Albert Einstein famously once railed against the new quantum physics model of the atom when it predicted that electrons could become 'entangled' and exhibit properties that seemed to require faster than light communication across vast distances, or that electrons could 'jump' between atomic orbitals in 'no time' - traversing a space or an energy level without actually passing through the distance or passing through the distance in 'zero time'. Further, the suggestion that electrons could pass across a physical barrier and just appear on the other side of it (in an effect known as tunneling) would have been profoundly troubling to him - if experienced in his time - as well.
Some of these apparently irrational, but yet observed, effects are now known to be due to the shared wave & particle (or 'dual nature') of the electron. Want to cause an electron to 'jump' energy levels in an instant? Just change it's wave 'shape' to one requiring more energy, and don't think of it as a particle at the time. Want to get an electron on the other side of a physical barrier? Just make the barrier thin enough so part of an electron's wave is on the other side of the barrier, and presto, there is now a probability of the electron mysteriously on the other side of the barrier - just don't think of it as a particle at the time.
While such effects might seem odd or arcane, much of modern life is literally built on knowing what is going on here. The transistor, the transistor radio, cell phones, televisions, modern electronic computer circuits, and even GPS depend on these effects. Further, present-day experiments are showing some degree of entanglement can occur on larger scales than originally thought. (See the brief article at this LINK.)
Clearly, these are mind-bending phenomenon for us as humans to consider. We are making progress, but it is slow. Einstein had some of the answers - but not all of them. And progress has been made. And certainly, we are becoming very good at using these effects - whether we understand them fully or not.
So, too, in the stock market. We will pose two questions for you. The first question is quite simple.
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| Elliott Impulse Wave Where Wave 3 is Shorter Than Wave 1 |
Given the diagram above, in an Elliott Impulse wave - where wave 3 is shorter than wave 1 - just how does that wave 5 know to be shorter than wave 3?
I mean what is this, predestination or something? Or are the waves 'in communication' with one or another? Or is there a mysterious man named Oz sitting behind a smoky curtain at the stock exchange pulling just the right levers that cause this to happen? Yet, there are example after example where the above is true enough and can be seen. So how does it happen? Inquiring minds want to know.
If that first example isn't puzzling enough, here is a bit more complicated one but one that you can see today. Below is a picture of the stock market, year-to-date.
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| SPY S&P500 Stock Index ETF - Year To Date |
Whether or not this pattern gets 'activated' by trading below the neck line of the pattern, please tell me how the stock market knew to trace out this partial or complete diagram of a near-perfect head & shoulders pattern - just as it is described in Edwards & Magee.
Note that the two shoulders shown here are almost exactly the same height. How did that happen? And notice that the volume dipped in the left shoulder, rose on the decline to the neck, and then volume all but dried up in the head formation. Further, volume increased again on the decline from the head to the neck - just as described - before volume fell off again on the right shoulder.
Again, whether this pattern activates to the downside, or whether is another larger right shoulder to make to match up with the even larger left shoulder remains an open item. The question is, "who or what is drawing such patterns?" Is it you? It's not me. How does such a pattern know to form?
It is a very good thing that - so far - we don't have to know every detail of the mechanism in order to put it's possible implications to use. But - just like serious physicists - serious market students may have something to learn by asking such questions.
Have a great weekend.
TraderJoe
Fascinating!
ReplyDeleteHere is another wrinkle. Does knowing the answers to these questions necessarily change the outcomes? You will recognize of course I am referring to the infamous Heisenberg Uncertainty Principle. Perhaps we are driven by forces more complex than we can ever truly comprehend!
Probably, because of "the observer effect". A person can not observe some systems without somehow interacting with them.
DeleteI vote that the vial broke already and the rat or in this case the bull is dead.
DeleteLol! P_T!
DeleteJoe, excellent commentary and interesting summation on quantum entanglement. Mysteries, all. There is an unmistakable communication occurring within the universe between all objects including human beings as evidenced by observed physical and social cycles current and historical. We observe and try to quantify predictively based on past observations of those patterns - sometimes with remarkable success. Thanks for injecting some philosophical and scientific basis for what you are actually doing with your work here. On that subject (segue)- may I refer you to the current weekly $NYAD 50 / 200 ma reading? The 50 ma is at an extreme low last seen Jun 29 2015 prior to the August decline that year. Also note- the weekly MACD has printed what looks like a leading diagonal down from Jul 2 2018 to now which is a very unusual thing to see on the MACD weekly. The weekly SPX top in Sept/Oct would coincide with the center of what could be the 3 down of that diagonal if you look closely at it. Just my 2 cents.
