The Right Stuff

The featured post in our blog is entitled The Eight Fold Path Method for Counting an Impulse. We have posted it in public view for all to see. This same methodology that led us to conclude we were in the fourth wave in February 2016, seen in the lower left hand side of this chart - and not get ultra-bearish - as some websites were leading their readers over-the-edge with bearish calls, can again be seen here in the chart below. And, it's prediction is similar.

SP500 Three-Day Chart using The Eight Fold Path Method

Here again. Remember, the first step in the method is to pick the time frame that provides between 120 - 160 candles on the chart for the wave of interest. So, in this case, that is the "three-day" chart. The ruler and its flag, shows that this time frame now provides 126 candles on the chart - right in the ballpark for our analysis. I need to emphasize this point because some people only adamantly want to analyze the daily chart, or they only want to analyze the weekly chart. Those selections are fraught with problems. They do not recognize that the market is fractal with regard to time, as well as with regard to price.

Now, some people don't even have the software that allows them to do this. But, yes, there is free software, as above, that can do it for you. Oh well. You can lead a horse to water, as they say...

Next, we plot the Elliott Wave Oscillator, and note where it's high point is. The high point will always be in a third wave of some type when you are counting an impulse - just as it is here. In this case, the high point is on wave minute (i) of Minor 3 because within Minor 3, the first wave is the extended wave in the sequence. You can clearly see, that this is where the "kick-off" momentum is, and where there are the most vertical bars. And, further, as we indicated in prior posts and videos, there is no retrace within Minor 3 that is greater than 38.2% - and this is a hallmark of an extended first wave.

But still, the high point of the EWO is within Minor 3, and overall, we know that Minor 3 is the extended wave in the sequence, as it is now longer than Minor 1. So we denote the extended minute first wave within Minor 3 as x (i), meaning it is the extended first wave. And since Minor 3 is the extended wave, it is denoted as x 3. When the first minute wave is the extended wave, then, by definition, wave minute (iii) and minute (v) must be shorter than minute (i), and they are. And, specifically, minute (v), not labeled at the end of Minor 3, must be shorter than minute (iii), and it is.

Next we expect the fifth wave, (v), within Minor 3 to be on a divergence with the EWO, and clearly it is. So, now we would fully expect a wave to form in the downward direction such that EWO will come back to within +10% to -40% of the highest reading within the third wave. Given that this is a three day chart, it may require a few weeks to do that.

The next step in the process is to draw a line from wave 1 to wave 3, and then indicate the channel by drawing the line parallel to it from the second wave, Minor 2. As we expressed in the last few weeks, it is essential to draw this channel so that no part of a line drawn from (4) to 2, cuts off any part of a third wave. This is a guideline from Glen Neely's work in Mastering Elliott Wave, and we want to fully credit him with it. If you dig in to the details, you can see that the minute (ii) location is also the only location that allows this guideline to be met within all of Minor 3.

The purpose of the fourth wave lower, Minor 4, is to attack the lower channel, and to provide some alternation with the second wave in the sequence, Minor 2. So, to get down to that channel, wave Minor 4 may either be a zigzag, a zigzag that starts a triangle, or a multiple zigzag. This is because wave 2 was a "running flat" wave, and a "running flat" predicts a strong up move after it - which it did. And only a sharp or a triangle can alternate with a flat.

Within certain limits, I can have no preference for how wave Minor 4 occurs. This is part of what I have termed The Fourth Wave Conundrum. Fourth waves are inherently unpredictable, except perhaps as regard to depth of the correction, and or alternation. But, that's about it.

In terms of depth of the correction, 38% - 50% of wave Minor 3 is most common. And that provides a range of about 2250 - 2300. Again, if wave 4 forms as a simple zigzag, then wave 5 might expect to be an ending diagonal. And if wave Minor 4 forms as a triangle, then Minor 5 might be one that is a simple quick thrust out of such a triangle. We'll have to wait and see how that occurs. While it will be interesting, it may be frustrating for traders who try to play the choppy waves  that might develop. Remember the very purpose of a fourth wave is to get people to surrender some of their hard won profits from wave Minor 3. And that is probably happening to some already.

I always try to provide an alternate when I see one, and I have already done that several times, but again, there is no evidence for the alternate at this time. The alternate, to refresh people's minds is that 1,2,3 is really only A,B,C of Intermediate (1) of a much larger fifth wave diagonal. The first evidence that such an alternative would be activated is that the 4th wave became larger than 50% x Minor 3, and / or that the Elliott Wave Oscillator (or EWO) went below the level of -40% of the highest point of wave 3. Again, neither of those are in evidence.

So, with that in mind, we remain on The Eight Fold Path, and wish you and yours a wonderful weekend.
TraderJoe