Nov 30-Dec 3-Dec 4 correction = wave "b", Dec 7 correction = wave "d", of the ascending wedge or ending diagonal triangle. So the supposed wave "b" and wave "d" may be waves of different degree.
here is a snippet of my chat with glen neely-- the only EW person worth reading: DAVE: How are you today, Glenn? GLENN: Doing great Dave, I appreciate you asking me to be on the show. DAVE: Let's start at the very beginning. What exactly is Elliott Wave? GLENN: Elliott Wave is the graphical representation of crowd psychology. It allows the practitioner to structure and categorize the seemingly random undulations of the stock market (and nearly any other market) into two classes and various patterns. When a pattern is identified, one can project what will occur next for a specified period. DAVE: Who came up with the concept? RN Elliott, correct? GLENN: That's right, Ralph Nelson Elliott. DAVE: How did Mr. Elliott first come up with the theory? GLENN: He was sick for an extended period of time in the late 1920s and early 1930s. He had lost lots of money in the stock market crash of 1929 and wanted to understand why. While bedridden, this desire caused him to study stock market data for years. From that process, he began to notice repeating patterns, not on a sine-wave basis and not based on specific time cycles, but based on structural price patterns. He noticed repeating behavior in various up-and-down moves that we now call pattern recognition. He started quantifying and classifying all these price patterns into what we now call Elliott Wave theory. DAVE: Interesting. What was the next step in the discovery? GLENN: Eventually, he discovered that these patterns had a relation to the Fibonacci number series. All Elliott Wave patterns contain a number of segments that total a Fibonacci number. He then started to notice that the patterns also contained Fibonacci relationships - what we now call the Golden Mean or Golden Ratio, which is .618. DAVE: Ah, the Fibonacci sequence. Wasn't this number sequence the result of a question given the mathematician Leonardo Fibonacci by a King who wanted to know how to figure out how many rabbits there would be after a certain number of mating periods? GLENN: I don't know all the details, but that was supposedly how he came up with this formula to figure out the answer, which created the Fibonacci number sequence. DAVE: I know the Fibonacci sequence is observable in many facets of nature. GLENN: Correct. The Fibonacci number series starts off with 0 and 1, then each two adjacent numbers is added together to get the third. So, you get a series that goes like this: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. In nature, you find that most plants have either three or five leaves. A sunflower has 144 seeds, which is a Fibonacci number. The spirals in a seashell are "created" based on the Golden ratio: .618, which is the relationship between each adjacent number in the Fibonacci number sequence. DAVE: You mentioned the term sine wave initially. Can you go a little bit deeper to what you mean when you say Elliott Waves are not sine waves? GLENN: By that, I meant Elliott Wave patterns are not tied to specific time periodicities. In other words, market tops and bottoms don't occur every five days, or five weeks or five years. Elliott is not based on specific time requirements. It's based on the design of price action. For example, let's say we are dealing with a three legged formation called an ABC correction. In that situation wave A may take 5 days, wave B may take 13 days, and wave C may take 8 days. Each period which is a Fibonacci number and they relate to each other by a Fibonacci relationship, but no wave takes the same amount of time. So, you don't have reliable, consistent highs and lows at a specified time, but once the pattern is over, it will possess Fibonacci relationships that can be used to confirm the end of one pattern and the start of the next.
