Sunday, November 4, 2018

Confidence Level of a Down Market

This post is quite long. Take some time to read it all and digest it thoroughly.

In the world of Elliott Wave analysis, while nothing is necessarily certain or absolute, little else speaks as loudly as a measurement. Many analysts don't do them. They guess. That is why you see and hear such a mish-mash of Elliott Wave counts out there.  Even several of our readers here "guess" or have too many alternates.

But, a measurement like a third wave exceeding 1.618 or 2.618 times it's first wave gives the analyst a high degree of confidence that they are in an extended third wave in a five-wave sequence. Or a 38% retrace after a 1.618 extension gives the analyst high confidence that they are in a fourth wave, after that third wave extension - with a likely fifth wave up to follow. Most people interested in Elliott Wave analysis are familiar with that type of concept, right?

As a result of measurement, I have one count. We have finished Minor 5 of Intermediate (5) at the October 2018 high (see second chart, below), and we have made minute wave ((i)) down, and are now in the correction for the minute ((ii)) wave; and likely just the (b) wave of minute ((ii) with a (c) wave upward still likely.

In case you didn't read all of the comments from Friday's post, today I thought I would outline the single biggest reason why one might have confidence that a true bear slide is beginning. I can't tell you the number of people who have asked or commented, "Why can't this five-waves down, be just the C wave of a truncated flat for Minor 4?"

And, the answer lies in measurement, and again in the concept of "degree". Remember, the concept of "degree" means that if you are calling a wave a "lower" degree, it must, in fact, be smaller in price and time than the preceding similarly labeled wave of higher degree. A web-site trying to sell its wares won't tell you these things. They may not even be aware of them or be paying attention to them. We, on the other hand, will show you.

First, we will start with a weekly chart of Intermediate Wave (4) from May, 2015 to Feb, 2016. This is now a widely recognized wave by most serious Elliott analysts because it terminated at the parallel from Intermediate wave (2) in October 2011.

S&P500 Cash - Weekly - Intermediate Wave (4)

I counted this wave as W-X-Y and published it widely. One of the reasons I counted it this way, is any other way of counting it results in degree violations. For example, in the wave from X-to-Y, my count at the time was that of an expanding leading diagonal for the (a) wave.  And I did this live and in real-time, not only in chat rooms but at a different web-site.

People laughed at me on-line. But in fact - if you count it any other way - for example, if you move the (a) up to where the i is, then you find the first sub-wave after (a) - where the iii is now - which must now be of a lower degree, would be longer than (a). That's just not allowed by the definition of wave degrees. The first sub-wave must be smaller than the whole prior wave. So I stuck to my guns. It turns out, I was correct. There was indeed a lower low after the leading expanding diagonal! If I wasn't correct, it meant there was no such concept as "degree" in Elliott wave counting.

Now, in looking at the above chart, I specifically made the candles large enough so you can count them if you wish. There are 38 candles from the first candle after the May 2015 high to the lowest low candle. Now, leap forward to Minor wave 4 in 2018.

S&P500 Cash - Weekly - Minor Wave 4

Many of you readers will recall that, because of the length of wave (a) down, I specifically called for a triangle for Minor wave 4. I did that here on the blog, and wrote major Elliott Wave services that disagreed with me specifically because at that length wave (a) would be longer than Intermediate (4). This is documented fact. You see, triangles are measured to their (e) waves. The new measurement results in no price degree violation with Intermediate (4).

Again, people laughed and scoffed, and they said things like, "don't you know it's percentages that matter not raw points?" Well, the triangle is there, clear as a bell. The triangle predicted "the last wave up in the sequence to a new high was about to follow." It did. And on many charts, a major Elliott wave service now recognizes it, clearly, and has drawn it in on their charts the same way I have it drawn on mine.

But, now it comes to the question, "Why can't this five-waves down, be just the C wave of a truncated flat for Minor 4?"

The best answers I can give them are these. First, I have thought of an Expanding Triangle scenario, but that would make Minor 4 even longer in points, because the (e) wave of such a triangle would make even a lower low. And that is a degree violation in points. So, that should not happen. Further, from a time perspective, the (c) wave of an expanding triangle usually takes the longest to complete, This is a very, very quick wave down we have. It just doesn't 'fit'. Also, it is not below the Feb low (yet) as an expanding triangle requires.

Second, IF wave C of Minor 4 was counted just as we did for Intermediate (4), at this location, from the first candle after the high to the lowest low, we would find such a proposal for Minor 4 is longer in time than Intermediate (4).  Wave Intermediate (4) was 38 weeks, but Minor 4 is 40 weeks? No, that is a time degree violation. Again, Minor 4 must be shorter in price and time than Intermediate (4).

NEED MORE EVIDENCE?

First, consider that we called the Minor 4 triangle, above, as being longer in time, than the Minor 2 zigzag. Minor 4 was 13 weeks. Minor 2 was from the Aug 2016 high to the Nov 2016 election low. It was 11 weeks. That is OK because both waves are of the same degree, and that is the characteristic relationship between second and fourth waves in the same impulse.

But now consider that we have counted the Minor 3 wave up from the November, 2016 election low, to the January, 2018 top. That is fifteen full months in time. If that wave is truly a Minor 3 wave, and no other label,  it must be shorter in time and price than its Intermediate (3) counterpart. What do we find? Intermediate (3) took from the Oct 2011 low to the May 2015 top. That is 43 monthly bars. So, we find that Minor 3 is, indeed, shorter than Intermediate (3) in time, preserving degree labeling. Oh, yes, and how about the length in price points? If you will measure in points, you will find Minor 3 to be 76.4% the length of Intermediate (3), again preserving degree labeling for both price and time.

