A Matter of Degree

In yesterday's post, it was shown how it possible that Primary wave four is becoming longer in time. One of the best pieces of supporting evidence for this count is wave degree. Typically, Elliott termed minor degree waves as those that showed up on the 'daily' chart, whereas intermediate degree waves were those that comprised the weekly chart, and Primary degree waves those that comprised the monthly chart. Please refer to the daily chart below for this discussion.

In our prior posts, we had counted down the daily waves to the August 2015 lows as Minor degree waves A, B, C or alternatively minor 1,2,3 (but 5 was not made in the SP500). We said 1,2,3 and A,B,C are equivalent until they are not.

One key point - and please don't miss it - is that the three minor waves lower form an Intermediate degree wave of some label. We had presumed it 'might' be intermediate (A) of a larger primary fourth wave triangle - and  that is still a possibility. Regardless of the specific label at the August low (A) or (W), we then have labeled three more minor waves higher to the November high. So, this structure now makes an Intermediate degree (X) wave - or less likely an Intermediate degree (B) wave. This type of degree labeling is proceeding simply, and smoothly and naturally. There is no 'guess work' or forcing of degrees to some preconceived notion or tortuous attempt to fit "degrees to points", and you can see that the A-B-C down to (W) and the A-B-C up to (X) consume 'roughly' the same amount of time.

But the next point to absorb is that under Elliott's structures, a Primary degree wave is composed of Intermediate degree waves. It would be a mistake to jump from minor degree labeling directly to Primary degree labeling, without explaining where the Intermediate degree went!

In the count above, the Intermediate degree is clearly shown. That is the major point - we are not leaving the Intermediate degree waves out of Elliott's Primary degree labeling.

Having said that, a wave (Y) - while the most likely course to make a 38.2% retracement of Primary 3, is not a 'for certain' wave. It is highly likely, but even it is 'not' for sure. Why not? Well price is currently down to the lower daily Bollinger Band. Sometimes, price bounces off of the lower band strongly. If and only if price makes a new high above (X), then it is 'possible' a barrier triangle is still in play for Primary 4. But that is nowhere near in evidence yet, and every attempt to reach the old highs has been rebuffed with a turn lower. More likely, a retreat from the lower Bollinger Band will only be towards the middle Bollinger Band (aka the 20-day SMA), before resuming lower.

But we think, besides the downward overlap, and the channel break illustrated, there are two more 'telling' pieces of evidence as to why we are still in a Primary 4th wave.

First, if you notice the structure from late August to late September, it forms a FLAT wave in the SP500. And second waves are 'usually' sharp zigzags, not flats. They 'can' be flats, but they are "usually' sharps. So, having a flat wave at this location is a serious warning. It fits the concept of a B wave much better than it does the concept of a second wave.

Second, we know by measurement that the C wave upward stopped just short of a C = 1.618 x A. In other words, it did not make the usual expectation for a strong and powerful third wave of 3 = 1.618 x 1.

Regardless of the eventual path, if we are making a Primary 4th wave, it must be composed of Intermediate degree wave labels that consume proportional amounts of time in the sideways or down direction to what the Intermediate degree labels have consumed in upward direction.

Cheers and enjoy the chart!

Channels and Alternation for Potential Primary 5th

Prices forming channels were important to R. N. Elliott and most practicing Elliotticians today would probably agree channels are important in Elliott Wave work. That being the case, the scenario below is the ‘best’ scenario for making a Primary 5th wave upward – using modern Elliott Wave theory. You will note we posted this potential scenario back on Nov. 22nd. So, today's drop should not have come as a surprise to anyone. We emphasize .. repeatedly ... this is a potential scenario. If you are interested in more discussion of it, it is posted below the chart.

One of the reasons for positing this scenario is that a triangle represents "indecision and a balance of forces" before the Fed meeting in December. Keep in mind there is lots of 'volatility' that can happen in the first half of the month, including the payroll employment report this Friday, and the Fed meeting on Dec 16th. Perhaps after all that is out of the way, the 'smart money' will feel more relaxed and start a rally into year end, and into the first of the year. But, more importantly than that, a triangle would signify that the last wave in a sequence is dead ahead. That's how triangles work when they are in a fourth wave position.

We should note that some people have posted a 'truncated fifth' wave at b of our triangle.

The problem with that scenario besides the fact the b wave of the triangle was clearly counted in real time by more than one analyst we know as a "three" and not a "five" is one key factor. If wave 5 was 'there', then wave 5 would not equal wave 1, which is one of the most common wave relationships. In fact, it would be much shorter. Further, the upward wave to that location would not be in a channel; it would be a wedge. But wedges are 'usually' diagonals, and this one would not be - again greatly lowering the odds of such a forced count.

Rather, 'at this point in time' we would expect the Elliott Wave Oscillator to weave around the zero level in a fourth wave, providing enough time for price somehow to contact and/or slightly break the lower trend line boundary before resuming higher. This could occur in the triangle OR in a double zigzag lower to the trend line. Either a triangle or a double-zigzag would provide the expected level of 'alternation' needed for a true Primary 5th wave.

Tentatively, we have 'sketched in' a lower triangle trend line from circle-a to circle-c. We will allow the lower trend line to be 're-anchored' within limits, if, and when we know that circle-c has ended.

Then, wave 5 should be "about as long" as wave 1. And it would likely fail somewhere near the median line of the parallel Elliott trend channel.

At this point in time, there are other wave counts we have to consider. We have outlined these in the posts entitled "A Hitch-Hiker's Guide to EW Galaxy", and subsequent "Galaxy Update". We have also indicated why this is necessary at this time. The uncertainty is inherent in fourth and fifth waves, and it is not perfectly clear yet which degree of fourth wave are we in. We have called this situation the "Fourth Wave Conundrum" in our YouTube Video, Critique of Elliott Wave for Trading. And it occurs at every degree of trend!

For now, the situation is we are "range bound" between the May 2015 high and the August 2015 low. We are awaiting resolution of the range. We can not 'make up' waves that 'just aren't there' for our personal reasons, and we can not 'force a count' that we truly don't see. We will update as best as possible when the wave count makes the most sense.

Three Examples of Long Term Elliott Log Trend Channels

Long term viewers of my YouTube channel will recall these posts, which were done as live updates at the time, showing the long term trend logarithmic channels in monthly Crude Oil ...

...and in monthly Gold.

To these .. one can add a two-weekly log channel in the Dow Jones Industrial Average, as below.

For each chart, the pattern of alternation is clearly stated. The last chart, that of the Dow also includes one of my favorite indicators. With 120 - 160 candles on the chart, wave iii of 3 is always at the maximum of the Elliott Wave Oscillator, the next major divergence is wave 3, and wave 4 should travel to or below the zero line - just as it has - but not more than 40% of height attained on wave 3 to the opposite side - the lower side - of the zero line... just as it has.

Elliott tells us to chart in log format for long term charts (weekly, monthly annually), but arithmetic is acceptable for shorter term charts (weekly, daily, hourly).

Cheers and enjoy the charts!

