Equivalent and Not

While we are waiting for a more complete description of recent down side price movement in the ES daily futures, I thought I would tackle this issue. (Yes, so far prices have declined as expected).

Logic is necessary for making analytical decisions. And if market analysis is to provide a basis for market decisions, then logic must be used.  A core principle of logic is that two things can not be the same unless they are identical in every way. Let's take as an example, two mechanical springs. IF two springs have the same part number, coil diameter, coil length, wire gauge, and tension when stretched five inches, then we may say "they are the same". IF they do not share all of these properties, then they simply are not said to be the same.

Let me at the outset distinguish, "being the same" from being a member of a set or of a category. Five types of plants as in 1) an oak, 2) a maple, 3) a pine, 4) a birch, and 5) a willow are all clearly not identically the same. Yet, they are a member of the set of trees, or the classification of trees. I am not referring to things which are members of sets or categories here. I am referring to knowing when a pattern is one pattern and NOT another.

Applying this same logic to Elliott Wave analysis, we need to find a way to distinguish clearly these contracting types of patterns.

Elliott Wave Logic - Two Types of Contracting Triple Zigzags

Each of these two patterns can have zigzags for each of the numbered or lettered legs. And yet, they are both contracting patterns - or volatility compression patterns. In practice, how is one to distinguish these patterns? The Elliott Wave Principle by Frost & Prechter sites "guidelines" for the diagonal as having waves ((ii)) and ((iv)) retrace between 62 - 81% of the prior wave.

This analysis is now suggesting that term "guideline" for this measurement is too soft, or too inconclusive to have practical use in decision-making. In the markets we need to make good decisions or it can cost us money. Therefore, I am proposing - based on logic alone - that any triple zigzag compression pattern that does not meet the 62% retrace requirement for the second wave can only be labeled as the triple zigzag - when over the prior wave 3 or A high - and not be labeled as a diagonal. In these cases the pattern would most likely be a B wave or an X wave.

What makes the difference? The measurements - just like the tension measurement when the spring in the above example is stretched the five inches. Hopefully, this can prevent unintended incorrect labeling of waves in the future.

Have a good start to the evening.

TraderJoe