Crying Over Spilt Milk

This post explains, in part, why I designed The Principle of Equivalence for financial markets. There is another reason, too, but I will leave that for later. This example is from the current US500 equity index. Two panels of four-hour charts are below. We know the market has traveled lower a bit - it has spilt some milk.

US500 CFD - 4 Hr - Two Logical Interpretations

As you can see from the left panel, it is possible to count the current wave structure as a series of three wave structures which might eventually go on to complete a contracting diagonal. Please ignore the degree of the labels for the moment. They are just for relative size illustration at this time. In the left panel you can see that purple 3 is shorter in price and time than purple 1. So, to complete this count, the wave structure needs a 4 that is shorter than 2, and a 5 that is shorter than 3, hopefully in three-wave sequences. The potential wave 4 already overlaps the potential wave 1, so that part of the job is already done. The MACD is diverging, so that could fit, too.

But now look on the right panel. It is also possible to consider the truncation at the red asterisk (*) shown, followed by an impulse for the first wave, blue 1. Then, in a parallel, there is a second wave, 2, followed by a smaller degree blue wave i. Because this wave is shorter in price & time than the larger degree wave 1, then we are allowed to also consider a nested count for a down move. And there might be an expanded flat brewing for the smaller-degree second wave ii. It is currently shorter in time than the larger wave 2.

So, there you have it. I'll bet you think it is pretty spiffy that two different counts can potentially work with all their wave degrees in-tact. Every wave that needs to be longer is longer. Every wave that needs to be shorter is shorter - and this is in both price and time. A purple count and a blue count. So, you'd be doing anything but crying over that spilt milk, right? You know what to do in either one of two cases, right?

No, a key reason why I designed the Principle of Equivalence is because of the chart below. Same panel on the left. Different panel on the right.

The count in the right panel is still a truncation count. But because the brown x wave shown is also shorter in price and time than brown 1, then it is potentially legitimate that the market is making an even larger second wave, 2. This wave could be in the overall flat variety. It could turn out to be a regular flat wave, a "running flat" wave that does not cross over the w wave, or even an expanded flat wave to make a deeper second wave, 2.

And this is a key reason why The Principle of Equivalence was designed. "With the current state of prices available to us at this time, there are literally three possibilities which, if prices were random, could each occur". Not two, three! That means there are roughly equal odds of the outcomes - purple, blue and brown - and those odds are roughly 33% each.

I have showed you intraday where examples with 3% or 4% odds routinely happen. So, are roughly-equal 33% odds anything to stake a claim on? I suggest not. It would be gambling at the very least, and maybe just plain irresponsible, especially with an FOMC meeting, more earnings, and probably POTUS war or peace tweets in the near future.

No, this is why I implore readers here to measure, measure, measure both price and time to see what fits in with various degrees of waves (which waves are actually larger and which waves are actually smaller) and remain patient and flexible until the situation clears.

To be truthful, I watched one veteran wave-counter's YouTube video this weekend and I watched him agonize how sloppy the market was, and what it was doing to the fund he runs. I mean he was almost crying on-line about how useless the wave principle was and how no counts currently fit his currently uber bullish scenario.

Rather than agonize, I long-ago developed a full-fledged equivalence principle that tells me what I must do in such situations, and why. It is not because of darned Elliott Wave. It is because there is a principle of wave counting that says, "lengths of price & lengths of time actually MATTER". And, like throwing a rock in a lake, you just don't know how big or small the waves will be until you either see them, or until you see the size of the pebble or boulder than goes into the water. 

Yes, from an investing or trading perspective, you want like the dickens to know how big those waves will be in the future. But, in actuality, all you have is odds. So, act accordingly until things become more clear.

Have an excellent rest of the evening,

TraderJoe