Ira Epstein Example - Part 2

In the previous post some of the advanced considerations were able to be outlined but not illustrated by way of example. We left off that post by saying there was an 'outside day down' which is defined as a higher high, a lower low and a lower close than the previous candle. With reference to the chart below, we want to illustrate, now, some of those more advanced considerations.

From Friday's candle, the "outside day down", clearly it can be seen that the futures traded down about 6 - 7 points in the pre-market Monday, but then clearly took out the high of the outside-day down. The consideration we outlined was that if the high of an outside-day down was taken out within the next two trading sessions, it would constitute a "bear trap" - as it is likely that a group of traders were caught short at the lows.

Follow-through by bullish participants can be seen on today's candle (Tuesday) with yet higher highs, putting more pressure on the bears.

So, then, very interestingly, Monday's candle is an "outside day up", and the same rule applies but in reverse. If the low of the outside candle up is taken out in the next two trading sessions, then it would constitute a "bull trap". So far, there is no sign of that, and it can only happen tomorrow or the signal is negated. What's good for the goose is good for the gander.

There remain several things to note on this chart. First, the slow stochastic is still fully embedded. Until the %K line (the red line) crosses back down under 80, it is not likely that price will try to regain the 20-day SMA.

Additionally, the 20-day SMA has recently crossed above the 100-day SMA constituting a "bull cross", the effects of which are already being seen in higher prices. How long this will last is not certain. Sometimes the cross happens very close to the point where the market enters a corrective phase, so even though the cross has happened, it, in itself, could sound a note of caution.

Lastly, note that there are still two gaps, circled in red, on the daily chart which are not yet closed. While some traders may not pay much attention to gaps, sometimes they form 'targets' for the Smart Money.

Disclaimer: Nothing in these observations is to be taken as trading or investment advice.

Paraphrase of Ira Epstein's Rules for Trading

Ira Epstein is a broker who works for the Lind Group and has published numerous videos on YouTube. From that information, a summary of his Rules for Trading that he provides to the public is distilled below.

Charting Requirement

These rules apply to the daily futures chart only. To follow his system, the following is needed.

1. Daily OHLC bar chart
2. Daily Bollinger Bands with 18-day Moving Average (20-day is acceptable)
3. Daily Slow Stochastic Indicator, plotted as 14,3,3.
4. Daily 100-day Simple Moving Average (SMA)
5. Swing line study (if available); i.e. higher highs, higher lows; lower highs, lower lows*

A current example chart that meets these requirements appears below. The 18-day SMA appears as the unbroken red line in the center of the bands, which are gray. The 100-day SMA appears as the green crosses.

ES Futures - Daily - Guidelines Example

Bollinger Band Theory 

Bollinger Bands are defined as a daily algorithm designed to keep the market trading within them 95% of the time. The Bollinger bands were developed by John Bollinger, and are 'volatility bands' constructed around the 18 day (or 20 day) moving average where the upper band and lower band are set at "two standard deviations from the moving average". The "two standard deviations" are what theoretically provide the 95% confidence level that the market will trade within the bands.

One does not want 100% confidence of trading within the bands because one is looking for signs of strength when price exceeds a band, and one is looking for signs of weakness when price can not quite hit a band as a price target.

These bands expand and contract with the volatility in the market. When they contract (get narrower) they often indicate a current period of 'consolidation' in the market. When they expand, they often indicate a time period when the market is trending. When the bands get narrow (consolidate), it often precedes a time when the market will trend.

Sometimes prices will be expected to close outside of the bands. Because of the small probability (5%) of trading outside of the bands, the number of consecutive closes outside of the band will typically be small 1 - 3 is common, whereas 4 - 7 closes outside of the bands is a very, very low probability event. The greater the number of consecutive closes, the lower the probability.

Slow Stochastic Theory

The slow stochastic (with parameters 14,3,3) is a price oscillator developed by George Lane, a large Chicago-based grain futures trader. The slow stochastic is a 'bounded' indicator, and can only travel between 0 & 100%. On the daily chart, values below 30% are defined as "over-sold", and values above 70% are defined as "over-bought".

Over-bought and over-sold on this indicator are potential reversal points in the market. However, an exception to over-bought and over-sold conditions is when the slow stochastic has 'embedded'. The slow stochastic is said to be embedded whenever one of these two conditions is met: both the %K and %D line of the slow stochastic is either over 80%, or under 20% for three consecutive days or more.

Other Definitions

• Line in the sand - the 18 day (or 20 day) simple moving average is termed "the line in the sand". This is a line to which daily price often returns. It is considered to be the 'neutral point' on the chart. Prices often 'return to the line in the sand' to regroup either before or after an important economic announcement. This 18-day SMA is also a "battle ground between the bulls and the bears" and the point where one group tries to wrest control of the market from the other group.
• Positive bias - the market is said to have positive bias whenever it has closed above the "line in the sand".
• Negative bias - the market is said to have negative bias whenever it has closed below the "line in the sand".
• Swing line uptrend - prices show higher highs and higher lows 'over' the 18-day SMA.
• Swing line downtrend - prices show lower lows and lower highs 'under' the 18-day SMA.
• Outside reversal day - same as in all technical analysis (outside day up or down).
• Smart Money - Smart Money is defined as the large hedge funds and institutional traders who have account sizes large enough to make a difference in price movement as seen on the chart as opposed to retail traders who account sizes typically don't affect the overall trend of price.
• Riding the Bollinger Band - there are several times when prices will close exceptionally close to an upper band or a lower band for 'several days in a row'. This often happens when the slow stochastic 'goes embedded', either higher or lower. This is a strong trending sign for prices.

Basic Trading Concept

1. One looks to buy a new long position when prices first exceed the 'line in the sand' to the upside. The target for this position is the "upper Bollinger band". This is because prices have shown they now have a positive bias, and the trade is in the direction of the prevailing trend.
2. One does not look to buy long when price is below the 'line in the sand', because prices do not yet have a positive bias, and the trade is not yet in the direction of a prevailing trend.
3. One looks to initiate a new short position when prices first exceed the 'line in the sand' to the downside. The target for this position is the "lower Bollinger band". This is because prices have shown they now have a negative bias, and the trade is in the direction of the prevailing trend.
4. One does not look to initiate a new short position when price is above the 'line in the sand', because prices do not yet have a negative bias, and the trade is not yet in the direction of a prevailing trend.
5. One looks to sell to 'take long profits only' at the upper Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up on long positions at the upper band. If new longs were initiated, this means the retail trader would be fighting what the Smart Money is doing.
6. Similarly, one does not look to initiate new long positions at the upper Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.
7. One looks to buy to 'take short profits only' at the lower Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up' on short positions at the lower band. If new shorts were initiated, this means the retail trader would be fighting what the Smart Money is doing.
8. Similarly, one does not look to initiate new short positions at the lower Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.

