Bill Williams - Follow Up

The last several days are a good example of what I meant when I said, "a person has to be very well capitalized to trade the Bill Williams system on a daily basis." Let's look at the daily chart of ES futures, below, with the Alligator Indicator, and with the Elliott Wave Oscillator (EWO or AO).

ES Futures - Daily - Bill Williams Alligator & EWO

Performance in this system would depend a bit on how you traded it, but overall, the prior down (red) fractal was on September 16th at 7,575. If one took the very first break of the fractal on Oct 30th, they would have had to endure the excursion to nearly 7,693 and back before they were in the money again.

Or, if they took the fractal break on Nov 4th, then they would have had to put up with being whipped as high as 7,746 before being in the black again. And most recently unless one used another method not in the Bill Williams system to recognize the candle on Nov 6th was temporarily the end of move, then they have had to watch their profits nearly vaporize only to be slightly in the good as this is written. This is a rough way to live short-term.

Note, the Alligator indicator is "wide open" to the downside. The EWO or AO is also red, below zero and appears to be declining. So, by the instructions of this system, the trader is doing absolutely nothing wrong. The problem is the system is somewhat insensitive to wild & quickly oscillating moves because these indicators typically involve 8 to 34 bars to note a significant difference, granted that the AO does use a 5-bar moving average for part of its calculation.

But the Smart Money has figured this out and that's why the algorithms ruthlessly swing prices intraday (at least up until now) to try to knock everyone out of a trend-following system.

But it is also why I have suggested using Ira's trading guidelines around the 18-day Bollinger Bands, and its over-bought, over-sold or embedded indications to help provide some guiderails on the Bill Williams system. Further, it is also why I have adapted those guidelines to the 30-minute Intraday Wave Counting Screen (IWCS) which is shown regularly in the comments. If you can see locally what the algorithms might do - where they might go - and whether one is over-bought, over-sold or embedded, it can help one maneuver into position for when the trends again become meaningful. 

SPX500 (CFD) - 30 min IWCS - Whippy

As you can see from today's IWCS above, the market went from essentially the lower band below the 100-per MA in an embedded condition in a diagonal that we called in real-time in the comments, to losing the embedded status and going back to the 18-per MA, to going back towards the upper band and now looking to embed on the upside.

Today's move from the high before the CPI report, to the morning low was -1.35%. Think of it. The move is saying that fully more than 1/100th of the historical value of this stock index should be dependent on one single CPI report that some statistician somewhere decided clicked higher by 0.1! Well, that's certainly not the way I would design things if I had my druthers, but the Smart Money have designed it this way (with ETF's, CFD's, options, futures, single-stock futures, etc. as ways to create excessive leverage and, hence, more extreme market movement).

I shake my head, and drop it slightly because nonsense is nonsense, and there just is no way around it sometimes.

Stay cool, calm and collected, and have an excellent rest of the evening,

TraderJoe

Triangle - What Triangle?

Several weeks ago, I indicated that I saw the possibility of a triangle near the top in US equity indexes. For days and days price required that I bide my time - while many of you asked, "where is the triangle? where is it? I don't see it?" Why did I wait? Because the mood at the time was so incredibly bullish that 8,000 was due in the SPX that few others could foresee their prized index declining so far in so few days. People would have called me out of my wits. So, I just waited until you can now see the potential triangle, plainly and in full view. The best way to see it is on this chart of the weekly NDX, below. It may not be what you expected. It is a potential expanding triangle, not a contracting one.

NDX Index - Weekly - Last-Chance Triangle

You'll note that the wave count in this chart is shown in red. That is because it is still an alternate count. Why is it an alternate?

Well, first, this downward leg currently meets the EW 'rule' for an expanding triangle that this down leg remains roughly 150% of the prior down leg, or less. Regular readers of this blog and students of the EW should perform that measurement for themselves. I have. So that 'rule' is so far met. But it could easily bust next week depending on what the Smart Money decides to do with prices closing beyond the lower daily Bollinger Band on Friday. And beyond that, the NQ100 futures have already overlapped the prior wave 1, up, in the roll-over contract as clearly annotated on the chart.

So, there's a bit of judgement here. Is the minor futures overlap to be allowed, or did price already top at the Ⓓ wave position like the S&P500 may have?

One interesting note is that in Mastering Elliott Wave, Neely indicates in several places in the book that the fifth wave up after an expanding triangle might not completely make a new high. More so, it is not likely to. Here is just a clip from that book to illustrate the point.

