Take Your Pick : Impulse or Diagonal

This post puts some more 'meat on the bones' of the potential contracting Ending Diagonal Count for Primary V, now that the Brexit highs have been surpassed. It is one of only two possibilities for how Primary V can end. It can end in an impulse or it can end in a diagonal

Below is the chart of the contracting shape of Diagonal.

Potential Ending Contracting Diagonal for Primary V

For the diagonal to form instead of the impulse, then all the requirements must be met, including the fact that Intermediate (1) ‘must’ make a new all time high to show it’s ‘motive’ character. Then, all the other requirements of a diagonal must be met, as well:

The lengths must measure such that (5) is shorter than (3), and (3) is shorter than (1), and (4) is shorter than (2). Furthermore, wave (4) must overlap wave (1), and all the three-wave sequences 'must' be countable as zigzags - or multiple zigzags - only.

We'll see how it plays out. So far, the needed high of 2135 for Intermediate (1) has not occurred, but prices got to within 5 points of that level on Friday.

The THUD heard round the world!

Counting the upward wave from the February lows as if it were Primary V had served us well - right up until the day of the Brexit vote. In fact, this chart of the ES E-mini S&P futures we posted the morning after the vote, shows that higher highs were made right up until the time of the vote.

E-Mini S&P 500 Futures - Higher Highs Until the Day of the Brexit Vote

First, we want to note, we did not count the futures this way until 'after' the vote. Second, we want to note that the cash indexes (Dow, S&P) do not look anything like this chart - as they never made the higher high at (5) on the S&P, or at (3) and (5) on the Dow.

We do note that the invalidation point of 2026 we showed on the cash chart in the weekend video has been taken out lower. During the week in two chat locations, we raised that invalidation level to 2074 because of potential overlap of another first sub-wave higher. That invalidation point was obviously also hit as the futures began their descent in the early hours.

Prior to the vote, on both chat sites, we noted specifically, that "brokers were increasing margins, particularly for currencies, and that news sites stated there might even be currency halts". We also noted that Thursday's up move occurred on very low volume". Both of those factors caused us to "sit one out", and not risk capital needlessly in either direction.

So where do we go from here? Well, it's certainly 'possible' that we have gotten a first wave up, and are still working on the second wave lower. Such a count would wind up synch-ing up both the ES futures and the major cash indexes. See chart below.

One 'possible' way a Primary Vth Wave Could Continue

After all, the S&P has not even made a 38% retracement of 'this' up-wave yet. So we do not wish to get too excited about a move that occurs on such wide-spread news, involving trading halts.

However, it is just as possible that the market has topped with the diagonal shape on the futures. Here is the similar diagonal on the cash S&P500.

Potential Diagonal Failure in the S&P500

The problem is this : Leading Diagonals can not fail. Well, the diagonal in the futures (which would be counted as 5:3:5:3:5) did not fail. It made the higher fifth wave. But, a similar (yet 3:3:3:3:3) diagonal in the S&P500 would have failed, and ending diagonals are allowed to fail! And, of course, since it is not possible to count the Dow Jones in the above manner, then this may provide a higher degree of probability that Primary V is still in progress but just needs a deeper second wave, as a FLAT wave. If that's the case, that would be fine with us.

We can see both sides of the coin, and therefore remain "patient and flexible" until the situation clears. Again, with the momentum lower, it will not be possible to talk about higher waves until or unless there are higher daily highs that exceed Thursday's S&P high.

This is a difficult wave-counting environment : one of the most difficult I have seen in recent times. And several counts remain possible.  For example, it is STILL possible to see the DOW (and DOW only) in a Primary IVth triangle. And - just as we saw the S&P500 in a W-X-Y Primary 4th wave, there is nothing to suggest it couldn't continue on in Primary IV, as W-X-Y-X-Z, before making a Primary Vth wave.

So, when we say something like, "Primary V may continue higher", we DO NOT mean to suggest that heavily speculative upside positions should be taken.  Nor, when we say, "momentum is currently lower" do we mean heavily leveraged short positions should be taken.

