Ralph Elliott’s ground-breaking book, Nature’s Law — The Secret of the Universe, was published on June 10, 1946. He died less than two years later, on January 15, 1948. He has been in ill health for over twenty years, an affliction that struck a couple of years before the 1929 stock market crash.
In 1932, having lost a large amount of his own money in the crash, at the age of 64, he was forced to turn to a new profession; he became intensely interested in the stock market.
What’s remarkable about his work is that he undertook it without computers and, in fact, had to invent his own ruler, called a “proportional divider,” the fulcrum of which could be moved to measure a 61.8% (the fibonacci “golden mean”) wavelength at various degrees of trend (as the market traces out the same patterns over and over again in a fractal manner).
Even at this early stage, Elliott was able to predict market moves with astounding accuracy and became somewhat of a sensation among a relatively small contingent of wall street brokers, most notably Charles Collins and Hamilton Bolton. Both had written books on various aspects of the stock market during the 1930s.
It takes some time to get comfortable with the quite unbelievable accuracy of this method in determining market moves. It took me about five years to master (I’m continually finding new subtleties within it), which included an intense study of the market during that period (over 20,000 hours). It has taken a bit longer to feel totally comfortable with its reliability; it takes time to buy into the fact that it simply never fails to follow Elliott’s rules.
If it fails for some reason, it’s the analyst who’s at fault, in my experience. Typically, the analyst allows some level of bias to get into their analysis and this results often in missing key measurements, or simply not delving deeply enough into the wave pattern.
In my work, I’ve discovered errors in the Elliott Wave Principle book and refined some of the rules, discounted others, to develop a system that seems to me to be almost infallible. The small number of errors I make have always been due to my own lack of discipline.
The Elliott Wave Principle has proven to me to be astounding in its accuracy and reliability.
Impulsive (Motive) Waves are Quite Rare
Thanks to the work of Ralph Nelson Elliott in figuring out how the market moves, we know that ending waves are always in five waves. Final waves of a trend can either be a motive five pattern, an ending diagonal, or a triangle of five waves. Those are the only choices; the final wave must be a fifth wave and it must consist of five sub-waves.
The other place to find them, of course, is in a trending market. At the present time, we’re in a countertrend wave (a fourth wave). Trending waves in a five wave pattern are waves 1, 3, and 5.
So, impulsive (motive) waves are unique patterns that are actually quite rare. While instances of these waves on occasion can look quite different than what you might expect, they must conform to a specific set of rules:
- (X) An impulse always subdivides into five waves.
- (X) Wave 1 always subdivides into an impulse.
- (X) Wave 3 always subdivides into an impulse.
- (X) Wave 5 always subdivides into an impulse, or a diagonal triangle.
- Wave 2 always subdivides into a zigzag, flat, or combination.
- Wave 4 always subdivides into a zigzag, flat, triangle, or combination.
- Wave 2 never moves beyond the start of wave 1.
- Wave 3 always moves beyond the end of wave 1.
- Wave 3 is never the shortest wave.
- Wave 4 never moves beyond the end of wave 1.
- Never are waves 1, 3, and 5 all extended.
These rules cannot be broken. If you were to analyze the current wave up from Dec. 26, you’d find it breaks the first four rules, which are arguably, the most important.
As a final fifth wave must be in five waves, this cannot be that wave, nor can it be the first wave of a five wave pattern. It is clearly a corrective wave.
Below is a visual representation of a five wave motive pattern.
What’s as important as the actual “count” (five waves) is the look and measurement of the underlying wave structure.
Corrective waves (waves 2 and 4) must be balanced in terms of size, and all waves must conform to specific fibonacci-based wave lengths, in order to meat the “impulsive” wave test. What’s referred to as “the right look” is often ignored by many analysts, and the specifics on wave measurement are for the most part, undocumented:
- Wave 1 is measured as a length of one unit. Based upon this measurement, wave 3 will be either 1.618 or 2.618 times the wave 1 length. Wave 5 is usually 1.618 times wave 1 but, occasionally, can extend to 2.618 times wave 1.
- Wave 2 must retrace 62% of wave 1 and wave 4 must retrace 38% of the combined length of waves 1 through 3.
The current wave up from Dec. 26 doesn’t even come close to meeting these requirements.
So, when I continually run up against the skepticism that this system can’t possible work, I “get it.” Most people aren’t willing to put in the work to master this method of forecasting the market. Those who do know that’s it’s the most accurate method known. It’s very simply how the market moves.
Elliott Wave Basics
Here is a page dedicated to a relatively basic description of the Elliott Wave Principle. You’ll also find a link to the book by Bob Prechter and A. J. Frost.
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US Market Snapshot (based on end-of-week wave structure)
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).
We're still sitting near the top of a B wave that's risen to about the 76% level of the height of the previous set of waves down from the all-time high on October 3, 2018. Almost all the other assets I cover on a daily basis are hovering at inflection points. The "greed factor" is at near an extreme; volume is at a low. It's past time to look for a turn down in a continuation of the larger fourth wave.
This week, we tracked a small fourth wave downturn that took the entire week, kicked off by a three wave move to the downside. The current move is not quite finished but I expect it to be on Monday morning. If we get a substantial move below 2717, something else may be happening.
Expect a move up from there to the previous high (around 2820) before the long-awaited turn down. The 76% usually contains a large corrective rally.
Because this "fourth wave" down took a week to play out, I'd expect this fifth wave up to take the same period of time. As a result, I'd be looking for a high either on Friday of this coming week, or the following Monday.
As I've been saying, the wave up from Dec. 26 is clearly corrective and, as a result, must fully retrace. This is supported by the US Dollar Index, the major USD currency pairs, WTI Oil, along with DAX and other international exchanges.
Summary: My preference is for a dramatic drop in a C wave to a new low that should begin this week. The culmination of this drop should mark the bottom of large fourth wave in progress since January 29, 2018 - over a full year of Hell. It may be a dramatic drop that lasts multiple months, and will target the previous fourth wave area somewhere under 2100.
Once we've completed the fourth wave down, we'll have a long climb to a final new high in a fifth wave.
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