Other Basic Trading Considerations

1. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an up trend, this will most often be accompanied by a slow stochastic which is positively embedded over 80.
2. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an down trend, this will most often be accompanied by a slow stochastic which is negatively embedded under 20.
3. Since the third day defines day when the stochastic goes 'embedded or not', the second day over 80 or under 20, is the day 'most at risk' for prices to reverse since, most often, the slow stochastic does not embed. Most often, the slow stochastic just goes from over-sold to over-bought and vice-versa without embedding.
4. When the slow-stochastic has been over-bought, then when the slow stochastic reverses to under the 80 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.
5. When the slow-stochastic has been over-sold, then when the slow stochastic reverses to over the 20 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.

Advanced Trading Considerations

1. When the slow stochastic has embedded in either direction, it is often seen - that when prices return to the "line in the sand" - then the line in the sand will be defended in the direction of the trend that embedded. In other words, price will generally 'bounce off' of the line in the sand and resume the trend. This doesn't always happen, but it often happens.
2. When there has been an outside reversal day down, the high of that day should not be taken out higher in the next two trading days or else it constitutes a 'bear trap' - meaning that a number of players have been trapped in their positions at the lows.
3. When there has been an outside reversal day up, the low of that day should not be taken out lower in the next two trading days or else it constitutes a 'bull trap' - meaning that a number of players have been trapped in their positions at the highs.
4. When the 18-day SMA crosses above the 100-day SMA, some moving average followers will view this as a positive sign. If this happens when price is above the moving averages the cross over can be considered valid.
5.  When the 18-day SMA crosses below the 100-day SMA, some moving average followers will view this as a negative sign. If this happens when price is below the moving averages the cross over can be considered valid.
6. Often times the 100-day SMA acts as either a price target or support / resistance depending on its relationship to the 18-day SMA, and/or the Bollinger Bands.

Example

While these rules may 'seem' complex, the example chart for the ES Dec 2015 futures above helps to clarify them.

1. From June 17 - August 1, price could not attain the upper Bollinger Band, and this is a sign of weakness, not strength.
2. In mid-July price made its target of the lower Bollinger Band, this is a sign of weakness, not strength.
3. Throughout early August, price can be seen to be trading for multiple days on "both sides of the line in the sand", there is clearly a battle going on for control of the market. Further, there is a narrowing of the Bollinger Bands indicating a period of consolidation, to be followed by a breakout in one direction or the other (more likely lower given the above information).
4. When prices break below the mid-August low, the Bollinger Bands begin to widen to the downside, indicating a trend beginning. This breakdown occurs under the 18-day SMA, and would be sold, as the market would have lower lows and lower highs (a swing line trend) under the line in the sand.
5. Prices begin to "ride the band lower" as the slow stochastic embeds under the 20-level indicating the down trend in force. Profits are allowed to build until the slow stochastic turns back above the 20 level, around August 23rd.
6. When the slow stochastic turns back up over the 20 level, it is 'most often' expected for price to meet the line in the sand, and that is what occurs in mid-September.
7. One does not initiate new shorts against the lower band in late August, per the above rationale as the probability of success is 5% or less (less for every day that price closes below the band).
8. One does not initiate new long positions in early September as price has not closed above the "line in the sand". 
9. A new long can be initiated in mid-September, after price closes back above the line in the sand. The target for this trade is the upper Bollinger band.
10. One would not initiate new longs on September 19th, when price is very near the upper Bollinger Band, as the probability of success is only 5% or less, of success. However, profits should look to be taken.
11. A new short position is not initiated in mid-September because price has not closed below the line in the sand.
12. When the slow stochastic turns back under 80, it is 'most often' expected that price will meet the line in the sand, and that is what does happen in mid-September.
13. A new short position can be initiated in late September after price closes below the line in the sand, with a target of the lower Bollinger Band. 
14. One would not initiate new short positions in late September when price closes on the lower Bollinger Band, as the probability of success is only 5% or less. However, buying back shorts to take short profits should be initiated.
15. One would not initiate new long positions in later September as price has not closed above the line in the sand.
16. In early October, price closes above the line in the sand on the second trading bar. One then looks to initiate new long positions with a target of the upper Bollinger Band. 
17. In late October, price has hit the upper Bollinger Band, and one would look to take at least-some profits on long positions. The slow stochastic has not yet crossed back under the 80 level from being embedded, so a trader may still wish to let some partial positions run until it does. This is discretionary.
18. The last daily bar is an "outside range day down", meaning if the high of this bar is taken out in the next two trading sessions, it could constitute a 'bear trap' - meaning some players have most likely been caught short in the trade - presumably giving the market more fuel for a further upside run.
19. Because the slow stochastic is still embedded for many more than three days, when it eventually turns down under 80, and price and the moving average begin to meet, it is a high probability that the line in the sand will be defended! Meaning price will bounce off the 18-day SMA and resume a turn higher. This does not always happen, but it often does!

Repeat this Cycle, and these Instructions Continuously!

We post this information to show two things: a) we care about trading as much as we do about counting Elliott Waves, and b) sometimes Elliott Wave counting can be a great 'assist' to trading, as in when the longer direction has been established. One can 'filter out' short trades or 'long trades' in the above system based on the Elliott wave count in the market. Other times, like now, Elliott Wave analysis can have clear alternatives, and, in such cases one may rely more on plain technical analysis or a trading system like this to help screen for potential trades.

Disclaimer: We make no claims for the profitability of the above rules. All trading results are determined by your decisions, and we accept no responsibility for them. (*) The Swing Line study is one developed by Ira Epstein, and only appears in charting software he provides. To respect the proprietary nature of this indicator, we have not reproduced it here. Instead, if you are interested in examples of the Swing Line study, go to YouTube, and search on Ira Epstein. Any one of his "End of the Day Financial" videos, "Currency" videos, or "Metals" videos will have the indicator applied to the chart.

TraderJoe

Principle of Equivalence

The primary purpose of this post, is to advise that, as of this writing, a marginally higher high over the Sep 2015 high has been made on the S&P500. That means that several upward counts can now pertain to the market. For example, on this daily chart, minute i, minute ii and minute iii are now valid waves of a potential Leading Diagonal upward for example for the minor wave A of the intermediate (B) wave of a triangle. We have shown those waves as circle-i, circle-ii, and circle-iii, which would mean circle-iv and circle-v would follow if this count would play out. We are writing this mid-day, and the day is not done, so minute iii can go higher - if it wants. We again want to emphasize that this is a valid potential count. For the count to be realized, it must play out according to the definition. That has not occurred yet.

However, keep in mind that in Elliott Wave theory, it is 'required' that the all of the legs of a diagonal be zigzags. So that means that since minute i and minute ii must be zigzags for a diagonal, they must also be functionally equivalent to a W-X-Y count : a double zigzag count. That's why on the chart, below, we are showing the same labels simultaneously.

At this moment in time, minute i, minute ii, and minute iii of a diagonal are logically and functionally equivalent to a-b-c-x-a-b-c, or W-X-Y. So, strictly on a 'wave labeling' basis it is difficult to tell them apart.

So, what then provides a road map for the future? Well, first it is very often a 'third' wave that makes a new high or low in the market. It is the wave with the power. Isn't that what we have here? A third wave (in this case of a potential diagonal) making a new high in the market? So, this may be one indicator the current count is correct. However, we also know that in a true contracting leading diagonal, wave iii can not be longer than wave i.

