Real-Time Triangle

For this weekend's post, I thought we'd have a look at a chart from the perspective of both Elliott Wave and the daily Bollinger Bands. This chart is of the daily EUR/USD currency pair.

The first thing the reader might like to observe is that when price breaks down from the very narrow bands on the left side of the chart in late April, it begins a trending move as the bands expand their width. Every day brings new lows (new swing line lows - lower lows & lower highs) underneath the "line in the sand", the 18-day SMA in red. Price "rides the band" lower as the daily slow stochastic first embeds below  the 20 mark of the indicator. (See first black ellipse on the indicator). Then, in early May, the 18-day SMA crosses below the 100-day SMA - as the green dotted curve - which gives more fuel to the moving average cross-over analysts.

EUR/USD - Daily - Triangle

In mid-May, the daily slow stochastic un-embeds for one day at the blue arrow - which it is allowed to do - and quickly re-embeds, per Ira Epstein's guidelines. See second black ellipse on the indicator. Price thus continues its ride of the lower band, and finally closes below the band at the wave 3 marker, shown. Ira's guidelines tell us not to "sell new positions" below the lower Bollinger band at 3, and that turns out to be sound thinking at that point.

Notice how when price was 'riding the band' it may strike the lower band, or penetrate it, but then quickly closes back above the band in accordance with the algorithm's aim to keep price within the band 95% of the time. When price closes outside of the band at 3, it has only a 5% chance of further closing outside the band - actually 4% because it expended one day outside the band already - and it quickly reverses and heads for the 18-day SMA, has a short battle there, and then goes on to close above the band.

Price makes the target of the upper band, and this is where the triangle begins. Trader whiplash and narrowing of the bands occurs in an attempt to confuse traders and reduce account profits. One can see price ping-ponging between the bands as the (b), (c), (d) and (e) waves of a triangle take form.

On the far right-hand side of the chart, this is where price can be seen to have broken down below the current (d) wave location. Price is also on the lower band, and the slow stochastic is clearly in over-sold territory.

From Bollinger Band theory, we know the rough probability of trading outside of the bands is only 5%. But, from triangle theory, we know a lower low might be expected as wave 5. So, whether one risks their money in a wave 5 trade, or waits for a reversal becomes a matter of judgement and skill in counting Elliott Waves.

But, here is why this particular example is shown for this weekend's chart. There is one very clear alternate which would still call for marginally higher prices first. That alternate would consider that Friday's low is only wave (d) of the triangle. Let me illustrate that so there is no confusion.

EUR/USD - Daily - Alternate Triangle

Since the (d) wave is not below the (b) wave, one must still at least consider that the triangle is on-going. Further, while we know the form of the triangle in the first chart is the "symmetrical" form, the bottom form of triangle could devolve into the "barrier" form of triangle where the bottom line becomes perfectly flat. Either triangle form would be a perfectly acceptable Elliott wave form!*

And this is the very essence of The Fourth Wave Conundrum! There are two completely plausible counts from an Elliott Wave perspective. One has already occurred (a bird in the hand?), and one is in the future. That's why any site that tells you that they have an infallible method, or once they count something, it always remains that count is smoking something that was legalized in Colorado.

No. The message we can take from this example is that the daily Bollinger Bands say that the probability of being outside the lower band in the future is only about 4 - 5%, meanwhile, the Elliott Wave analysis of a triangle of any type screams the message, "the last downward wave set is dead ahead".

Whether you use this information or not - or how you use it - is entirely up to you. This site does not provide trading or investment advice for reasons we have cited in the past.

If you are a very, very large trading firm - with oodles of capital that allows sitting through draw downs - then you might start buying now, or as soon as the exit of the triangle occurs. That is the Smart Money coming in to play the reversion to the 18-day SMA. If you are a retail trader, you might do as our paraphrase of Ira Epstein's guidelines for trading suggests, and wait until price has a positive bias by being above the 18-day SMA, "the line in the sand", in an effort to put the "wind at your back" and trade in the direction of the prevailing trend. Which you decide - if any of these - is just your decision.

The purpose of the Elliott Wave analysis is to help you gauge what paths are possible or potential so that you can accurately assess the situation in a systematic, uniform and rules-based manner. The reason so much Elliott Wave analysis out there on the web is so awful is either: 1) analysts simply don't know the rules, 2) analysts intentionally break the rules to fit their purposes, or 3) there is insufficient consideration of how alternates and technical analysis interplay. There are really times when the count can have a legitimate alternate. We just showed you one. This means that wave analysis is always and ever an exercise in probability.

We are always and only estimating probabilities in every post we make. This is especially true during The Fourth Wave Conundrum - which happens during every fourth wave - at every degree of trend.

*Note: The true Elliott Wave aficionado would observe that the existence of the alternate is due to the Elliott Wave rule that says "four of the five legs of the triangle must be simple zigzags". The fifth leg of any triangle can be more complex, and is most commonly a double zigzag, less commonly a triangle, and even less commonly a flat wave. So, in the above example, if wave (b) is the double zigzag then the original triangle count is perfectly fine. But, most commonly, the complex wave of the triangle is wave (c) or (d). Whether wave (b) is a double zigzag is exceptionally difficult to discern in this instance. The market doesn't make it easy.

Have a good weekend.
TraderJoe