still adhere to the rule of not allowing overlap with wave 1. If all of this should occur, then the alternate would take the place of the main count.

Have an excellent start to the weekend.

TraderJoe