Expanding Triangle Schematic

In fact, Neely states the 'rule' that the (upward, in this case) breakout of an expanding triangle is always shorter than the widest width of the triangle. So, this would suggest another price failure should the pattern even complete properly.

So, whether this pattern comes about or not, we have some waiting and measuring to do to see if 1) the e:3 wave becomes longer than 150%, 2) whether cash NDX overlaps downward, 3) whether there is a real attempt at another five-wave rally.

Thus far, Friday's price movement was not all that encouraging. It certainly seemed like more consolidation. But we offer the possibility of this wave formation for completeness including an attempt to analyze the odds. And they seem, "fairly low at this point, but not impossible". And IFF it occurs, it might have something to contribute to the other indexes. And if it does not occur, you have the criteria to be able to measure and judge for yourself at your leisure. We'll have to see. Meanwhile, we need to follow the local technicals.

With that said, have an excellent rest of the weekend,

TraderJoe

Next Best Number

Regular readers of the blog might be getting - let's call it a little impatient - that I have repeatedly stated that the potential diagonal upward, if it is a C wave, must be retraced fully in less time than it took to build to consider the diagonal as being confirmed. That remains true. I can't account for others' patience or the lack of it. But I will offer a Next Best Number that comes from the study of degree labeling. It is shown here on the ES 2-day chart (roll-over contract).

So, to be right to the point, degree labeling suggests that if we correctly identified the March low as the minute ⓒ wave low of the Minor B wave, then any down wave that is longer than that one should be identified as a Minor degree wave or larger than a Minor degree wave down, or certainly it must be as large as the previous minute degree wave ⓒ, and that would be at minute degree. And that number is 7,207 in round figures.

Notice that would also undercut the prior minute-ii (circle-ii) wave lows, as sloppy as they are. So, given the appropriate backing-and-filling, the odds would likely increase from roughly 95% of the diagonal being confirmed to about 98%.

Why not 100%? Well, there is a reason for the expression involving a certain rotund woman who has a singing voice. That is because a diagonal is what it is. It is a structure of a type. And if the structure is to be meaningful, then it must predict something. In this case, IFF it is an ending diagonal, then it must predict its lower low in less time than it took to build. So, we must leave 2% on the table for the possible error that it is a leading diagonal instead of an ending one. This high up in the wave structure, a leading diagonal seems completely incredulous, but who knows what the FOMC will do? Or what the government will do? So, there are low odds - very low odds we suggest.

Otherwise, if the number is exceeded, we may go down into the free-fall area back to the April lows or beyond.

But anyway, here is a new fairly exact number to ponder over. I'll have more to say on it should the number exceeded. But for now, let's see how it goes. Remember, if we are entering a bear market, stiff retraces can occur at any time, so trade accordingly.

Have an excellent rest of the evening,

TraderJoe

For Five

There is now a simple way to count five non-overlapping waves down on the ES futures 4-hr chart below in a bit of a wedge shape from the truncation top, as follows. (Once again, please ignore the absolute degrees of the waves shown; these are just for relative size at this time.)

Note the wedge shape is only that - a shape. I do not believe at this time it would be a diagonal. It has an extended third wave, and a non-overlapping 4th wave. It is not anywhere near certain, clear or confirmed that the fifth wave is done. With the longer third wave, the fifth wave is free to extend if it wishes.

Keep in mind on the daily chart, price is currently below the lower daily Bollinger Band. The bias is still lower, and the daily slow stochastic is in over-sold territory. In my head I could almost imagine that Ira would say something like, "this is normally a place where the Smart Money might take some profits off the table". This is not trading or investment advice - just some context.

Have an excellent rest of the evening,

TraderJoe

Tricky Treats

As I stated in prior postings, no amount of downward movement will be a surprise. We got only a typical smaller portion, Halloween-sized, morsel of that on Friday, and then a rebound. The most ghastly of facts surrounding this decline is that my proprietary bullish sentiment model shows the percent bullishness as still being on the longest average sustained romp over the 60% level that has ever been recorded by this measure, as shown in the weekly chart below, as of this weekend. 

Bullish Sentiment - Weekly - Longest Ever Sustained Push Over 60%

Now for a real fright: compare that level to that shown on the CNN Money Fear & Greed Index, shown below.