ReplyDeleteI wish there was a "Like" button here!
DeleteGreat Question
ReplyDeleteThe movements of the market are a reflection of investor sentiment/psychology.
When something changes sentiment in a positive way price moves up to balance positive and negative sentiment. There is finite amount of positive sentiment at any given time. Waves 1-3-5 in an impulse are merely a dissapation pattern of that sentiment. Once the total is gone, it's gone. If one wave uses up more of it's normal share then another wave will have to use less since the total is a fixed amount. That's how wave 5 knows when to stop.
As for the head and shoulders pattern. Sentiment levels tend to repeat themselves at equal price points (That's called support and resistance) When something causes sentiment to change in a significant way the pattern breaks down and the support or resistance level is violated.
I couldn't have said it better myself. And just 'why', is "There ..a..finite amount of positive sentiment at any given time."?
DeleteHuman emotion is a mysterious thing. If I were capable of somehow quantifying it in advance I would be living in an island paradise sipping Maitai's all day instead of trying to trade stocks. On the other hand insn't that exactly what the market is doing through price?
DeleteLove it.
DeleteI would have thought that if Wave 5 turns out longer than Wave 3 then the wave counts are adjusted back until they fit the rules.
ReplyDeleteI guess the C stands for 'cynic'.
DeleteThat is a very interesting comment.
DeleteFor a thesis to move from Scientific "Theory" to "Law", one Sine Qua Non of that process is an incontestable demonstration of predictive power. Most Elliotticians do not do very well in this regard so I ubderstand your cynicism.
Verne,
DeleteI've heard this criticism of of EWT many times. It is spawned by a misunderstanding of what EWT actually is. Now lets be real. There is no trading theory or system that's reliably and consistently predictive of future market performance. If there was there would be no market. EWT is a logical and backward looking method of documenting price movement based on repeatable patterns. The fly in the ointment is that there are too many possible combinations to make it reliably predictive of the future. What it does do is to indicate probabilities of future behavior based the observable past. As you've seen in many advertising disclaimers "past performance in no guarantee of future results" EWT is merely separating future outcomes into more or less probable groupings. When and whether to trade on that info is a combination of art, probability and luck, not science.
It is an absolute truth that one can not categorize a single sub-wave or group of sub-waves until one has actually seen them occur. One simply can not draw a line between two points that have not occurred yet or are not located in space and time yet. Hint: the question to answer is, "are the sub-waves being considered corrective, or trending?". I hope this helps.
DeleteI'm pretty sure the answer to that is yes. I won't answer fully in order to give some of the newer followers a chance to wrestle with this but here is a hint.
DeleteThere is a Hannibal Lecter line in "Silence of the Lambs" where he asks, "What is it's nature?"
Joe your interesting. Thanks for your work. It means a lot to me. I see the whole thing as fractals. Your EW work has helped me a lot. I'm not the best person to count but I use the count and the channels (fractals the form to trade with. Take the noise out of it. When I show people I explain how it helps one see the future.
ReplyDeleteThanks ski. I like your approach.
DeletePittsburg Tom the irony is that I completely agree with you. My observation was prompted by the fact that many EW analysts contend the methodolgy IS scientific and that they CAN predict market direction. It is still not clear to me whether they attribute their own evident failure in the predictive arena to either a misunderstanding or misapplication of the rules,but as you point out, no one does it with 100% accuracy. Scientific Laws are obeyed 100% of the time.
ReplyDeleteWell Verne,
DeleteThose are the people who are trying to sell something. We have a real treasure here in Trader Joe!
You gentlemen are getting close! Ask yourself another couple of questions. Does nature always follow scientific laws for making a tree? Then, why do some trees 'look' different from each other? Does nature always follow scientific laws for making a person? Then why does almost every person look different than another?
DeleteCan you predict before blooming what a specific tree will look like when mature? Can you predict before birth what any individual person will look like "when they're 64" as the song goes?
But were scientific laws not followed? They had to be - yet you couldn't predict the exact shape of something. Hmmm....
