The Fourth Wave Conundrum

I have written often that The Fourth Wave Conundrum - which occurs at every degree of trend - is what helps make the Elliott Wave quite a bit less predictable than one would like. The problem, again, is that when a fourth wave is expected, and the market starts down with only a three-wave sequence, then the number of possible patterns explodes to thirteen! So, one has only a one-in-thirteen possibility of being correct by random chance. This amounts to odds of 8 : 92 of being correct. Not good. 

To further illustrate this point, we are going to look at the longer-term market prospects IF, and only IF, the SP500 makes a higher monthly high like the NDX has. We don't care if it does. We are agnostic from a wave counting viewpoint. We have no vested emotional interest in the matter as we are too well aware of this conundrum that we have explained numerous times in the history of this blog. So let's start with some scenarios. The first one is this.

Flat Wave for SuperCycle [IV]

That scenario derives from the "Thrust from a Triangle Interpretation" of wave Cycle V. That means that the downward wave sequence into 2022 was only a three-wave sequence (the 'devil' that creates all the issues). And we could eventually bust the local high and travel to 90% to 150% to make a Primary Ⓑ wave up, before making a Primary Ⓒ wave down. This is a completely realistic scenario, and one must be open to it. Perhaps the 5,000 level will be touched, first.

This scenario has going for it that that 2020 rise "looks like" a thrust from an expanding triangle. It is a massive explosion and can be interpreted that way. Keep in mind on the way down recently the ES futures did overlap downwards. So, we might only have A-B-C up to (W) in the recent count, with an (X) wave down - unlike in the NDX that has no overlaps. The next scenario is this one.

The Contracting Diagonal Scenario

The scenario results from the Flat IV Interpretation of the Covid-19 decline instead of the triangle. The issues with this scenario are that wave Cycle V looks out-of-proportion to Cycle IV in terms of time. But, such a condition might be due to the money-printing and fiscal stimulus we all know of. Another issue is that wave Primary ③ must go over the top again for this count. That hasn't happened yet. Regarding the double-zigzag for wave ③ instead of a single zigzag Prechter has written (and I have seen it once in the EuroFX) that sometimes the third wave forms as a double-zigzag in an effort to try to become the longest wave. The "zigzag substitution rule" in The Elliott Wave Principle by Frost & Prechter allows triple and double zigzags to substitute for a single zigzag. Again, the SP500 5,000 level could be touched or exceeded.

Such a pattern would be a fitting end to a Cycle Degree wave, and it is a way to hobble over to the next Presidential Inauguration. So, one should keep it in the back of one's mind. The third pattern being presented is this one.

The Barrier Triangle Scenario

This scenario recognizes the extreme rise to the 2021-2022 top as a third primary wave. Since then, we may be in a triangle. The wave down would be Intermediate (A) and was the most violent leg of the triangle. The other waves of the triangle would still be in construction in what might turn into a horrible range-bound grind until there is a pop out of the triangle. Again, the S&P500 level of 5,000 could be met or exceeded.

Of these scenarios, the first is favored slightly. But any of them could happen - as could some others. So, one really, really needs to be flexible and open-minded. As Prechter presented in the interview shown previously, long-term sentiment is excessive. So, could this index crumble from here and use the three-waves down from the high as the first wave of a diagonal? It could, but the odds are low. And one must wait until the high is exceeded or not to draw any conclusions.

But IF the high is exceeded, one shouldn't be scratching one's head too long. These very same wave scenarios play out in very, very many fourth waves at all degrees of trend. And, going over the high again - if that's what happens is not a sign of failure or anything else - it is what it is: maybe just a sign of money-printing. So remain flexible, calm and patient.

Have an excellent start to the holiday.

TraderJoe