How You Can Tell

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

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

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

S&P500 Cash - Daily - Two of Four Scenarios

Impulse

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

Deep Triangle

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

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

S&P500 Cash - Daily - Scenarios Three and Four

Impulse Up 

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

Shallow Triangle 

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

The Fourth Wave Conundrum

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

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

Hope this helps, and have a great weekend!
TraderJoe