Answer to the Quiz

Yesterday for those blog readers really, really interested in Elliott Wave, I indicated how the current wave structure might also resolve a true conflict that I was seeing between my own work and that of Neely in Mastering Elliott Wave. I provided a hint that the wave structure of interest was nearer the beginning section of the chart.

First, here is the item of interest from Neely: it is that of "running flat waves". I have long maintained that for a wave to be "corrective" to another wave, they must have some overlap in common. It doesn't have to be much, but there must be 'some'. Neely disagrees. Here is a diagram from page 5-38 in his book, Mastering Elliott Wave. See the lower chart, titled, "Running".

Here you can see that Neely clearly suggests in a "running flat" wave, the c:5 can have no overlap with the a:3 wave, or with the initial up wave, and still be corrective to it. I disagree, and I think I see what the source of the conundrum is. Here is a chart of SP500 cash index, versus the futures.

Running Flat - Futures versus Cash

When one examines what I have called the "running flat" wave in the futures on the left, it is shown that there is, in fact, overlap in the futures market of the minute ((c)) wave with both of the ((a))-3 wave and the Minor A wave - allowing it to be corrective to it. And, yet, when one looks at the cash chart, no such overlap exists!

So, this seems to be where the source of the conundrum is. Earlier in Neely's book he indicates that only cash is to be plotted. In fact, he says never plot the futures because there is 'time decay' in the contracts.

I believe it is this item that has led Neely astray to some extent. Just like that gap on the cash chart tends to tell the naive observer than there is no opportunity at all to trade in a gap, the futures show there is clear and perhaps more continuous price movement in some portions of the cash gap. (Yes, it is true there are some 'true' futures gaps with no trading as well - sometimes on a weekend).

The problem with Neely's contention is that there is no way to distinguish the non-overlapping wave with what can be a portion of, say, a larger third wave. And that is a huge problem! No overlap means something very special in Elliott wave, and I maintain that the distinction between overlap and non-overlap must be accounted for in an accurate wave count.

So, I will reiterate two principles of wave counting: 1) for a wave to be corrective to another, there must be some common price territory between the two waves, and 2) the cash indexes - such as DJIA or the SP500 - are a bit misleading in that they do not encompass all price and time that their related individual stocks, components or derivatives trade. Thus, the cash indexes should be 'taken with a grain of salt'. They do not reflect all price action at all times traded. Even individual stocks now have "extended hours" for trading, which makes the situation even more complex. For this reason, wave degrees must use the futures (or extended hours for stocks) which provides a better estimate of the time involved to create the wave.

I hope this quiz was instructive - whether you chose to complete it or not. This is the third post this weekend, and you may wish to read the other two now - if you haven't already. Have an excellent rest of the weekend.

TraderJoe