No, our approach is one of caution and care, and, in fact, we offer no trading or investment advice of any type. We are merely counting waves - as best we can.

New Year's Update

Here is an update to the chart presented on January 1st, 2016. As you have likely heard by now, the first week of the year was a stinker! This pretty much followed the script and count we had outlined on January 1, and we were able to call it wave-by-wave in the real time chat room.

We appear to have completed minor A down of Intermediate (Y). The structure did form a valid Expanding Leading Diagonal, at least to this point. I wish I could tell you in advance how deep the minor B retracement wave will go, but unfortunately since the downward diagonal is best described as a 3:3:3:3:3 diagonal, and as an A wave, it neither necessarily calls for a deep retrace or the start of a bear market. As a B wave, it could typically be expected to retrace between 23% and 76%, of the entire diagonal but could go deeper. A retrace back to the 20-day SMA might be a good place to start.

The Expanding Leading Diagonal does call for lower prices in the eventual C wave, and so, at some point we would expect the low if Intermediate wave (W) to be taken out lower. The only restriction of the valid diagonal at this point is that price may not travel above (X), and still expect minor C lower.

Cheers and enjoy the chart!

An Eight Fold Path - in Progress

Since there have been a lot of comments made about the curious nature of this morning’s US Dollar Index moves, I thought I would post another Eight Fold Path chart – this time not on a stock index, but on the US Dollar Index, the count of which is currently “in progress”. Again, this is the only truly ‘objective’ way I know to count the Elliott Wave impulse in real time, and to help eliminate all of the guess-work about labels.

The ‘implication’ or prediction from this chart is that since wave 2 (minor 2) is a FLAT wave, then wave 4, will be something other. Wave 4 already has a clear (a), (b), (c), down in a zigzag, so it is ‘possible’ that wave 4 ended there. And while such a count is ‘possible’ and would provide the needed alternation, it does not attack the lower channel, yet, and it makes wave 4 quite short in time – which is opposite to the typical personality of fourth waves.

So, it is also possible, and more likely, that minor wave 4 becomes a triangle to ‘provide more time’ for the wave to attack the lower channel boundary. Further, because wave 2 is a FLAT, there ‘should not’ be a new B wave high within wave 4. Any higher high would be minor 5.

So, while the ‘potential’ impulse is playing out, there is a caveat : wave 2 is again a FLAT – which is not typical of second waves : possible but not typical. So, if the EWO breaks below -40%, or the potential fourth wave breaks the channel and does not quickly rebound, then the Elliottician must simply accept the result that 1,2,3 was actually the alternate A,B,C. The 1,2,3 and A,B,C are equivalent until they are not.

Followers of my blog and in some live chat rooms will recognize that nothing in this count has been changed since it's inception, and "special note" was made when wave 3 was 1.618 x 1 - live and in real time.

Cheers and enjoy the chart.

The Eight-Fold Path Method for Counting an Impulse

A much wiser man than I called the "The Eight Fold Path" the way to enlightenment, and it is in that spirit of sharing that this post is made.

When you survey the world of Elliott Wave analysis, you find that many casual wave analysts will post a chart of "something", with some numbers and letters on it and call it a wave chart, or maybe their "best guess" of where prices are going. But we contend unless people follow a very simple, eight step procedure they will be lost in making objective Elliott Wave counts: counts which are predictive - or like in fourth waves - clearly indicate when prediction is going to be sketchy, at best.

So without further delay - let's outline those simple eight steps, with an example below the steps. All though I didn't explicitly say it in the first posting of this article, I need to make it clear that this method applied to counting Elliott Impulse waves only. In fact, if you follow this method, and the wave does not conform to these guidelines then most likely the wave is a diagonal or part of a larger corrective structure, and not an impulse wave! And knowing that can be a great deal of help as well.

Step 1 - chose the time frame that provides 120 - 160 candles for the wave of interest. Does it have to be exactly 120 to 160 candles? No, but it should not be 80, and it should not be 220. We'll talk more about why at the end of this blog post.