This, market-basket approach, is showing outright fear and labels it as such. The indicator-basket is made up of a mishmash of moving averages on a number of factors, and it's trying to tell you people are thinking differently than the survey data, above. Quite honestly, I've looked over their indicators and to me they are confusing with the overall index ill-constructed. So this may amount to an unintentional but never-the-less nasty Trick being played on you - much like when the high-school kids on Halloween night think they're only going to flood your window-well with the garden hose, but instead the whole basement gets drenched.

We know that daily price now has a lower high (or a series of them) and now a lower low. So, does the market offer any costumes that might be more informative, and not just hip & cool? Well, for that we turn to the work of Master Trader, Bill Williams. Bill wrote the book Trading Chaos and offered some indicators that are still in wide use today. A few of them are used in the chart below. They are 1) the Alligator, 2) the Elliott Wave Oscillator, or AO, and 3) fractals.

The first thing one can note is that the truncation high, if it remains so, did occur on a confirmed divergence with the Elliott Wave Oscillator as shown in the bottom panel. That divergence is given the term confirmed precisely because there was a daily higher price high on a lower EWO value, and then the EWO dropped below zero again.

The next thing to note is in the upper right - the presence of a trap fractal. That is defined as a price that exceeded a prior fractal, in this case, green or up, and then promptly reversed to exceed a fractal in the opposite direction, in this case a red or down fractal.

So, think about the characteristics of either 2nd waves or of B waves. Their job is to try to convince you that the trend prior to the last wave is really reversing. In other words, you didn't see a 1 wave or an A wave, down, in this case, before the 2 wave or B wave up. No, that down wave was a sham, a ghost, as it literally didn't happen. That is what the trap fractal tries to do. It tries to get you to buy into the reversal back into the prior up trend at precisely the incorrect time.

So, in the Bill Williams system, there is now a fractal break well below the alligator. Several down (red) fractals have been broken lower. And the daily gator appears to be turning lower. And, while this is a sell signal in the Bill Williams system, keep in mind, as I have written about before, to follow this system on a daily basis requires a very high level of capitalization relative to risk. So, what that means is one either has to be extremely wealthy already not to care about the inevitable retracements relative to one's potential market gains, or one has to remain out of the market until one of those retraces occurs, or one has to keep their position sizes extremely small (in either futures or options, say) until the gator fully "opens up" to the downside. In short, extremely conscientious risk-management must be practiced or the consequences might be suffered.

Lastly, should the market continue lower the chart is showing the first two price counts along the way, noting that the 2.618 Fibonacci level is also a measured move should the neckline of this bobblehead be significantly broken lower.

Have a terrifying, hair-raising, and blood-curdling rest of the weekend - just kidding, of course.

TraderJoe

Main Truncation Count

The main truncation count (*) on the ES 8-hr chart, currently counts like the chart shown below, and is somewhat based on earnings performance, so far.

But this count has to prove itself by making new lows. A clear invalidation is shown. At the present the count is channeling well. If there is to be a third wave, it should shatter the lower channel line and try to make a 1.618 wave, lower. That is because the up wave, b/ii, is slightly greater than a 62% retrace.

Have an excellent start to the evening,

TraderJoe

Pump Err or Dump Err

One way or another mistakes will be made. We don't know what the FOMC will do, although the consensus is they will hold rates steady tomorrow. Today, as shown in the comments for the prior post, price can be interpreted to have made 'five-waves-up'. Price got back near the 18-day SMA, the 'line in the sand', and then backed off a tad.

Will they pump em' on the FOMC, or dump em' on the FOMC & buy-em back the day after? This remains an open question. Because of the likely exceptional volatility, uncertainty and opportunity for mistakes, Ira typically would say something like, "take the day off - at least until you know the report, the chatter in the press conference, and/or then how the big organizations and other countries respond the day after".

In Ira's method, the main trend is trying to be determined for either entry or reversal. Right now, the daily bias is down. Will it stay that way or will price close way above the 18-day, flipping the bias to up? The daily slow stochastic is still over-sold, so this is still a bit of a warning sign from momentum as well.

And, as I showed before, there is still a count, for example, that allows another nicked ATH to be made. It is the one below on the 2-day chart shown. It's a little far away, yet, but, if the 18-period does not restrain prices. This count definitely works.

It is what I referred to earlier as a larger wave 3, although, still in a diagonal. However, the key question to ask is how much does one want to be whipped around inside the daily bands where the 'house' typically has the edge? Being near the 18-day average basically means the odds currently are roughly 50-50. Not very good for large decisions.

Have an excellent start to the evening,

TraderJoe