Eliminating the Improbable and Impossible
The Elliott Wave Principle is a set of rules and guidelines for identifying recurring patterns in the market. The bulk of the work I do across ten specific assets on a daily basis involves deductive reasoning. There are thirteen simple patterns that repeat over and over again in the market. There are no other known patterns that make up either of two types of waves—motive (trend waves) and corrective waves.
Staying completely objective and paying attention to the intricacies of wave structure is the key to good analysis. There is seldom more than one valid wave to count a wave sequence. It’s the ability of the analyst to recognize these patterns and properly use the host of rules and guidelines to accurately predict future market movement.
“Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means and objective study—” a disciplined form of technical analysis.” If you do not believe what you see, you are likely to read into your analysis what you think should be there for some other reason. At this point, your count becomes subjective and worthless.
Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott’s highly specific rules reduce the number of valid alternatives to a minimum.
Under only the rarest of circumstances do you ever know exactly what the market is going to do. You must understand and accept that even an approach that can identify high odds for a fairly specific event must be wrong some of the time.
Of course, there are often times when, despite a rigorous analysis, there is no clearly preferred interpretation. At such times, you must wait until the count resolves itself. When after a while the apparent jumble gels into a clearer picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%. It is that’s really inexperienced to pinpoint a turn, and the weight principle is the only approach that can occasionally provide the opportunity to do so.
The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting. Many of these guidelines are specific and can occasionally yield stunningly precise results. If indeed markets are patterned, and if those patterns have a recognizable recognisable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, experience shows that they do.” —The Elliott Wave Principle, Frost and Prechter
The Elliott Wave Principle (the book—you can find it in my book list) is a starting place to learn how to predict the market. Most people will not take the time to learn it, because it’s complicated. Many analysts don’t spend the time to learn it fully or don’t comply with the rules (which cannot be broken) or guidelines. Therefore their counts are inaccurate and useless.
For example, there are so many who throw around the term “impulsive wave” without the slightest idea of the rules for the formation of one. There are a greater number who pay absolutely no attention to the subwaves, which most of the time, can confirm or undermine a carefully considered count. There are also many who don’t look across multiple related indices to ensure they support the prediction. And then there’s the issue of “the right look” to a motive wave. If you don’t have the innate ability to recognize patterns, this can be a prediction-breaker alone.
All of these facets of a disciplined approach are critical in defining the future movement of the market based upon its current state. If done properly, I have found it much more accurate than any other method of analyzing the market. And by the way, it works on any free market.
Many analysts provide alternative counts, which in many cases, is a safety net for their minimal knowledge of the Principle or a lack of discipline. I only rarely provide alternate counts because, as a trader, it’s difficult to act on two counts, predicting a move in opposite directions. How do you trade that situation?
As a trader, it makes more sense to have one count and know when you’re wrong. EW does that exceptionally well. However, the greater benefit as an analyst is to be meticulous in your work, objective to a fault, and follow the EW rules and guidelines.
A Look at the Fall
The chart on the left illustrates the potential gravity of the coming drop coming this fall (click to expand).
When five waves up are complete, that’s the end of the rally. We’re virtually there, but we’re virtually alone as traders, because volume is almost non-existant.
The entire drop is in 3 waves (a zigzag). The A wave will be in 5 impulsive waves to about the half-way point numerically. Then we’ll head up to sideways for at least a year. The final wave down will be a stair-stepping affair, the longest wave (in time) of the entire process. I give it five years roughly to reach the bottom (below 3K in the DOW).
More to come as we move closer to a top over the coming weeks. It’s always rather sobering to look at this chart.
The Market This Week
Here's the latest daily chart of ES (emini futures)
Above is the daily chart of ES (click to enlarge, as with any of my charts). This weekend, we're sitting in the final pattern of the rally from 2009. It's a fractured market with the Nasdaq slightly out-of-sync with the SP500. Rather than being a problem or making analysis more difficult, it's actually aided in firming up the most probable end-game scenario.
There are two ways to count the final wave we're in (the blue Z wave) thus far. I showed the alternate count in the ES chart last week. However, they both point to exactly the same result. The pattern of the final set of waves up (the Z waves—from the top-most X to Z on the chart) is a final third zigzag of a "triple three," or three zigzags in a row, the most you can have as a pattern. We are in the final "fifth wave" of that pattern.
The drop this week came down in two segments (an ABC wave), but measurements of both this entire corrective wave and the subwaves are "off." The lengths of the subwaves don't fall into the usual fibonacci ratios one would expect. However, the SP500 is sitting right on the 62% retrace level from the previous fourth wave bottom at ~2438. That's a very strong inflection point. At the same time, NQ completed five impulsive waves up on Friday.
There was also an issue with the final wave in SPX and ES that went to a brief new high (topping at 2488) before the drop: It was in an ABC configuration, a very obvious zigzag. This makes the entire structure from the previous fourth wave a corrective wave.
These facts (plus the position of this wave in a fifth wave location) point to only one possibility—an ending diagonal. You'll find a similar pattern in the DOW and Russell indices.
This has changed the projected "top tick" price level to possibly lower: I'm showing it here as around 2500. Of course, being we have an ending diagonal, we can expect it to go slightly higher than I project.
With the NQ and related NDX indices currently in a fifth wave, this places the two major US exchanges in sync, both finishing their final patterns (although structurally different) at the same time.
Volume: Note that volume now expands with selling, but drops considerably when the market heads back up. This is yet another signal of an impending top.
The USD currency pairs have finished their fourth waves (in conjunction with the US dollar) and have entered, or are entering the fifth and final wave, as well.
Summary: The final wave five is in progress. Although early to call an ending diagonal, deductive reasoning has served to eliminate other potential patterns.
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Wednesday, August 23 at 1:00 pm EST (US market time)
The Chart Show is a one hour webinar in which Peter Temple provides the Elliott Wave analysis in real time for the US market, gold, silver, oil, major USD currency pairs, and more. You won't find a more accurate or comprehensive market prediction anywhere for this price.
Get caught up on the market from an Elliott Wave perspective. You’ll also get Andy Pancholi cycle turn dates for the SP500 for the balance of the current month. There’ll be a Q&A session during and at the end of the webinar and the possibility (depending on time) of taking requests.
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