Notice here, we did not say, pick an hourly chart, or pick a daily chart, or pick a 5-minute chart. Elliott patterns unfold in clear waves. Your first job is to decide which wave you are analyzing. Are you analyzing the five-waves of a potential impulse third wave? Are you analyzing the A wave of a zigzag A-B-C structure? Or, are you analyzing the entire bull market wave since March, 2009?

Step 2 - use a bar chart for that wave, and include on it the Elliott Wave Oscillator indicator (EWO). This indicator is also sometimes known as the Awesome Oscillator. Regardless, its just the difference of two simple moving averages; one of 34 periods and one of 5 periods.

Step 3 - locate the maximum value of EWO. This location is reserved for wave iii of 3 in an impulse wave. Note the value of the EWO at this location.

Step 4 - locate a 1.618 or 2.618, or (more rarely) a 4.236 extension following the first wave up. This is most likely where wave 3 in an impulse wave will end, and it will end on a divergence from the EWO value in Step 3.

Step 5 - draw a parallel Elliott channel around waves 1, 2, and 3 in an impulse (which alternatively in every wave can be A, B and C).

Step 6 - watch for the EWO to retrace to near the zero line for wave 4. Computer studies have shown that most wave four's will have the EWO retrace to +10% - to -40% of the maximum value of the EWO in Step 3. Further, verify, by measurement that wave four only retraces 23.6 - 50% of wave three, with 50% being an absolute maximum. Beyond, that level any wave four call has extremely low odds.

Step 7 - in an impulse look for wave four to attack the lower channel line in some manner, but then rebound quickly from it - even if there is a false break. In a true impulse, Wave 5, upward, should be under way and should reach a length of 5 = 1, or alternatively, 5 = 0.618 x (net 1 - through 3). Furthermore, wave 5 must end on a further divergence with the Elliott Wave Oscillator.

Step 8 - Verify, verify, verify that there was alternation present. Most second waves are deep, sharp waves. They are typically zigzags or double zigzags that retrace 50 - 62% or more of their first waves. Fourth waves are 'usually' long, complicated sideways affairs such as triangles, flats or compound waves like flat-x-zigzag. Regardless, there should be alternation in a true impulsive structure. In the rare cases where wave 2 is a flat, then wave 4 will 'most likely' be a triangle or a zigzag to alternate with it.

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.

This is a chart to illustrate the above concepts in counting an impulse wave - objectively. First, I decided to study the "up wave from November, 2012 in the Dow Jones Industrial Average", and selected the time frame that best put 120 to 160 candles on the chart. That time frame was "daily". Second, the Elliott Wave Oscillator was added to the chart. Third, the maximum of the Elliott Wave Oscillator was examined, and determined to be the location for wave iii of 3. Fourth, we note that wave 3 just exceeds a 1.618 extension. Note that wave v of 3 ends on a divergence of the Elliott Wave Oscillator.  Fifth, we draw a channel around waves 1,2,3 (or alternatively A,B,C until an impulse is 'proven'). Sixth, we note that the EWO comes very close to the zero line for wave 4. Seventh, we note that wave 4 attacks the lower channel boundary, and wave 5 quickly resumes, and makes a wave which is 5 = 1, and  actually, just slightly beyond. Note again that wave 5 ends on another divergence with the Elliott Wave Oscillator. Finally, and Fibonacci eighth, we verify alternation. Wave 2 is a classic zigzag sharp with a 50% retracement, and wave 4 is a 'compound' FLAT wave. Its a flat to blue 'a', then a flat to blue 'c' & black 'a', then a larger flat to black 'c', & black 4.

Look at how time consuming these fourth waves are! And you know what? I almost guarantee you that no person alive predicted this exact structure. This is the very meaning of the "fourth wave conundrum" as we have presented it in our YouTube video. So, in each case you know what everyone is asking for the better part of a whole month, "What's the count? What's the count?", and thinking, "what kind of Elliotician are you that you don't know what the count is, right now? how am I going to make money following you?! I'm getting whipped around like crazy here." And on and on it goes in those pesky fourth waves.

