Reason for the Principle of Equivalence

Today, we were counting upward possibly looking for a fourth wave. The market did indeed move upward but it kept on going so far as to invalidate a fourth wave. So? So, as per The Eight-Fold-Path-Method we simply assign A, B, C to the prior downward waves. First, here is the bolded paragraph from The Eight- Fold Path Method (the featured post in the upper right-hand corner of the main blog page). 

IF the potential WAVE 4 breaks the channel, and does not rebound, or the EWO takes on more than -40% of the value of wave iii of 3, on the opposite side of zero, then, most likely, the up wave was only the alternate A-B-C, and there is nothing the Elliott analyst can do except objectively accept the result. 1,2,3 and A,B,C are equivalent until they are not.

The above paragraph was written for the up wave, but the same applies to the down wave. Now here is the chart.

We had written this wave could fail. It did. And we gave the location of the potential failure. Why did we say it could fail? There were two reasons: 1) the down wave started with a diagonal. That means most often these are A waves. And 2) the down wave did stop just short of the 1.618 extension of the now A wave. That was just too suspicious, and it did prove to be foretelling.

Why did I originate the Principle of Equivalence? For just this reason: often inside of triangles and diagonals Fibonacci ratios like C = 1.618 x A, or C = 2.618 x A occur. Heck, I even monitored one instance in a real-time trading room of C = 4.236 x A.

If that can be the case, then the analyst has no business counting 1, 2, 3 .. until there is actually a four and a five. This is the very essence of The Eight-Fold Path Method. It is very, very different than the way the novice analyst begins counting Elliott Waves.

So, to honor this Principle I will generate no more charts showing 1, 2, 3 until there is a very clear fourth and fifth wave. And that brings us to today's wave. Here is the chart of SPY 15-min chart because it is a little clearer than the futures.

First, notice that I have labeled this chart as A/1, B/2 and C/3. This is to honor the Principle of Equivalence. Now you know the why of it. I will, however, express my preference for the count by showing that A or 1 first, depending on the evidence.

So, why did I label it starting with A at this time? Because look at the extent of the longest and deepest retrace. By gosh, it is only 23.6%! This suggests that so brief and shallow a wave is only a B wave, and not a second wave that typically travels between 50 & 78%. Further, once again, there is not yet a 1.618 upward wave. There you have it. Could this be wrong? It could. But it's not supposed to be according to common wave structures.

And, why in the prior post did I not use the convention shown in the prior paragraphs? I thought it would be helpful to re-emphasize this Principle when it was clear what the downward wave forms would be, and where I had also clearly outlined the invalidation level and provided a warning.

Hopefully you can see that The Principle of Equivalence, in particular, and The Eight-Fold Path Method, in general, both fully express the idea that wave counting is always a probabilistic exercise. If your analyst doesn't caution you of this often, there is something missing from their wave education. There will be times when wave counting is a bit more straightforward than this. 

This is not one of those times, and we may therefore be inside of a downward diagonal or one of a couple of triangles. I will have more to say on that later.

For now, have a good start to your evening,

TraderJoe