Measuring Expanded Flats & The Fourth Wave Conundrum

While we are waiting to see if any new daily fractal lows are made today, a lot of interest has cropped up around the proper way to measure Expanded Flats. This is probably because of a number of Elliott Wave sites who are projecting expanded flats from the high. So, because their sites claim there is an Expanded Flat in progress, people think they can badger me to complete the work others are not showing you, rather than badger them! This is clearly quite rude, but emotions do not run this blog. The Elliott Wave does. People want this education for free, and they don't even want to have to read a book so that the education sinks in and becomes a part of their second nature. Too bad for them. Well, here it is.

S&P500 Cash Index - Weekly - Expanded Flat

First some definitions:

Regular Flat - A regular flat 'always' starts with three-waves-down to (A), as shown above, as A,B,C on the left. In a Regular Flat the (B) wave remains with a zone of 90% to 105% of the length of the (A) wave. This example is not shown above. The above example is for the Expanded Flat, below. The (B) wave must occur as a 'three', either as a zigzag, multiple zigzag or in rare instances a Flat, itself. Again, the (B) wave will stay within 90 - 105% of (A), but it must make the 90% level by Elliott wave 'rule'. In such cases the expectation is that the (C) wave, not shown above will just be (C) = (A) or very close to it. In such cases, the (C) wave barely pips under than (A) wave.

Expanded Flat -  The term 'expanded flat' means the (B) wave is 'greater than the 105%' expected in the regular flat wave. This is because the market forces were extraordinarily strong during the rise, as with a QE program, reduction of interest rates, etc. propelling the market initially higher. In compensation, the (C) wave is expected to 'expand' greater than a typical (C) = (A) to make a meaningful correction to the price movement. An expanded flat must 'also' start with just three waves down, as A,B,C on the left in the above chart. Then, the (B) wave in three waves 'must' exceed 105%. In the case shown above, the (B) wave just pips over the 1.618% level in three waves, shown as A, triangle-B and C up to the (B) wave before the (C) wave down takes over.

Measuring Expanded Flats

1. Because the term 'expanded' is used in the flat, one uses the Fibonacci expansion ruler, and NOT the Fibonacci retrace ruler.
2. The 'anchor point' or 'origin point' of the ruler is placed at beginning of the (A) wave, the red 0, shown above. 
3. The measurement of the (A) wave is taken, with the first point, the red 1, shown above, at the end of the (A) wave. This is shown with the dotted line down to the 1, although the dotted line is offset slightly so you can see it. In reality, you will hit the low of (A) exactly, and if your software allows, actually anchor the point on the end of the (A) wave.
4. Next, the Expansion Point, shown as red 2, is drawn out to the (B) wave high at 3,394. Again, the dotted line to 2, is offset so you can see it. In reality you will hit the end of the (B) wave exactly, and anchor on that point if your software allows.
5. The projection of (C) shown as point red 3, is then given by the Fibonacci extensions that travel downward. As the whole purpose of the Expanded Flat is to make a deeper correction than the (C) = (A) of a Regular Flat, one looks for the most common Fibonacci extension points beyond the low of the (A) wave. Those points are 1.618 x (A), subtracted from (B), 2.00 x (A), subtracted from (B) and 2.618 x (A), subtracted from (B). These are all common Fibonacci ratios.
6. In the example above, the (C) wave stopped at 2.00 x (A), subtracted from (B), an acceptable result.
7. In the example above, it should be clear the 1.618 expansion, also shown above, would not have resulted in a new low beyond the (A) wave which is the whole mission of an expanded flat. Therefore, one looks to the next Fibonacci level ratios to see where an ending point might be.
8. CAUTION: there is no Elliott Wave rule that states what the length of the (C) wave will be. There is only a general guideline for flats that (C) will be between 100% x (A), and 165% x (A) and it is based on the authors' experiences to that point in time when the rules were written, and primarily on the Dow Jones Industrial Average. The above chart is of the S&P500 which includes the greater volatility from a high proportion of tech stocks.

What does this say about the current market environment? Here is a four-hour line chart of the ES futures on a close only basis. 

ES Futures - 4 Hr - The Fourth Wave Conundrum

The very first thing to note is that the left-hand side 'can be' counted as three-waves-down. Then the up wave travels to close to the 1.382 external retrace on that potential (A) wave or (X) wave down.  But the up wave can also be counted as a 'five', or as a 'double-zigzag'. This is very, very hard to tell. Regardless, if it is a 'three' it can be a (B) wave. But if it is a 'five' then it could end the wave sequence upward. Again, this is very, very hard to tell.

Yet, most importantly, the current down wave has not exceeded the 78.6% level needed to help distinguish a triangle from an expanded flat. Maybe it will exceed 78.6%, maybe it will become an expanded flat. Maybe it will triangle instead. Maybe it will far exceed the limits expected of an expanded flat and indicate a top.

This is all part of what I have termed The Fourth Wave Conundrum. This is a period of time, starting with a wave sequence which begins with only three-waves-down, and during which any type of one of the 13 common fourth wave structures sideways can occur (including various flats, triangles and/or combination waves), or during which an ending diagonal, upwards, can occur. Everyone wants to know what the wave count is. They ask and they pester. They get testy. I get it. Their money may be at risk. But what they don't understand is that this is the market's way of insuring there is risk in the count and in participating in the market. IF there were a 100% certain answer, the participants would win every time, and the market would cease to be a market.

Tip: don't struggle with bad software. Make sure your Fibonacci rulers can anchor on the end points so that you get precise measurements.

Snapshot of Fibonacci Expansion Tool on MotiveWave platform (also including Retrace, and Extension tools.)

Have an excellent start to the day.

TraderJoe