So, that IF wave iii were to become longer than wave i, then the better count may simply be W-X-Y. A long enough interior wave could invalidate a diagonal, and upwardly overlap the minor A wave down. It that case then the wave could be long enough to have formed Intermediate (B), of a triangle all by itself. (We want to emphasize, that, at this point in time, no such formation is in evidence, but it 'could' occur.) But it could, emphasize could, also be W-X-Y of a much larger correction like a potential second wave up, although, here again, there is insufficient price evidence to draw such a conclusion at this time.

Also if Minor A-B-C, down & W, up provide an almost perfectly parallel channel, then a back test of the channel as minute iv, overlapping minute i, staying shorter than ii, without making lower  low  than X is also a very plausible scenario. It would continue the pattern of 'whippy' moves in the market. This might then be followed by another zigzag higher to make minute v, which, in a diagonal must then be shorter than minute iii.

Ok. Fine, but there are two problems here, too. The first is that diagonals should be relatively rare patterns. And, do you see the second problem here? In such a scenario, then the equivalent pattern is W-X-Y-X-Z which could be just a triple zigzag to make intermediate (B) of a triangle - formed of zigzags high enough to have the S&P500 overlap with it's minor wave A, down.

For this reason, it takes a keen view of market oscillators, technical internals, channels and Bollinger bands to sort things out at this time. From our vantage point, we simply wanted to use this live example to show exactly why there are often 'alternates' in a market. Just part of the reason, is that in Elliott Wave counting 1-2-3 is often equivalent to A-B-C (until it isn't by adding a fourth and fifth wave), and a diagonal must be comprised of double and triple zigzags.

Hope this helps!

A Hitch-Hiker's Guide to the EW Galaxy

Because some people keep posting the same information in chat rooms, repeatedly, and because others think I am some kind of Elliott Wave monster - out to seek and destroy other chat rooms - or that I claim that my counts are 'always correct', or others say I am here to promote myself, I want to use that energy to update with this post.

With apologies to 'A Hitch-Hiker's guide to the Galaxy', I am going to offer you these six realistic Elliott Wave scenarios, any of which 'could' occur without any breaking of the Elliott Wave rules. There may be others I have missed. If there are, let me know.

Clearly because they are offered for free, and also because I am not selling anything (check my web site- any and all 'Products' for sale have been removed), I hope it reduces the perception of any pandering or self-interest, other than that people actually learn to count Elliott Waves, as they are described in the texts. Why am I doing this now? First, because this is the most difficult time in history to make good Elliott wave predictions. The market will lurch & jolt; it will cause gains and losses, it will cause people to have a surge in optimism of new highs, and then it will disappoint with overlaps of some kind. If you can learn to survive in this environment, then counting impulse waves higher or lower, will seem like a walk in the park at some later point in future.

The second reason I am posting this, now, is people almost always drag out the very tired comparison to Robert Prechter. Saying, "you know he thought he was always right, too" or some other such nonsense. The fact is Prechter's organization has almost always posted alternate counts, whether you want to acknowledge that or not, or whether you wanted to use them or not! So, please take that argument and use it on someone else.

The third reason is that people keep telling me that because, somehow, a wave did not conform to my expectations that it means that you can't possibly trade using it! Bingo! I agree with that statement to some - even a large - degree. I have made an entire video, posted on YouTube, about "A Critique of Using Elliott Wave for Trading", particularly if it is used alone or in isolation. If you haven't watched it, you should! We are in that period now called "The Fourth Wave Conundrum" in that video: many, many options. And I maintain, that when a wave label invalidates it provides a lot of information for the future.

So, without further delay, here are six plausible scenarios for the future. You will have to decide what you like and what you don't like, and let the market decide the outcome.

Scenario 1 - P5 Failure

Clearly for this scenario, you have to think there have been three Primary waves of a Cycle Impulse upward to at or beyond P3 = 1.618 x P1. That's fine it might work that way in the U.S. It's just not working that way for the London FTSE. One reason to question this scenario is how short P5 would be in relation to P1. It's not a 'deal-breaker' though. It could happen. It just needs five waves up from P4. Other comments are on the chart.

Scenario 2 - Regular P5

This chart has many of the same features as the prior one - just that P5 is allowed to take on a more reasonable length in relationship to P1. Who knows, perhaps P5 would produce a "throw-over" of the channel that would end the move - like the Gold market did. It's plausible. The one thing about this chart is it ignores the overhead supply of the seven month diagonal from last November to this May.

Scenario 3 - Triangle

One advantage to this chart is that P4 is allowed to consume more time in relationship to P2, and price is allowed to contact the lower channel line, and perhaps make a 'false breakout below it' while still producing acceptable alternation in the count.

Scenario 4 : Double Zigzag or Flat-X-Zigzag

This scenario allows price not only to contact the lower channel line, but also re-define it. In other words, we would re-draw the P2 to P4 trend line, when we 'know' where the new P4 is. Then P5 could head upward, and make a wave that is more like P5 = P1. It might also allow a 38.2% retrace of P3 in the U.S., but it might mean more ugliness in foreign markets.

Sceanrio 5 : Leading Diagonal Downward

This scenario would be ugly, indeed, because a deep retrace for a second wave (ii) of a diagonal would have most convinced that new highs are in the offing - yet this scenario would both recognize the overhead supply created, and allow the S&P500 to validate it's ending diagonal triangle - that formed in May, 2015 - like many other stock indexes have done. It would also recognize the extreme leverage and number of people that participate in the market via the ES futures rather than buying traditional stocks, for example. In this scenario, wave (ii), to follow the rules, must now form with a similar structure as wave (B) of the triangle, start with a Leading Diagonal, A, then retrace for a B, then make a C wave up to form a legitimate zigzag.

Scenario 6 - Regular Impulse

 It's funny, but the wave iv of a simple impulse downward has 'not yet invalidated'. Certainly, it has a high risk of doing so - which is why it is presented last. But, still, we can not rule it out just yet. The Dow is only points away. If we can rule it out, we get to take one scenario "off the table". If not, that will tell us something, too.

So, here are six scenarios. And you might ask, "what's the point"? The point is that based on Elliott Wave theory it is 'very to hard say' where exactly one is in the wave count. But it is 'largely' because the down movement consisted of, or started with, three waves down. That very same 'conundrum' happens on all degrees of wave counting - whether you want to accept it or not. That's why Bill Williams developed some indicators that can help in that decision and why they are incorporated into some products like Advanced GET, E-Signal or Motivewave (I have no business relationship with any of them).

Yes, as of Friday momentum looks up. Want to fight that? That's up to you. So, if it's hard to tell where one is, one might want to at least remain flexible, do the best job of short-term wave counting possible, and, if possible, let the market clear up some of the confusion.!

Cheers and the best to you always!