My take - all oak trees are uniquely 'oak' but no two are identical (that we can observe). ditto - snow flakes, etc. What makes them 'oak' and not 'beech'? What makes the second snowflake look different from the one adjacent to it or one somewhere across the other side of our planet or on another planet (other galaxy)? Regarding trees there are many definable attributes that we can observe- shape, size, color, leaf pattern, botanical analysis, growing regions etc. We attach a label to the species among all other trees but have never seen an identical copy yet. In the market, are there ever an exactly identical pair of candles or group of candles? Sometimes they can be very close but if you drill down far enough there will probably be some difference - internal wave time, volume, etc. In quantum computing, the qubits can be a little bit 1 and a little bit 0 but they still have the qubit label because of a definable nature that physics gives to them (my apologies to physicists if I have this in an imprecise form). Entangled pairs have a large combination of 'little bit this and that' (1-0, 0-0, 0-1, etc). My wonder is regarding the nature of the quantum world that most likely drives creation, it is not exact until it returns a result that the universe itself 'observes' and the entanglement of many pairs can create an almost infinite number of computational pathways manufacturing unique solutions each and every time. Again, my apologies to physicists. As always, this still begs more questions but isn't that our voyage of discovery?
DeleteIt seems to me that biological expression is a bit different so far as Natural Law goes. Genetic expression can take infinite forms, impossible to predict wuth precision as we do not know ahead of time which genes are going to be expressed in the next generation and which remain latent. And of course there is mutagenesis. As some of you well know, CRISPER technology is making that arena a whole new ballgame,so to speak I think in discussing EW, a more apt comparison would be something lije the laws of motion. We know for example, distance traveled will ALWAYS be one half the acceleration times the square of elapsed time. Here we are dealing with limited varables and formulation of some kind of testable theory should presumably be easier. After all, the market can really do only three things: Go up, down, or sideways.
DeleteJoe, what is the probability we are still in the process of making wave 1 down and that we are currently only have two legs of a contracting diagonal put in? 10/29 is 1 and 12/3 is 2.
ReplyDeleteHi Gerald. Unfortunately not very good, because 'both' down waves can be counted as diagonals. That would be 'very, very poor' alternation in a structure. Also, because the up waves count best as w-x-y which is a double zigzag. The corrective waves in true diagonals are usually, almost always, single zigzags, although the b waves within those zigzags can be flats. So, I'd say the odds are 15:85 against that one.
DeleteThanks, Joe. I just see momentum bad and wondering what else this could be.
DeleteVery intriguing sutff! So at which part of the wave does the next door grandma ask for stock tips? And similarly at which part of the wave does most number of skyscrapers erect? Everyday we are left with the simplest form of question; will there be more sellers than buyers or will there be more buyers than sellers. Are more people lifting offers than hitting the bids or vice versa. As that is essentially what drives the price.
ReplyDeleteLast I heard every day there are the same number of buyers and sellers. For every transaction, there must be a buyer and a seller.
DeleteHaha come to think about it you are absolutely right. I should have written more ‘willing’ buyers than sellers and more ‘willing’ sellers than buyers. Any great study being done studying tick movements ie the rate at which ticks are being lifted or being hit?
DeleteBrett Steenbarger posted a chart very much like that: https://traderfeed.blogspot.com/2018/12/what-in-world-is-going-on-with-stock.html
DeleteThanks very helpful
DeleteI can’t figure out the emotional roller coaster of my wife sometimes and so how can I figure out the ‘collective’ psychology or mass psychology of every market participants in the market place at any given point. Also what has changed since increasing amount money is being managed by artificial intelligence that has no psychological influences such as from greed and fear. If one day the entire market is dominated by such algorithms or even better self-learning AIs...will chart patterns still work as they may be a reflection of mass human psychology?
ReplyDeletePredicting a market accurately using a chart is like a F1 race car driver trying to race by looking at a rear view mirror. Yes, if you see a straight road through the rear view mirror the chances of seeing a straight road ahead of you remains high (or not)?
ReplyDeleteNot quite true; if I tell you to get off at mile marker 1.618, then you know where to turn.
DeleteIf moving averages are like the rear view mirror view of the road....EW is like the signposts that alters time to time?
DeleteTo be honest still trying to figure out what to use. EW seem to be at the heart of it but honestly very complicated....will take years to learn it
DeleteHi Joe, hope your weekend is well. I have a question about TNX using EWO. So When I look at TNX on a weekly and a 4 day chart (to get get 120-160 candles) from the April 2016 low to the most recent high, the high in the EWO is 12/14/16 however inst that a wave 1? I am curious as to why that would be, could it be because of the pattern? I was considering a ending diagonal however they do not display a corrective ABC sequence rather impulsive 5 waves. Was wondering if the wave 1 can ever be the most impulsive wave or am I missing something.
ReplyDeleteThank you,
Yes. You are missing something. For now I would pay attention to that loss of upward momentum.
DeleteJust fyi - A new post has been made on Sunday.
ReplyDelete