Interview with Dale Pinkert (F.A.C.E.)
FACE Interview 6.12.18 Peter says that all recent $DXY waves look corrective in nature.
The Importance of Paying Attention to Sub Waves
Often the market will send subtle signals to tell you what it’s going to do next. If you’re not paying attention to the subwaves (may don’t), you’ll miss big opportunities and run the risk of being incorrect in your analysis. Here’s a good example:
Earlier in the week, we’d traced out what appeared to be a zigzag (a 5-3-5 pattern. ie -- five waves down (there was an ending diagonal as part of the first wave), a three wave retrace to the upside, and then another five waves down).
A zigzag suggests a partial retrace will be next up, followed by another pattern (another zigzag or a triangle are the most common corrective patterns in this case).
However, on that Friday, the market dropped to a further new low, creating an additional wave, negating the zigzag pattern and making the entire pattern count as a “three.” I remarked at the time that I wasn’t sure how that was going to affect the overall market, but that we needed to pay attention to it. The SP500 also traced out an additional wave to the downside at the same time.
This pattern was foreshadowing a flat, although we could not have known that at the time. The subtle signals for the flat were as follows:
- The corrective wave down from 2818 was a 3 count.
- It was followed by a wave up, which did not make a new high. That wave was also a 3 count.
- What followed that wave was a 5 waver down to a new low. The entire pattern is a regular flat.
Now, the problem we have is that the wave down from 2818 is in three waves. As such. It needs to be completely retraced in order to “set up” for another pattern to the downside. However, it hasn’t been so far. Even though we’ve had a wave up after this wave, it did not fully retrace. Then we had a wave down in five waves. However, that original wave with the 3-count still needs a retrace back up to the top.
This is the importance of paying attention to subwaves and the count.
The market does the most predicable thing in the most unpredictable manner.
The other red flag in all this is that we have a contracting triangle tracing out in the NQ daily chart. This triangle is obvious and requires one more wave up to complete it (the E wave). Since NQ and ES more more or less together, than means we can expect a large wave up in ES and the SP500.
To summarize, if you’re going to use Elliott Wave to tell you where the market is going you need to:
- pay particular attention to the subwaves, because that’s where the subtle hints are that will affect the market in big way, and
- pay attention to sister indices (in this case, a check of NQ/NDX shows a triangle in progress, which supports the projected rally in ES.
This is where many analysts and EW novices make mistakes. You also need to pay attention to tops and bottoms. Missing a double top by a couple of points usually means you’ll eventually come back to test it.
Attention to detail can mean the difference between a great trade and a frustrating (and surprising) loss.
Elliott Wave Basics
There are two types of Elliott wave patterns:
- Motive (or impulsive waves) which are “trend” waves.
- Corrective waves, which are “counter trend” waves.
Motive waves contain five distinct waves that move the market forward in a trend. Counter trend waves are in 3 waves and simply correct the trend.
All these patterns move at what we call multiple degrees of trend (in other words, the market is fractal, meaning there are smaller series of waves that move in the same patterns within the larger patterns). The keys to analyzing Elliott waves is being able to recognize the patterns and the “degree” of trend (or countertrend) that you’re working within.
Impulsive (motive) waves move in very distinct and reliable patterns of five waves. Subwaves of motive waves measure out to specific lengths (fibonacci ratios) very accurately. Motive waves are the easiest waves to trade. You find them in a trending market.
Waves 1, 3, and 5 of a motive wave pattern each contain 5 impulsive subwaves. Waves 2 and 4 are countertrend waves and move in 3 waves.
Countertrend waves move in 3 waves and always retrace to their start eventually. Counrtertrend (corrective waves) are typically in patterns — for example, a triangle, flat, or zigzag. Waves within those patterns can be difficult to predict, but the patterns themselves are very predictable.
Fibonacci ratios run all through the market. They determine the lengths of waves and provide entry and exit points. These measurements are really accurate in trending markets, but more difficult to identify in corrective markets (we’ve been in a corrective market in all the asset classes I cover since 2009).
To use Elliott wave analysis accurately, you must be able to recognize the difference between a trend wave (motive) and a countertrend wave (corrective). There’s very much more to proper Elliott wave analysis, but this gives you the basics.
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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).
Last weekend, I was expecting a continuing rally to the previous high at ~ 2818. However, we didn't quite get there, which was a bit of a surprise; we turned down without making a new high, or double top.
That wave down ended up as a five waver, dropping from 2814 to 2620 (a slight new low). It's now obvious that the three wave up-and-down pattern from the high on November 8 is a flat (a 3-3-5 pattern).
On Friday, we experienced a deep drop in ES, although not to a new low (while NQ did drop to a slight new low). These two indices are now out-of-sync, which is rare these days.
The wave down in ES on Friday was corrective, a B wave. I know that because, although it looks like five waves, the third wave is the shortest wave, and that's not allowed in a 5-waver. So, corrective it is.
Up and down and out of control is how the market seemed. It was time to take a step back and figure out what was going on from a big picture perspective. One look at the daily chart of NQ and the situation became obvious. NQ is tracing out a contracting triangle and needs one more wave up (the E wave) to the upper triangle trendline somewhere around 7046).
Meanwhile, since the emini futures are generally moving in lock-step, I expect ES to retrace up to at least the 2710 area and possibly higher. Then we should get a turn down, which should lead to a dramatic new low below 2400.
As I've been saying, these large fourth waves consist of multiple patterns (what we call combination waves). Both ES and NQ developed a large running flat from the drop in January of this year. That was the first pattern.
The second pattern differs in ES and NQ. ES has traced out a flat and NQ has traced out a contracting triangle. Triangles, as part of a combination, are always the final pattern. So, I'd expect a fairly deep fifth wave out of the triangle to a new low in NQ.
In ES, once we test the top of the flat, it's most likely we'll get a zigzag down for a final pattern. This should be a dramatic drop and deliver the fear I've been expecting.
Summary: I'm looking for a rally this weekend to test the 2710 area at least, after a three wave drop on Friday.
Once we have a new high, we're looking for a dramatic drop to an area under 2400 ... at least.
Once we bottom in this large fourth wave, we'll be looking for one more final wave up to a new high. That fifth wave up to a new high will be the end of the 500 year bull market.
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