The Fourth Degree

When you ask someone for some information - if you do not inquire politely enough - it is sometimes referred to as giving them "the third degree". Politely or not, can we inquire as to where the market is in it's hourly count? In Tuesday's post, we clearly said that if the Dow made a higher high than the September high, then it would officially take all downward diagonals off of the table. Yesterday, the Dow did that, and in live chat room, and elsewhere, we removed the downward diagonal possibility and upped the odds of a Primary fourth wave in progress. We are currently at 70:30, that a Primary 4th wave is in progress.

We have shown in our weekend video, that if we are to make a Primary fourth wave triangle, there needs to be a clear Intermediate (B) wave up, that would start with a minor wave A. Originally, we were looking for a Leading Diagonal, upward. The first attempt at that count invalidated at two different levels. But, because of the look of the Dow's chart, in particular, and the position of the Bollinger Bands on the S&P 500, we are putting a Leading Diagonal Minor wave A back on the table.

In the chart below, you can see the S&P 500 has not yet made the higher high, but we would expect it to. Yet, the question is, can we better tell where we are in the hourly count? One key might be a structure in the 'fourth degree' .. well in the fourth wave position. If you examine this chart closely, you can see a structure that we have clearly labeled as a five-wave triangle (A,B,C,D,E,) and wave iv.

(More text below chart).

Triangle in Fourth Wave Position of wave iii

If the triangle is properly located in a wave iv, then it should precede the 'last wave up' in this wave sequence. Assuming a new high is made, then it is very possibly wave minute iii of such a Leading Diagonal. Since we never did count the September downward sequence as a 'five' and only as a 'three', then a diagonal structure can, in fact, still be on the table.

Of course, the requirements remain the same as for all diagonals. Minute wave iii (circle iii) must remain smaller than minute wave i, and minute wave iv must remain smaller than minute wave ii. Minute wave iv must then overlap minute wave i, in the downward direction, and minute wave v, up, must remain smaller than minute wave iii.

With further upward movement the Dow will overlap it's first downward minor wave (minor wave A).

See chart below.

Daily Dow Could Upwardly Overlap

If the overlap occurs, it may be enough to only consider the upward movement as a simpler W-X-Y of Intermediate (B) rather than requiring a full Leading Diagonal would form. So, we have clearly labeled this alternate count on the S&P 500. But, note the position of the daily slow stochastic being in over-bought territory.

The Dow's downward retrace in September was nowhere near as deep as the SP500's. Because the two counts are not in lock-step, it may be necessary for the S&P 500 to form a Leading Diagonal in order to effect a legitimate first wave higher, minor A. Whether a leading diagonal or W-X-Y, the market will have to tell us through valid formations which count is in play. In either case, the upward diagonal possibility would invalidate below the respective September lows.

Snake Oil or Not?

Many are aware of how the expression "snake oil" arose from certain products being sold in the American West of yore. If you are not familiar with this term, you can read about it here. Here it used as a title for this post because many believe or have read or have heard from others that all Elliott Wave analysis falls into this category : as a 'cure all' for market analysis that is nearly infallible.

Because many, many people constantly challenge me in what they think are cogent arguments about the usefulness of Elliott Wave theory, I have decided to write this short perspective so I do not repeatedly have to address this issue. It takes too much of my time, drains my energy, and generally puts me in a bad mood to constantly address it during the trading day, or in chat rooms. So, I will do it here, and simply refer people back to this original work as needed in the future.

Who makes these arguments? 

Usually the people who make these arguments are only vaguely familiar with Elliott Wave work. They may have read the Elliott Wave Principle (EWP) by Frost & Prechter, once. They may have understood some of it, but they haven't even committed the rules and guidelines to memory so they can see if they can apply them in real time. Then again, they may not have read it, the EWP, even once.

If they are familiar with the work, these individuals may have full time jobs, and simply may not have had the time to try to apply it "real time" in markets. This clearly is not as inexcusable as someone who has not read the work with full understanding.

Regardless of the knowledge level, these people are keenly aware of how one of the key developers and practitioners of wave theory has made some very bad calls. For this reason, they either see Elliott Wave Theory as 'useless' or, worse, actually 'detrimental' to market performance. And that is what those who argue against Elliott Wave theory usually use as the 'silver bullet' to end the Elliott Wave argument, once and for all, and for all time : they use someone's else performance.

But, beyond that, usually these people have not read the more modern works on Elliott Wave theory. These works include those by Steven Poser, Glenn Neely and Bill Williams. Clearly, when Robert Prechter had his forecasting difficulties, others seeing 'some' value in Elliott Wave analysis tried to advance the work. In fact, the modern state of Elliott wave analysis includes all of these works. Glenn Neely, in Mastering Elliott Wave Theory, sought to quantify typical wave patterns and provide better realistic representations of what the common waves look like, than the EWP did. Bill Williams, PhD., is a master trader who has sought to make wave theory more reliable, not by throwing away anything in wave theory, but by updating it for the modern science of chaos theory, and by adding a relevant series of indicators to guide wave formation.

More Reliable? - Not Good Enough

I know what you're thinking. Hey, bud, I'm a trader (or investor) and I have to make a trade or make a decision. I need to be sure that decision is correct because it's my money. Well, my first response is, that's a nice goal : to make a highly reliable decision. But, to never make a mistake is a bit unrealistic. In fact, let's call it a pipe dream. In no other endeavor do people not make mistakes. Mistakes happen in business, they happen in war, they happen in marriage, they happen in sports. Why would we expect no mistakes to happen in market prediction?

Yes, the fact that mistakes happen is why the issue of reliability in forecasting is an issue. Not all forecasts or predictions are 100% reliable : in fact, none are. To make this issue clear, I have taken them time to construct this graphic. Hopefully, it is a picture you can keep in mind.

Likelihood of a Correct Prediction

This chart shows how likely you are to be correct, if you make a certain prediction. For example, if you predict that the sun will rise tomorrow, you have greater than a 99% chance of being correct. That is because in more than the last 100 days, the number of times the sun has not risen has been exactly zero. But one day - for some reason - the sun will likely not rise. So, we can not say the chance is 'exactly' zero. But for all practical purposes it is 'near zero'.

In a similar vein, the likelihood that you will awake tomorrow is also greater than 99%. In the last 100 days, if you are reading this, you have woken up every day. But one day, it is certain you will not. So again, the probability of waking up is near 100% - just not exactly 100%.

I won't go through every example in excruciating detail. You know that local weather forecasts are now getting to be about 70 - 80% reliable for the near term. They 'can' tell you, for example, the chance of rain is 80%, tomorrow, for example, and be quite correct. The other examples are a coin toss - which you know is a 50 - 50 chance; predicting you will win at a game of solitaire about 17 - 25%, depending on skill; predicting a U.S. Citizen will never pay a dime in payroll tax  - about 14% of Americans never have. Yes, an asteroid will hit the earth again - one wiped out the dinosaurs, but it does not happen at a frequency of once in a hundred days, thankfully, and, yes, 'some' day the sun will become a red giant star, or explode, based on the history of other stars.

Elliott Wave Impulses

I won't go in to much detail now, but when an Elliott Wave impulse gets underway, it is the 'more' predictable of the patterns. There is 'better' than a 50:50 chance that it will have five waves, that the third wave will have the most momentum, that the third wave will have a price gap in it, and that the fifth wave will have less momentum than the third wave.