And yes, there are even slight variations on this - such as when the first wave is the extended wave, but this is the only objective way I know to count the Elliott impulse wave. And, it was discovered by Master Trader Bill Williams, using mainframe SuperComputers to crunch all the data. So, when people say they are being "objective", see if they are meeting this type of simple, defined criteria.

And, yes, I hear you Gen-X'ers and Millenials: you got it. This is a procedure. And you hate procedures. Really? Do I have to follow a procedure? Well .. let's just say "only if you truly want to see the Elliott Wave at work."

Ok, now, for those of you interested in only the modest amount of mathematics, I told you I would tell you the secret of why you need to pick the time-frame that best provides 120 - 160 candles on the chart. Here you go: it is because it takes 5 x 34 = or 170 candles to produce five oscillations around the 34 period moving average of the Elliott Wave Oscillator. Yes, the bright ones among you got it right: the five "oscillations" are the five waves of an Elliott Impulse Wave. So, if you are going to have a chance of seeing that fourth wave come back to the channel with the EWO nearing zero, it must happen starting sometime soon after 120 candles are on the chart.

That's all there is to it! It's that simple! Don't make it more complicated than it is!

Cheers.

New Year's Wishes

We could, of course, spend a lot of time in this blog wishing everyone well in the new year (and we sincerely do!), but rather we have some wishes that some Elliott Wave blogs and sites would really tell it like it was - for them! Some were fantastically bullish from 2014 - 2015, setting targets for the S&P500 as high as 2,500+ within that time, only to be sorely disappointed that not only was that level not reached, but even more modest new highs after the May, 2015 high were not reached.

Not so for us! We took the approach that an ending diagonal triangle was formed from November, 2014 to May, 2015, and that it meant downside ahead. People wrote to us - told us we were crazy - told us we didn't know how to count an ending diagonal - because the downside wasn't occurring as fast as it 'should' have (clearly in their opinion), until, whoosh, then there was all the downside you could handle in August!

What really galls us though, through out the whole affair is the lack of candor some of these sites have had. Even in their "year-end review", they make no mention of how they doggedly posted 1-2-i-ii, up, in full pace with the bullish fervor of the time, did not obtain new highs, and these waves were not followed by the elusive wave 3. We even went to these sites, pleaded with them as best we could to 'look out below', posted numerous charts - only to be ignored until it was too late.

In other words, if you were placing investments on a "three to follow" - plain and simple - you lost! They got caught up in bullish sentiment; we did not.

Rather our approach cited the "fourth wave conundrum", the whippy trade, and the lack of follow-through. We said it was very possible a triangle was forming for Primary 4, as just one of the many alternates possible in the various wave four structures; OR that Primary 5 was forming, giving probabilities only. We even 'tried' to count five waves up from the August low, but quickly noted on December 19th in this blog when downward overlap occurred, and that count appeared kaput - just someone's pipe dream.

So, where are we now? To make life simple : we are still in a range! We are in the range between the August, 2015 low and the May, 2015 high. Until we break out of that range, we can not assign a new Intermediate wave label. We showed you the possible & even probable W-X-Y count, down to a new low in the December 19th post. The reasoning is simple: we think that since the other market averages (DJIA, DJT, RUT) made lower lows in August, 2015, proving out their earlier ending diagonals ending in May, 2015, that the S&P500 should too.

Well, how about the current wave structure? As we cited in the December 20th blog post. It is "still" not out of the realm of possibility that the market makes a Primary 4th triangle, but the wave structure still is not indicating that (a slightly higher high over the November 2 high is needed to reactivate that possibility). Instead, we think, most likely we are headed for the new low, wave (Y), shown in the December 19th post, and as evidence, we are counting this structure below on the four hourly chart of the cash S&P 500.

In this chart the blue numerals are the number of S&P points traveled. As you can see, the structure currently is Wave minute iii (circle iii) is 112 points, and it is longer than minute i (circle i) at 97 points. And wave minute iv (circle iv) at 88 points is longer than wave minute ii (circle ii) at 85 points. Wave minute iv also overlaps wave minute i, so the only thing that would be needed is for wave minute v (circle v) to become longer than wave i. If this occurs, and a proper Expanding Leading Diagonal is formed, then it would be minor wave A, of Intermediate (Y). This would be a 3:3:3:3:3 form of a Leading Diagonal and would NOT be as bearish as the 5:3:5:3:5 variety - meaning it may not be a final top. But, it could be bearish enough to form minor A-B-C down to Intermediate wave (Y).

