Common

There is a favorite character of mine in the television series about railroading days in the wild west called "Hell on Wheels" that is played by an actor named Common. It is because so many people now think that the market "on a straight track to new highs" that I talk briefly about what is Common.

In section 2.5 of (the online edition of) The Elliott Wave Principle by Frost & Prechter, this statement appears as the very first in the guidelines for diagonal waves.

"Waves 2 and 4 each usually retrace .66 to .81 of the preceding wave."

This means that if we are making a diagonal, lower, as the start of a bear market, that it is "usual", which means it would be "common" to allow the second wave to retrace up to 81% of the first sequence downward. It is not a 'rule' but is a tendency which has been observed enough on different time scales to call it 'usual' or 'common'.

A quite typical criticism of people who chart the market using Elliott Waves is that "the count is wrong", or "the count changed", or "you said the market movement might stop here, but it didn't". But, what many such people also don't quite get is that counting any corrective wave - whether it is a minor wave 2, as I think we are now in, or a minute wave ((b)) - can be as confusing as heck. I don't say that lightly. It is the very purpose of corrective waves to confuse. Sometimes, they can start, appear to stop, and then re-accelerate to convince us of a new trend in the corrective direction - only to immediately and sharply reverse without warning proving out the now abandoned corrective count. 

Other times, after the correction ends prices can only "ooze" lower or higher at the start - making one think nothing of it - only to explode later in a volley of impulsive behavior in the direction of the expected reversal.

If you have not seen this and experienced the same, then you have not been observing the market for long. This is the case often enough for corrective waves that it must also be called "usual" or even common.

And if counting corrective waves is "usually" confusing, then why would you expect it to be anything else? Why would you expect me not to become at times incorrectly reversed, or only be correct in the short run? This is the nature of corrective waves. It's what they do. The question is why would you expect differently? I don't.

We write this today again to try to sever what some people see as the "pure link" between an Elliott Wave Count and a trade or a market action by a participant.  For example, yesterday we posted a count of potential diagonal. The count currently follows the rules of wave counting. But, is the pattern done to the upside? We don't know that definitively for certain. Diagonals can "throw over" their upper trend lines. And, diagonals are a pattern that can even "explode" upward into their alternate of 1-2-i-ii. Have we seen this before? Yes, we certainly have. Has it surprised us when it has happened? Sometimes. 

That is why one becomes familiar with Elliott Wave patterns. I'm not just talking about what the patterns are, but how they also form their alternates. This is what helps to prevent such surprises.

Now, I know what you're thinking - "hmmm, I wonder by this if TJ is hedging on his longer term count?". And the answer is a clear and unequivocal "No."

But, does this mean that action is to be taken Monday, or that it should have been taken on Friday? That choice very clearly remains up to you. 

In two articles going back more than three years I have paraphrased what one broker sees as the correct market steps to take, and when to take them. The articles are below.

A Paraphrase of Ira Epstein's Guidelines for Trading : LINK
Ira Epstein Example - Part 2 : LINK

In it, Ira - as well as a number of other trading coaches, master trader's, and market writers that I have learned from - teach that one should generally trade in the direction of the trend as given by a significant moving average. This is what is known colloquially as "putting the wind at your back" or "not fighting the trend of the market". 

Now while I do not offer any trading or investment advice - at all - ever - I can tell you what I have personally found to be valuable lessons from others.  And trading only with the trend is one of them. Sometimes not trading during FED meetings or major significant economic report - like a payroll report - or sometimes not trading while on vacation or away from home - are some others. 

So, because I do not offer trading or investment advice - you are clearly free to trade against the trend, or to trade impulsively from your phone, or to trade through a FED meeting. Go right ahead. That is up to you.  All I can tell you is very rarely will you catch me doing the same. I view it as one of the surest paths to ruin.  Again I offer no trading or investment advice, and you are solely responsible for the consequences of your decisions and actions.

But I can also tell you, that by keeping an Elliott Wave count - one that follows the rules and guidelines - it will help open your mind to possible market action. And it can sometimes provide clear invalidation points which can be used for ... ? No, not necessarily only stops, but for determining what alternate the market may be trying to construct.

Use wave counts for stops? Well. Does that mean you are trading against the trend? Why would one do that? Again, your choice. Not mine. Perhaps if you are a highly, highly skilled individual with a truly first rate level of market knowledge or available metrics, or if you are exceptionally well capitalized and understand what it is to 'probe' a trade, you might attempt such a thing. Many, perhaps most, blog readers are likely not in that category. So, be realistic. That's all I ask.

Lastly, in this discussion of what is common, or usual, I find that people who criticize Elliott Wave or it's practitioners "usually" don't have a deep appreciation of what Elliott Wave counting involves. That's OK. It takes many months, sometimes years to get even a clear overall grasp of the concept.  But beyond that there are intricacies such as "the speed of moves", or the importance of "degree" that can take even a seasoned professional many more months or years to grasp or to actually see examples of it in action in the market.

So, you can take the position, "I know everything I need to know about Elliott Wave, and this is it in the nutshell: it's hogwash!". Fine. So be it. But I can tell you - when used properly - it can be used as another great lens with which to view market action through, and to help shape your opinion. And I can also tell you what it is not. It is not a fail-safe, fool-proof manner by which to use to place trades against the trend.  And, if you think it is, or you have heard that it is, or if you are trying to use it for the same, then you probably fall in the category of people that do not have a deep appreciation for it yet.

Which will it be? Ignore it? Or try to learn something from it?

The choice is entirely yours.

Have a good weekend,

TraderJoe