Once a true impulse starts, there are only three ways it can form : an extended first wave,  extended third wave, and extended fifth wave.

This is useful information. Is it infallible information? No, it is not. What you do with that information is up to you. You can use it effectively or you can misuse it.

Elliott Wave Corrections

By contrast, when an Elliott Wave correction begins it is the more notoriously difficult of the Elliott Wave patterns to predict. That's because the number of possible corrective patterns explodes enormously. There are sharps, which are zigzags, double zigzags, triple zigzags, and then there are triangles of several types (symmetrical, running & barrier contracting, and expanding triangles), and then there are flats of several types .. a few of which are regular flats, irregular flats, expanded flats, as well as double-three's and triple-three's.

Because there are so many types of corrections, your ability - even as a knowledgeable wave trader - to correctly predict which is going to form is highly limited.

Folks, let me be clear, this is just the nature of the game. It is a huge limitation. Yet, once a correction is over, just the fact that it is over and the type of correction that formed does, indeed, again provide you with more information. The information is there for your use, or again, your misuse.

Geez - yet more problems?

Readers knowledgeable of Elliott Wave theory will recognize that I did not even include the pattern termed the 'diagonal' in this discussion. This pattern both increases and decreases the useful of wave theory in certain situations. Sometimes it 'definitely' signals the end of a wave, but sometimes, in a fake-out or not, it is really signalling the beginning of the next wave.

And, then, there is the issue of "long range" forecasting versus short range forecasting. Just like the weather, it is much, much harder to accurately predict whether it will rain on June 21st in Miami three years from now, then it is to predict whether it will snow tomorrow.

So, the more wave sequences in the future one tries to predict, the inherently less reliable the Elliott Wave forecast is going to be. So, let me say it again, predictions of Primary sized - monthly sized - waves, for example, are much more inherently difficult than predictions of minor sized - daily sized - waves. This, too, is simply the nature of the beast.

Summary

From this discussion some readers can glean that if they truly understand wave theory - and not just some vague conception of wave theory - they might have the opportunity to make some predictions more successfully  than flipping a coin. To which some smart-alecks might just say, "too much work! I'll go with the coin!". And, the more reasonably short-term the prediction, within certain limits, the better chance it has or the fewer possibilities there are to contend with.

And, yet, others might recognize that maybe it wasn't wave theory, itself, that resulted in the poor but highly recognized calls of an individual or organization, but maybe the specific way they applied wave theory. Maybe it was his, her's, or their desire for fame and personal excellence or maybe it was an organization's need to sell newsletters of dramatic consequences that led to the incorrect predictions.

Which camp will you fall in? Will you recognize or not, that predicting waves is an exercise in reliability or probability, or will you just 'give up'? And will you recognize that modern wave theory is beyond where Prechter got it, or not? Most importantly, will you recognize that not only is it the theory, itself, but it is also the person using it, not using it, or misusing it that is also a factor in a successful prediction? That person is you!

Your call.

Large Fourth Wave?

Summary
Large fourth waves are not only possible, they are documented, and they can lead to 5 = 3.

Details
So with yesterdays invalidation of any upward diagonals, the downward count changes to the count below, with minor waves 1, 2, 3 and 4 complete, and minor wave 5 in progress. This is the Plan B count that was shown before and now becomes the 'main' count.  But a key issue involved in this chart is whether the fourth wave should be as large as it is, and I committed to review various materials and find out if large fourth waves make any sense.

Four of Five Minor Waves Lower in the SP500 Index

Reviewing Mastering Elliot Wave by Glenn Neely, Chapter 5-14, 'Realistic Representations' does, in fact, show impulsions with large fourth waves relative to their second waves when the third wave is extended.

So, then the Elliott Wave Principle by Frost & Prechter was searched, and, in fact, Figure 80 on page 100 of the 2nd Ed, (which is the same figure as  Figure 2-16 on Page 85 of the current 10th Ed), does in fact show a wave where the fourth wave measures much larger than the second wave. Using modern charting software, that wave is reproduced, below.

The Wave 4 in the EWP which is very much larger than Wave 2

You can see that the claimed fourth wave retraces 50 - 62% of the third wave. But in the Elliott Wave Principle, the next wave is cut off after only a very small portion of it, just like you see above, so it is very difficult to tell if a proper fifth wave was even made, or what occurred as a result. So, in order to check this out, the additional bars were added to the chart below.

As you can see, not only was a fifth wave new high made, but the extent of that fifth wave is such that wave 5 = 3. Personally, I take this to be a real warning sign for those expecting a quick rebound after a brief new low below wave 3, the August 24th low, and another indicator that a primary fourth wave might be in real danger.

Anyway, my commitment has been met, and I hope this information helps you in the days ahead.

Objective Invalidation

Summary
Now on Plan B

Details

In yesterday's post, we raised the invalidation point for the potential contracting leading diagonal to 1953.45 because there were an initial five waves up, and they should not have been exceeded lower if the diagonal were to form properly. Later in the day, the five waves extended higher but into a three wave sequence with c = 0.618 x a, where 'a' was the initial five waves up.

The raised invalidation level 1953.45 was taken out on the cash open this morning, so that level - and the only needed level - of invalidation occurred. There are several purposes now to this post.

The first purpose is to clearly indicate that the second level of invalidation has also occurred. Since price is now below 1930.45, then a minute wave iv would now be longer than a minute wave ii. So, the upward contracting diagonal is as dead as it could be.

The next purpose of this post is to also 'rule out' an Expanding diagonal for an up wave A of a Primary 4 triangle. The reason for that is that minute iii is 'shorter' in price than minute i. In an expanding diagonal minute iii would have to be longer than minute i, and it is not.

In the weekend video, we contended that we would 'err' on the side of Primary 4 for a while, but the discussion in the video states that a Primary fourth wave is on 'shaky ground' because of the shallow Primary second wave. We also wrote in our posts that this daily count was a potential leading diagonal, and it would have to form properly. It did not. We have always carried the alternate of W-X-Y on this upward move, and therefore, there is no surprise or dismay at the invalidation. It 'simply' but entirely changes the picture from Plan A to Plan B. We gave the bulls a chance; they fumbled the ball.

So, a lower low than 24 August is now expected. Next, we must confirm a five-wave sequence lower, to the lower low. Those are not fully in evidence, yet, and a chart showing the invalidation of the prior diagonal is below. Please refer to the 20 Sep post for the Plan B details. However, if those five daily minor waves down occur in proper form, then we must also take a Primary 4th wave off of the table. This would agree especially well with what is occurring in the FTSE 100, as well, having overlapped it's first wave up after March, 2009.

Again, we will only apply wave labels in accordance with sound Elliott Wave principles, as best we understand them, and attempt to show you this logic until it is clear.