Will it occur? Well sometimes the first trading day of the new month and new year can have some fireworks in it from the new inflows from pension plans, 401k plans, etc. So, it is even 'possible' that wave minute iv (circle-iv) is not done to the upside yet. Thursday's down move 'could' only be wave iv of the minuet (c) wave higher of minute iv. That would not change anything as long as the high of wave minute ii (circle ii) was not exceeded at 2104.27 on the cash S&P.

Barring that, wave minute v (circle v) should become longer than minute iii (circle iii) at 1970.55, and this would be the level to exceed lower once the end of minute wave iv (circle iv) is confirmed.

A Matter of Degree

In yesterday's post, it was shown how it possible that Primary wave four is becoming longer in time. One of the best pieces of supporting evidence for this count is wave degree. Typically, Elliott termed minor degree waves as those that showed up on the 'daily' chart, whereas intermediate degree waves were those that comprised the weekly chart, and Primary degree waves those that comprised the monthly chart. Please refer to the daily chart below for this discussion.

In our prior posts, we had counted down the daily waves to the August 2015 lows as Minor degree waves A, B, C or alternatively minor 1,2,3 (but 5 was not made in the SP500). We said 1,2,3 and A,B,C are equivalent until they are not.

One key point - and please don't miss it - is that the three minor waves lower form an Intermediate degree wave of some label. We had presumed it 'might' be intermediate (A) of a larger primary fourth wave triangle - and  that is still a possibility. Regardless of the specific label at the August low (A) or (W), we then have labeled three more minor waves higher to the November high. So, this structure now makes an Intermediate degree (X) wave - or less likely an Intermediate degree (B) wave. This type of degree labeling is proceeding simply, and smoothly and naturally. There is no 'guess work' or forcing of degrees to some preconceived notion or tortuous attempt to fit "degrees to points", and you can see that the A-B-C down to (W) and the A-B-C up to (X) consume 'roughly' the same amount of time.

But the next point to absorb is that under Elliott's structures, a Primary degree wave is composed of Intermediate degree waves. It would be a mistake to jump from minor degree labeling directly to Primary degree labeling, without explaining where the Intermediate degree went!

In the count above, the Intermediate degree is clearly shown. That is the major point - we are not leaving the Intermediate degree waves out of Elliott's Primary degree labeling.

Having said that, a wave (Y) - while the most likely course to make a 38.2% retracement of Primary 3, is not a 'for certain' wave. It is highly likely, but even it is 'not' for sure. Why not? Well price is currently down to the lower daily Bollinger Band. Sometimes, price bounces off of the lower band strongly. If and only if price makes a new high above (X), then it is 'possible' a barrier triangle is still in play for Primary 4. But that is nowhere near in evidence yet, and every attempt to reach the old highs has been rebuffed with a turn lower. More likely, a retreat from the lower Bollinger Band will only be towards the middle Bollinger Band (aka the 20-day SMA), before resuming lower.

But we think, besides the downward overlap, and the channel break illustrated, there are two more 'telling' pieces of evidence as to why we are still in a Primary 4th wave.

First, if you notice the structure from late August to late September, it forms a FLAT wave in the SP500. And second waves are 'usually' sharp zigzags, not flats. They 'can' be flats, but they are "usually' sharps. So, having a flat wave at this location is a serious warning. It fits the concept of a B wave much better than it does the concept of a second wave.

Second, we know by measurement that the C wave upward stopped just short of a C = 1.618 x A. In other words, it did not make the usual expectation for a strong and powerful third wave of 3 = 1.618 x 1.

Regardless of the eventual path, if we are making a Primary 4th wave, it must be composed of Intermediate degree wave labels that consume proportional amounts of time in the sideways or down direction to what the Intermediate degree labels have consumed in upward direction.

Cheers and enjoy the chart!