DAVE: OK, let's move into more specifics about Elliott Wave. I know the Wave is composed of two major types of waves: the impulse wave, and the corrective wave. Tell me about the impulse wave. How is it defined? GLENN: Impulsive patterns occur primarily when you have extensive public involvement in a market. When a market is in corrective formations, they tend to go sideways and form in three segments. When you are in an impulsive pattern it's because you have an extra element that is coming into the picture. Usually, it's the public coming into the market as opposed to professionals trading amongst themselves. When the public gets involved in a market (CBOE:^SPX - News) it creates an extra leg in the sequence. Let's say a market is beginning an uptrend. The first advance is called Wave One; after that, it is followed by a reaction for Wave Two that must not retrace more than 100% of leg one. Next comes Wave Three. The media and the public generally become interested and involved in a market near the top of Wave Three. As the public is jumping in, professionals and more sophisticated traders begin to get out of the market. In the entire five-legged, impulsive sequence, whichever leg the public gets most involved in will be the longest wave of the sequence - that could be Wave One, Wave Three or Wave Five. Generally, public participation is heaviest in the third wave of a sequence. DAVE: I see. The public coming into the market would naturally make this wave the longest. GLENN: Correct. DAVE: OK, I am starting to understand how the waves reflect market psychology. GLENN: Good. Let's move on a little. Most of the advance has already occurred by the time the public gets in. If they waited until the very end and get in on the fifth wave, then the fifth wave would be the longest segment. The primary element that occurs depending on whether the first, third, or fifth wave is the longest is based on psychological perception. If there is a lot of anticipation of a market advancing or declining, then the majority of the people will enter on the first wave. If there is a just a general level of interest, it will usually take until the end of Wave Three to get the public's attention. If there is a lot of disinterest or disbelieve in a market advance or decline, that will carry through almost to the very end and they will not come in until the fifth wave is nearing an end, which would make Wave Five the longest. What the market is doing in that case is forcing the majority to get in at approximately the worst price (i.e., when you have high demand for something, but little supply). That is why the majority can never be in early in a pattern; once the majority comes in it creates an over-demand and limits the supply, which stretches that wave of the pattern, leaving the remaining (if any) to be much smaller. DAVE: This makes sense in a theoretical standpoint. In actual practice, how does a trader know when or where to start the count? GLENN: I am impressed with that question.You nailed the crucial part of counting waves. If you miss this part, your analysis will never be correct. This is not part of the orthodox Wave theory, but is part of my NEoWave Theory. In NEoWave theory, the most important characteristic that must be present to confirm the start of a new trend is a counter-trend reaction that is "violent" in relation to price action contained in the previous move (i.e., if the market is starting a new downtrend, that trend must move further and faster than any decline seen during the advancing phase). DAVE: A move like the 1987 crash? Is this what you mean when you say "violent, counter-active move? GLENN: Yes, the crash of 1987 was a very distinct event. It was the largest, fastest price decline since before 1982. Violence of that magnitude is not required to end one pattern and start the next, but the '87 decline clearly indicated the end of an old trend (pattern) and the start of a new pattern (in this case, Wave Three ended at the high and wave 4 began with the crash, but didn't end until January 1995). DAVE: Can you provide any more current examples? GLENN: Sure, take a look at a daily S&P chart from October of last year to the present. From October's low until January's top, each drop was mild and shallow; but, beginning January 3rd the market collapsed (relative to prior action). In just a few days it dropped more in price and time than any other since October's low. Based on NEoWave behavior requirements, January's decline produced a definitive change in behavior, signaling the conclusion of one pattern and the start of another. DAVE: Let's move on to your improvements of Elliott Wave? How did you improve the basic theory? GLENN: Orthodox Wave theory is very flexible, extremely subjective, and allows for a vast array of opinions. If you ask most Elliott Wave analysts what they think a market will do, the odds are they will all have a different view. Not a great foundation for trading and making money. On the other hand, those people who have taken the time to learn my NEoWave approach (on their own or through my private NEoWave Trading classes), will frequently come us with the conclusion as I do - even if it has been years since we last spoke. That is almost unheard of in the Elliott Wave arena. Even more important, wave counts produced with NEoWave Theory are far less likely to be altered later and far more likely to be accurate from start to finish of a trend. DAVE: You pretty much quantified Elliott Wave making it more a science than an art? GLENN: If you want market analysis to be a science instead of a subjective form of analysis, there must be very specific rules that must be followed. And there must be enough rules to all but eliminate opinion from the process. Othodox Elliott Wave provides a lot of leeway for interpretation. This is why most well-known Elliott Wave analysts have lots of different opinions, and even worse, many of them will have four or five opinions of their own. Maybe they'll have variation number one, or scenario number two, or three or four. In my weekly NEoWave Chart service, I almost never have more then one wave count. Even better, my wave counts rarely change. For example in the S&P 500, from 1988 to 2004, my long-term wave count did not change for 15 years! No one in the world of Wave analysis can say that except me. Recently, for the first time since 1988, I made a subtle change to my long-term forecast, but my overall expectations have remained the same. DAVE: OK, let's get even more specific about the actual application of wave theory to trading. The specific point where to begin the count. How do you quantify if a particular move qualifies for your definition of a violent counter-active move? Seems sort of nebulous without hindsight.