Upward Diagonals of any type invalidated

Invalidation Moves Up to 1953 Cash

Below is a chart of the SP500 5-minute bars that was posted after market on Friday, which suggested we had A-B-C down to minute iv on the hourly chart of the potential upwardly contracting Leading Diagonal on the daily chart. The chart showed what is an impulse A wave, and a contracting ending diagonal C wave. This chart was criticized by some, saying, "you see too many diagonals and are probably just caught long and are trying to justify it. Too much of this behavior will cause your ruin, because that's what I used to do." Here is the updated chart as of this morning.

SP500 Cash Five Minute Follow-Up Chart

The true intention of the chart was not the count relative to any of my positions. I don't have many 'nevers', but I try never to mix wave labeling with accounting. It was to explain the chop at the end of the session relative to the impulse character early in the session, and it appears to. While some may have been turned around, caught off guard or dismayed by the futures having been down -13 last night, only to turn around to be +12 by the time the market opened - this analyst was not. Many, many times the overnight futures do not leave their tracks in the cash market. And, while many times the futures do have an impact, a very good strategy is often to wait for the cash market open to see where things "really are". So, for example you could have watched the Packers beat the Seahawks in peace last night - as I did.

So, do I make this post to make some hay of a short term rise, or for some other personal reason? No, the reason for the post is further analysis. From the low of wave C we have had a "five wave rise" with a gap in wave three. That means the "invalidation point" for the overall contracting leading diagonal scenario now increases from 1930 to 1953, the low of the C wave. That's the way this process works. If we've just had - between the end of the session Friday, and early today - a five wave rise, it should NOT be taken out lower unless some other pattern is at play. So, let me say it again, the invalidation point for the hourly leading diagonal now rises to 1953.

Invalidation points are not mystery. They are not hard to understand. They are a-kin to 'stops'. Hope this helps. Cheers and enjoy the chart! E-T

Always, Always, Always have a Plan B

Considerable discussion in the September 19th post, below, shows why a Primary fourth wave is 'still' possible in US Equities. We have clearly done our jobs as Elliotticians of describing the 'main' count. This count is chosen for several reasons. Among them are the following: 1) At the monthly level, trend in equities is still 'up', with higher monthly highs and higher monthly lows. 2) At the weekly level there is a curious and suspicious divergence between the DOW and the S&P500 Index. Why hasn't the SP500 made a lower weekly low, as the DOW has? Is the SP500 trying to signal that a Primary fourth wave is truly ahead of us? 3) At the daily level, short term the 'recent' trend is up, with higher daily highs and higher daily lows, and we don't like to 'fight the trend'. Longer term, we must agree the daily chart could convert to full-on bearish. 4) At the hourly level, there is a good possibility of a contracting Leading Diagonal, and 5) at the five-minute level there is a possibility of a contracting ending diagonal C wave - meaning higher prices could result from the 'bullish falling wedge pattern'.

So, those are the reasons for judging that a Primary fourth wave is 'possible'. And, to that end, we have provided a very 'clear' and unambiguous 'invalidation point', based again on sound Elliott Wave logic, where that pattern would invalidate.That level is below 1930, in the cash SP500 Index.

Yet, we have been a very vocal advocate that Elliott Wave reasoning is an exercise in 'probabilistic thinking'. For many counts there is a very good 'alternate'. Furthermore, no one has yet asked, "what is one to do if the invalidation point is hit?" Well, here again, we have been vocal advocates that if trading is looked at as a business, one should always have a plan B. What else are we to do as traders? Take our ball home and exit the game in shame?

Having an equally well thought-out plan B should be looked at with no more stigma than when, say, in a football game, the quarterback decided at the last minute to keep the ball and run for the first down, versus the original plan of passing that ball, but the receivers were covered this time. That's it. That's all. The point of the trading game is to make and keep profits. Once one gets the longer term trend of the market correct, then that will likely happen.

We are currently in the price-discovery phase where the market will tell us which path it plans to take. With that in mind, without any apology, but actually with the best intention of preparing myself, this chart of Plan B is offered.

Alternative Count for the SP500 Index, Five Minor Waves Lower to an Intermediate Wave

This count counts all of the previous waves to the August bottom as the same; 1, 2, 3 are exactly equivalent to A, B, C in the 'main' count. In this count there certainly is no overlap of wave 4 with wave 1, and wave 4 does not encroach even upon wave 2 territory. There 'would' be good alternation, if it occurs this way, because if wave 2 is properly seen as a FLAT, then wave 4 would be properly seen as a double zigzag. Furthermore, every numbered wave occurs on alternate sides of the EMA-34, thus providing good form and balance.

The only significant objection to this count is that wave 4 is quite a bit 'larger' than wave 2, and 'usually' it is smaller. Right now, I don't know of a 'rule' that prevents such a thing - as long as wave 1 is not overlapped. But I will go back through some of the guidelines of wave formation and review this situation to see if it is a critical objection or not.

There is also one minor objection to this count : right now the waves form a suspiciously 'perfect' channel. So, the count may still be corrective. 'Usually' impulse waves have 'some' sloppiness in their channeling. Wave three's in particular tend to exceed channel boundaries. Again, this is not a 'deal breaker', but it is 'something' to keep one's eye on.

Right now, this is the very best alternate I see. And, an impulse wave lower, would most likely, turn the overall tide of the market lower.

Importantly, we do not want to be caught on the 'slope of hope', hoping for a Primary 5th wave yet to follow when the market does intend to head lower so it is very important to listen to the market's message, and below 1930, cash S&P, the game takes on a different character.

If a minor wave 5 were to occur lower - in opposition to the main count - then it would likely stop on the mid-point of the channel line. But, again, right now, there is no price evidence for that, so that is getting ahead of ourselves.

Thinking It Through with Gratitude

Successfully predicting the formation of an Ending Contracting Diagonal beginning in late December, 2014 in my YouTube channel and watching it form successfully through May, 2015 was both an emotionally exhilarating and emotionally exhausting experience. In case you are not familiar with the prediction, it appears below, as it was made.

Prediction of Ending Contracting Diagonal in the SP500 Index

It was exhilarating, of course, to see such a prediction come true, but it was also exhausting because of the rampant bullishness at the time, with some people making much higher price projections. Few people on blogs and web-sites thought this pattern would end or interrupt the bull market, and it was very exhausting trying to communicate with others - showing with sound Elliott wave logic - how their own reasoning could be off. Many refused to accept the idea but were forced to, as, day-by-day, prices headed lower. Stocks topped, at least temporarily in May 2015. The $DOW and $NYA have since made lower lows than the wave shown as circle-4, above, validating that a true diagonal occurred. The S&P has not, yet. It may or may not. But overall, one certainly has to have gratitude for this degree of foresight.

Most people are now familiar with the water-shed decline in prices that occurred in August, 2015. This daily chart will show that decline and subsequent wave action.

Daily S&P 500 Index Since the Top

Once again, it is important to try to apply sound Elliott Wave logic to this count. The logic goes as follows. IF the top was actually the end of a Primary-C wave, as certain publications have suggested, then by this time it should be 'exceptionally easy' to count five-waves lower from the top. I have tried that already. I could see where after the August decline, which some count as a third wave, there could have been a regular symmetric or barrier triangle to form a fourth wave, and that simply did not occur. Let me say it again. I 'tried' to count it that way. I expected it to happen. The market said, "sorry charlie", and was more bullish than a regular triangle. So, I 'will' listen to the market.

