The Principle of Equivalence - Weekly Example

In it's simplest terms, The Principle of Equivalence as I have stated it says that, "A,B,C is 1,2,3 until it is not". The power of this principle in wave counting is that it requires a recognizable fourth and fifth wave to make a completed impulse as distinct from a simpler zigzag. Below are weekly line charts of the ES futures closing values. They show this principle on the weekly chart.

This first chart (shown as Part 1) may be a fairly simple zigzag wave within the parallel channel shown as the dashed lines.

ES Futures - Weekly - Zigzag Interpretation

At this point, even recognizing that our state of knowledge is such that we can not claim upward price movement is over, the fit to a weekly parallel is remarkable. In other words, there are easy ways to claim that a c wave can result in a higher wave if a more expanded flat is made for a fourth wave of the c wave. What is suspicious however, is that the lower boundary of the parallel is above the 4,200 level where the closing chart might avoid overlap if a much larger downward wave takes over.

To keep it simple, the next chart (shown as Part 2) demonstrates how the three waves could become more.

ES Futures - Weekly - Impulsing Interpretation

The further the wave proceeds higher, the more the third wave likeliness increases, and the higher the lower boundary of the parallel channel moves.

The Principle of Equivalence is one reason The Eight-Fold-Path-Method was developed - to try to help determine differences between impulses and simple zigzags. The Eight-Fold-Path-Method is the featured post in this blog and appears in the upper right-hand corner of the main page.

Some of the characteristics of true extended third waves are 1) they tend to travel above the upper parallel, 2) they often (not always) reach to 1.618 times the first wave or more, 3) they have a large central gap in the middle of the wave on the cash chart, 4) they often have a peak of momentum on the smaller degree third wave within the larger degree third wave, and have an initial momentum divergence on the smaller degree fifth wave of the larger third wave, and 5) they sometimes show the power to break through prior market resistance points to the upside or support points to the downside, and this comes from the fact that their initial retraces usually, most-often, exceed 50% in depth of the initial first wave. So, they have a good base for larger movement.

Some, but not all, of these characteristics are seen in this latter chart above. A key question is whether further of these characteristics will develop or not. Right now, from OHLC charts that show the extreme values, one thing we can say that the two up waves (depending on which terminal points are picked for the analysis) are approximately the same length. This is more characteristic of the zigzag scenario, but requires the analyst to assume that the upward trend is over. 

The upcoming week will help determine if that changes or not. And, if it changes, by how much. As such, it is still a reason to remain patient, flexible and cautious as the market traces out its very whippy structures near the prior resistance and prior highs.

This is the second post this weekend, and if you have not seen the first one, yet, you may wish to. Have an excellent rest of the weekend. 

TraderJoe