Get the hang of it yet? Now, if you are really interested in Elliott Wave, try this exercise for yourself. We called Minor 1 within Intermediate (5) to be from the Feb 2016 low to the Aug 2016 high. How many months is that? And we called Intermediate (1) from the March 2009 low, to the April 2010 high. How many months is that? Is degree labeling preserved in terms of time for Minor 1 of Intermediate (5)? And how about in price points?

The degree violation considerations gave us absolutely excellent predictability that a triangle and new high would result. They did. The very same degree violation considerations should give us a high degree of confidence that a new bear is upon us. Again, otherwise, then there is no such concept as "wave degree" in Elliott wave theory.

I hope this helps explain the logic - using indisputable measurements. That's what it's about. It's about measuring the waves and considering time as well as price in the analysis.

Have an excellent rest of the weekend.
TraderJoe



33 comments:

  1. Thank you.
    I have learned more about EW in six months of reading your posts,than six years of subscribing to the guys who 'wrote the book"
    Imho, none better...

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  2. Thank you for explaining this concept so well Joe, it makes a huge amount of sense.
    It's fascinating to me to actually see the rolling over from bull market to bear, what a clever man Elliott was.
    Paul

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  3. +1 One of your best. I was one of those who was pointing out the concept % vs points in that 4th wave triangle. Not laughing but trying to consider all possibilities. Your call was correct and my hat is off to you for that.
    I have a question that may be a bit unfair to ask, but I'm that type of guy. (grin)
    What would you say someone was missing if they maintained that the recent top was not the top but rather only a non existent Major wave 1 of 5. and that we have much further to go on the upside?

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    1. I would say they are ignoring every wave from 1857, including a Fibonacci 89 years from the 1929 top. And that they don't know what the meaning of an Extended fifth wave is (from 1974).

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  4. C'mon Joe don't be bashful. Tell us what you really think. LOL

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    1. OK. There is no such thing as a Major wave? Lol.

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  5. Thanks Joe for the detailed analysis. It took quite some time to absorb all the information in the above post.

    Based on previous posts, you have indicated the wave 1 down is a triangle, and I believe the following 2 is expected to have a very sharp retrace that almost go back to the start of the wave 1 down. Is that an expectation?

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    1. Hi SVS. No, the minute wave ((i)) down is called a 'diagonal', not a triangle. A diagonal slopes downward with the trend of the market, as this one does. A triangle only goes sideways 'across' the trend of the market. But, yes, the diagonal will most likely have a three-wave retrace for minute ((ii)). It 'can be' a deep retrace, but doesn't have to be. It can be as little as 38% or as much as 78% or more. My best guess overall is to keep an eye on the 18-day SMA and the upper daily Bollinger Band for initial resistance points. Again, we have already likely made the (a) wave of the (a)-(b)-(c), and are now in the (b) wave down.

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  6. Very nice post. Thank you !

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  7. hi joe
    thanks you for the update
    you do a great job as a professional
    for me you are the best and a very great teacher
    congratulations to you joe
    from dom de france

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  8. Bravo, Joe! I love reading posts like this. Always go back to basics when one gets confused.

    Now my question: When are you going to release YOUR book, and when do you start accepting pre-orders?

    Have a great weekend!

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  9. Very nice work, kudos where they're deserved. Where can we find more of you on a regular basis in between the nightly blog posts?

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    1. Thanks. I am not currently doing intraday charting - at least for a while.

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  10. Great job Joe! Looking forward to your big picture outlook soon!

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  11. Replies
    1. the 4th wave triangle example ... a wave bigger than prior 4th... predict higher e wave... that's magic lol ... have you seen that type of predictability often?

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    2. Welcome. The longer third wave Minor 3 at 2.618 was also a factor.

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  12. Hi Joe,

    Great Works! and thanks for sharing.

    " and we have made minute wave ((i)) down, and are now in the correction for the minute ((ii)) wave; and likely just the (b) wave of minute ((ii) with a (c) wave upward still likely. ...

    if (ii) with (c) up happens, the most typical case it should equal (a) of (ii), which 153 points (from 2603 to 2756), that will take (c) of (ii) to 2853 (if 2700 finished (b) of (ii) at 2700)

    You have a wonderful week.


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    1. Thanks David & welcome. You have a good week, too.

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  13. Hi ET. Thanks for unveiling your valuable thoughts, your analysis and background on the Elliot Waves of the S&P 500. The time to read your explanation above is nothing compared to the time one needs to build up the knowledge.

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  14. Happy Monday Joe, Hope you are still responding here.
    Over the weekend I went back and reviewed some of your past videos. Yes, I saved them. I was particularly interested in the comments you made in the first 5 minutes of your 2016 year end video as regards the expected behavior of a multi generational Supercycle wave 4. I don't want to steal any thunder from any up comming video's you may have planned, but did want to comment that in relating that to the current price action. It seems to me that given the size of what has been labled minute 1 down that we are going to have very high volatility and large price swings compared to the past and that it will provide great trading opportunities and a not so great investing environment.

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  15. Great work!
    I learned a lot from your post.
    Thank you so much

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  16. Joe thank you for providing such insightful analysis. I have a genuine question, when we have a leading diagonal shouldn't the retracement be much more deeper? The market had a shallow retracement for wave (b)? Or was this a guideline proposed by Robert Pretcher? I have learned a great deal from you, thank you.

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