Some say, well the fifth wave down is actually the truncated wave that did not make a lower low at the end of August. Wait-a-minute! IF we had Primary-C up to May, and are starting a 'major decline' why are we having to invoke a truncated wave this early in the downward count?! That doesn't make sense and it questions the 'impulse down' theory.

But, furthermore look at the structure of the first wave down in June - the wave labeled as minor A. This wave clearly 'doesn't go anywhere', it doesn't even make a new low over the May low. This is often a sign of an "A" wave, and not a "1" wave. Next, the choppy sideways movement that goes until mid-August can best be counted as one unified - albeit complex - sideways flat wave. Why? Well, it has a lower low at circle-x, and a higher high than circle-w at circle-y. Next, subsequent down waves (a) and (c) ALSO do not make lower lows. The very hallmark of motive waves in a down trend is that they make lower lows, and these do not. So, as far as I can tell, the B wave is a sideways flat, until middle of August.

But that is the next problem for the "impulse down" theory. "Most often", a second wave is in the "sharp" category of waves - meaning either a zigzag or multiple zigzag. Clearly, thinking in terms of probabilities, this greatly reduces the probability of a second wave at this location. So, B wave it is.

Then, there is the watershed wave downward. It does 'in fact' have all the characteristics of a "third" wave. But, C waves are in the "third position" also, as the Elliott Wave Principle, by Frost & Prechter, clearly points out. So, when I add all of this together, it points me to think we have had an A-B-C down from the top, even as powerfully down as that end of August wave, down, was.

Then there is channeling. If you have not studied many 'true impulses', there is an observation by keen Elliott Wave technicians, like Jeffery Kennedy, that, in a true impulse, waves 1 & 2 often form the "base channel", and wave 3 will break it to the down side. That base channel is shown on the above chart (just drawn between A & B, as if they were 1 & 2). The prediction from "base channel" theory is that wave four will refrain from re-entering the base channel. That is because wave fours tend to be rather weak and sideways structures. As you can plainly see from the chart, above, recent price movement has, in fact, re-entered the base channel. This actually tilts the chart from bearish to 'somewhat more bullish' because of that.

That is one of the factors that changed my view of the current daily waves from a regular contracting or barrier triangle to a more bullish triangle - the contracting leading diagonal triangle. So far, all of the predictions for that leading diagonal have come to pass, including the higher wave minute-iii (circle iii) which occurred even as others were predicting much lower stock prices at the time.

Next, there is the "size" of this overall wave. Because some commercial Elliott Wave services still say, "well, the top is likely in, but there is one way for the market to rescue itself", it means that Primary 4, now, rather than Primary C at the top, is still on the table. There is no getting around it. Do I like that situation of uncertainty - heck, no. But, as market technicians, we must 'deal with it'.

In fact, if we have had "three waves down" A-B-C to the August lows, that is the 'worst imaginable' situation there could be for an Elliott Wave technician. In my YouTube video, "A Critique of Elliott Wave Theory for Trading", I describe that there are thirteen (13), yes, thirteen, legitimate patterns that can form from three waves down after a third wave up of an impulse has formed. A triangle is among those patterns.

So, when I next look at the fact that Primary 3 (if that's what it is) did indeed pass the 1.618 Fibonacci extension, as I measure it, then this says, regardless of the shallow decline in Primary 2, that the May, top, could , indeed, be Primary 3. BUT, if that is the case, how many months and months did that wave consume?! Fully 43 months by my count! Is it then reasonable to conclude that decline of only five months will correct a rise of 43 months??!! It just doesn't seem likely, so I don't think so.

Again, it is just wave logic that is telling me this correction may go on much longer. In the chart below, I have sketched in a plausible scenario - that Primary 4 takes up much, much, much more time in the form of a triangle. The five waves of the triangle must be Intermediate waves, shown properly as (A), (B), (C), (D), & (E). That is because it takes intermediate sized waves to make up a primary sized wave. Backing up to the current waves down from the May high, that means they are Minor sized waves, making up one intermediate wave, lower, intermediate (A) of the potential triangle.

A Possibility for a Primary Fourth Wave - Circle 4

Next, let's ask what a triangle represents. A triangle is a "pattern that moves prices sideways and takes up time. It represents a 'balance between the forces of buying and selling' and is often characterized by lower volume and indecision'." From an economic viewpoint, isn't that what we are seeing from the Fed? A complete lack of decision on when to hike interest rates? And isn't that what we are seeing from many, many wave pundits? Is it A-B-C or is it P1 - P3? Many wave followers describe themselves as confused. This situation both demonstrates and creates more indecision.

But further, many are probably giving back profits that were earned sitting long in P3 as the "whippy-ness" of the current market environment chops accounts around. This is characteristic in a triangle. The whippy, choppy action is something which has been foreseen. It could last a while.

Lastly, it must be said, we have no infallible view of Elliott Wave theory. We know things change. We know there are news announcements we can't foresee. How then do we know when the "pretty picture" above, is incorrect? Well, let's look at a short term, hourly chart.

Hourly S&P500 Index in a Leading Diagonal Minor Degree A Wave

So, we have been following this hourly pattern on the SP500 cash. From the August 24th lows, there is a clear pattern of higher highs and higher lows - the very definition of an up trend - at least short term. So far, the pattern looks like a contracting Leading Diagonal, with each numbered wave on an opposite side of the EMA-34 for good form and balance. Wave minute iv may have completed at Friday's low. For a contracting Leading Diagonal to form properly, wave minute iii must be less than wave minute i, which it is; wave minute iv must be less than wave ii - which it is currently. Wave minute v must be less than wave minute iii, and wave minute iv must overlap wave minute i - which it has already.

But, to maintain it's integrity as a Leading Diagonal, wave minute iv, we said, must be less than wave minute ii. Using a Fibonacci ruler, we can calculate that this pattern would invalidate below the low of 1930, because then a wave minute iv would be longer than wave minute ii and that is not allowed in a contracting leading diagonal. In addition, wave minute iii may not travel below the low of wave minute ii, but that level of invalidation has held, already, so the 1930 level takes precedence.

So, that's what is here - on the charts. What is not on the charts is also of some very great importance. There is no major commercial wave service I am aware of, or dedicated Elliott wave blogger, who has drawn a triangle pattern in the waves prior to May, 2015. This is very important because most technicians know, and Elliott Wave technicians almost always look for a triangle pattern to appear before the last wave in a sequence. That hasn't happened yet, and so we have to ask "why not?". Perhaps it is because the triangle will form as Primary 4. That would make the last wave Primary 5.

So, there you have it. We have tried to put the whole package together. From Primary counts, to Intermediate Counts, to Minor Counts to minute counts, using sound Elliott Wave logic. This may read in a boring manner. It's not as cute as pasting pictures of bears or bulls devouring something. We hope it is, in fact, something useful, and the type of analysis that doesn't cause you to jump out of your thirteenth floor window when you read it or receive the newsletter.