Don't underestimate EW! in Market Wizards, Paul Tudor Jones II (who has made more money than everyone here combined) says that EW offers very good alternatives when trading. Unfortunately he is not specific on his trading methods.
lynx...very good question! My momentum work, which I've always used in conjunction with counting the waves, suggests the bull market cycle is not yet complete. The MMI helps to keep me on track. The incomplete cycle is also confirmed by the additional two sets of new highs, above the Jan 2004 top, by the NAZ and SPX. Their MMI cycles are not complete either. tony
Hi Popesidious, A friend of mine, who studied under Jones, also uses EW. I studied under Eli Tullis who taught Jones, but I had to teach Eli EW. Eli made me buy Market Wizards because Jones mentions him in the book Personally, I've had enormous success with EW. The most satisfying was calling the 2000 top (within two hundred points) in the Dow. The fifth wave lasted for 13 years: from the 1987 crash to the bubble top in 2000. Nothing has ever happened like that in the history of the stock market. There was 10 subdivisions of degree within the major wave, I ran out of symbols to label it. The next would have to be my Jun, 1987 article in Barron's: calling for a crash in the stock market by January. It came early, the advance ended in Aug 1987. EW is just like any other technical tool. Everyone has their favorite for what they like to do in the markets. And, they use it for so long the know every single nuance. I've been using my interpretation since 1984. Impulse waves are relatively easy: they have to be some combination of one thru five. Correctional waves can drive one insane: there are so many variable combinations to ABC you would be amazed. EW is my favorite technical tool for following and trading the indexes. I'm not always right, who is, but usually pretty damn close to it over a long period. Thanks for the post! tony Below is my 6 year chart for the NAZ. I'm the only one with this count, that i know of...
Hi gharghur2, is it easy to identify the waves in present tense? because it looks easy to draw them in past tense, but I think that to identfy them when they are happening must be very hard. Does EW apply to Day-Trading?
gharghur2, Isn't it better to wait for the impulse waves rather than get in on the 5th waves as from all I've read 5th wave is the weak last attempt before the turn? I haven't used EW for trading for the simple reason that there are so many price points (for example, retraces can be 23.6%, 38.2%, 50%, 61.8%, or 76.4 % ...) It seems to be able to explain moves "after the fact" for that simple reason. However, there could be some validity in understanding the long-term trend, and to get an idea as to where we are in that. Of course, as I said before I am not knowledgeable enough to either accept or reject it as a decision tool for short-term trading.
popesidious, It is not too difficult to follow them as they unfold, as long as one uses some additional technical tools to confirm the count. Each bull market has it's own set of characteristics. Thus, after the first set of impulse waves you know what to look for in the proceeding ones. For instance, the 1980's market was characterized by a wave 2 flat and wave 4 zigzag. Thus, 2's were usually retraced about 38.2% and 4's about 61.8%. And, they lasted about 8 weeks. This bull market has been charactized by complex and lengthy corrections, from one month to six months, depending upon the index one follows. Thus, it is less predictable in determining the end of a correction. I'm sure I'll get some arguments here but: standard EW, in my opinion, could never work consistently for day trading. Simply because, each day provides only one true data point in the big picture, and that is the close. What goes on during the course of the day helps to create that most important psychological point. However, since I spend a lot of time watching the markets unfold these days, I have been working on some abstract EW that identifies intraday psychological pivot points, similar to the floor traders mathematical ones. It's still in the preliminary stages, but so far so good. Each impulse wave creates it's own set of EW pivots. A pivot point being a price where support or resistance should be encountered depending upon the direction. The concept is: since impulse waves are never fully retraced, then there must be identifyable intraday psychological points that act as support and resistance for the correction. These are the EW pivots for this impulse wave in the SPX: 1161...should be final testing point 1174...has held all four selloffs thus far: 1168,1171,1173,1175 1184...key level, when it acts as support the correction ends 1191...resistance to any rallies thus far 1212...key level, when this is exceeded, impulse confirmed 1221...held first sell off from highs 1234...acted as resistance to the first two rallies of correction 1245...the previous high For the past three weeks the market has been trying to bottom. Sometimes a bottom is an event, and at others a process. The SPX may need to finally washout 1174 and head down to 1161 to create the bottom event. We'll see! The NAZ put in it's low at 2026 on 10/13. The next impulse wave is waiting for the SPX to end it's correction. tony
Lynx, I have found it best to try anticipate the end of a correction, and to get in the market when the downside risk is minimal, and the risk reward great. To jump onboard of an impulse wave is often difficult. And, jumping in on the fifth wave can be very disappointing. Fibonacci retracements, in my experience, sometimes work and sometimes don't. I've seen many corrections end within the middle of two ratios. I explained in the above post, that I believe there are identifyable psychological pivot points that contain the range of corrections. The long term trend most certainly is the key to "investing" in the stock market. It tells where you are in a bull/bear market and what to expect in additional waves to end the cycle. In example: My count for this bull market has unfolded thus far in the SPX: waves I - IV (10/02 - 08/04) ... only an extended wave V left. wave 1 of V (03/05) wave 2 of V (04/05) wave i of 3 (08/05) wave ii of 3 (now)...what left? wave iii of 3 wave iv of 3 wave v of 3 wave 4 of V wave 5 of V ... end of bull market! What would change this count? Another impulse wave to marginal new highs with failures in one or more of the indices. Then, waves 1 and i would be considered part of a final diagonal triangle V.th wave. The accumulative advance/decline lines in both the DOW and SPX confirm my count. See chart! The A/D line usually tops in wave 3 and fails to make new highs in wave 5. A perfect example is 1987! tony
gharghur2, thx for the detailed explanation. I agree that there could be one final push to the upside before the whole bull ends -- that view is also supported by the fact that we nearing the seasonally good (Nov thru 1st qtr) period for stocks. However there are some negative divergences which have been bothering me for months.. 1. negative divergence of momentum (RSI, MACD etc) and also 2. the negative divergence between S&P and the DOW -- lately DOW has been lagging as s&p was making new highs. do you use fib #s to estimate price targets? and/or time targets?