GLENN: Not at all, it's very specific. Let's say the S&P is at 1200 and it drops to 1100 over a period of time. During that decline, the market probably rallied a few times. Measure the time and price consumed by each rally during the decline. To confirm the decline is over, you must see an advance around the 1100 low that is larger and faster than any other rally since the 1200 top. In other words, you are looking for a move that is quicker and larger than every previous rally during the decline. That will signal a new pattern has started and an old pattern has ended. DAVE: That will signal that the decline is over? GLENN: That will be the point where the previous pattern is concluded, even if it's higher than the low. In other words, you may have a low, a bounce off the low that's really slow, and then a conclusion that's at a higher low, and then the market has a violent rally. It is at the higher low - where the violent rally began - that the old trend ended. Most wave analysts don't understand the importance of this concept or don't take the time to apply it. They usually start their wave counts from the very bottom and they finish them at the very top. That is why most wave analysts' counts are usually wrong, and constantly need revision - they assume wave patterns start at the bottom and end at the top of a trend. Remember, wave theory isn't about price, it is about mass psychology. Mass psychology doesn't always conveniently peak out at the top or bottom of a trend. Psychology may make its shift after the high or after the low. It is where psychology changes that a new pattern begins and an old pattern ends. DAVE: What other aspects of Elliott's theory did you improve upon? GLENN: Quite a few actually. The orthodox Elliott Wave theory was based on Fibonacci numbers, pattern recognition, and Fibonacci relationships - that's pretty much it. NEoWave theory--my contribution to the field--integrates and substantially adds to that concept processes of logical induction and deduction, structural limits, time limits, special plotting procedures, self confirmation requirements (which describe how a market has to behave in the future to prove the pattern just finished was properly analyzed) an
Here is my trade setup... I have labeled the decline from the Oct. 11 high as wave 1 and today's high as wave 2 completing an A-B-C correction of wave 1. My trade would be to short 2 March e-mini S & P contracts at 1514. A decline below 1514(end of wave 4 of wave C) would be my confirmation that a top is in and that the Stock indices have begun a new leg down. If filled my my initial stop would be at 1533(1 pt. above todays high) for a risk of $1900.00. My target is 1350 which if reached would represent a profit of $16,400 and a reward vs. risk of 8.63 to 1. If the trade is initiated I would move my stop to breakeven when the contracts trade at 1441. Today I would place my sell stop order prior to todays Fed announcement. If the stock indices rally on the Fed news I will work my sell stop until the market trades above the Oct. 11 high
Rob how about a short placed around the 1522*Dec cont/ 1532 March cont area. It will give far more breathing space than the lesser degree wave 4 low. If the market wants to go into some short of Extention wave, then a spike down to just below the Lesser wave 4 to take out everyones stops & limits making them run for cover on the way back up is a favorite play to set up a 1,2 i, ii,iii count. If however the market up move is done ie, The A-B-C is complete your getting a far better entry up at the 1520's Dec /30's Mar Your braver than me to front run the FED. I just wait untill the market shows her hand. We normally get 3 spikes on the news on the lower time frames ie 5min. The first is the real direction, the second is the fade & the Third sets off back in the direction of the first. * December prices.