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Elliott Wave Review and Update

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rmr1976

Posted : Friday, February 3, 2006 11:38:14 PM

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Joined: 12/19/2004
Posts: 457

One of the best things about Worden's software is the ability to write comments on notes. I don't know of any other technical software that makes writing notes on charts so easy.

When I first signed up for Telechart, way back in 2000, I didn't think it was a big deal. "How important could keeping a diary about your market opinion be?" I thought.

Well, it is probably essential for any aspiring trader to write their thoughts down, so they can review what was going through their minds, in real time. They can also capture some of the history and news background that goes into making a chart pattern.

With that, I'd like to review some of my posts on the market using Elliott Wave.

Back in July, I was bullish on the market. I wrote:
Today likely marked a significant bottom...

"In Elliott, the crucial question: does a complete 5 wave advance signal the end of the move? That is very difficult to determine in advance. In my opinion, I suspect that the March high will be broken, and that will be the end of wave 5,1. So I expect more waves in the direction of the current trend. SP-500 will have support around 1200, give or take 10 points.

Now is a very low risk entry point to go long the broad market. If the SP-500 trades below today's low, this analysis is off. The SP should not trade below today's low in the forseeable future."

Looking back, that low held up for just over 3 months.

On the violation of the low, I altered my outlook. On October 24, I wrote:

Today likely marked a significant bottom...

(At Bottom of Post)

"Wave e of this diagonal triangle (wedge) is likely to lead the market up toward the highs for the year, and may permit the SP to make a slightly higher high. I do not anticipate 1300 to be taken out, but the final wave of a diagonal may overshoot. I do believe 1250 (+/- 10 points) is a reasonable target and would be very cautious with long positions at that time.

Keep in mind that the implications of an upward slanting wedge are bearish, but only upon the breakdown. Short term traders may be able to profit from the coming swings by playing the long side of the market, and using previous support/resistance levels as targets.

Intermediate term trend followers could maintain any long positions and use a rather short to intermediate term moving average as a stop.

Longer term investors are likely to find stocks to be a high risk/low reward proposition at this time.

Look out for signs of exhaustion (ie. candle reversals) at key resistance levels. The market action is likely to be very deceptive for the next few months.

I'd be especially cautious around March. If this analysis is correct, the breakdown from the wedge pattern could rival the initial decline from the 2000 high."

I'd say my analysis has been pretty accurate with projecting support and resistance levels. My one error was the following:

Don't be fooled by this rally, long term outlook isn't good.

"For the adventurous, initiating shorts or bearish trades appears to me to be the lower risk play at this time. A close stop for intermediate traders (ie. 1280), provides a low risk point to initiate shorts. If held significant longs, I'd be getting out of the market asap. At the very least, be hedged."

There was a minor, untradeable swing down from the time of that note to the December low. Once January started, we broke out to 1295. So I was off by 1% from that note. I actually traded that analysis, and stopped myself out.

What is the current state of the market?

There are 3 possibilities worth considering, in my opinion. The top 2 are bearish, the third one bullish.

Bearish outlook:
We are still in some sort of wedge/triangle formation in all of the major indexes, especially the Russell 2000. The question is, how far along.

The Russell continues to surprise to the upside.
The main possibility I'm considering is a wedge/diagonal triangle formation from Elliott Wave.

It has specific requirements, in that wave 3 cannot be the shortest swing in the formation.

I see the following as a strong possibility:

Wave 1: 8/13/04 to 12/31/04 Length: 27.17%
Wave 3: 4/29/05 to 8/3/05 Length: 20.78%
Wave 5: 10/19/05 to 2/3/06(?) Length: 19.79

As wave 5 of a diagonal triangle cannot be longer than wave 3, we are within 1% of the major high in the Russell 2000 if this count turns out to be correct. That would mean this is the start of a bear market.

The alternate possibility is:

Wave 1: 8/13/04 to 12/31/04 Length: 27.17%
Wave 3: a) 4/29/05 to 8/3/05 Length: 20.78%
b) 7/29/05 to 10/17/05 Length: -10.2% (50% retrace of wave a)
c) 10/19/05 to 1/19/06(?) Length: 16.61%
Wave a,b,c length: 29.19%

This count is slightly less bearish, in that we could retrace 61.8% of wave 3, and end up at 603, with time for another rise of 20%+ before the bear market starts.

Regardless, even the less bearish count suggests the potential for a sharp decline of 18% in small cap stocks.

The major indices have a similar outlook, although the requirements for the SP and the Nasdaq are not a strict.

I see them as forming an Elliott Wave triangle. Likewise, we could have just ended wave e, and in the first legs of a major bear market, or wave c, with a short but sharp sell off, which would take us back to the October lows.

The bull count:
Wave 5.3.4, with wave a few more bullish uptrends to go, which could take us over 1350.

Suffice it to say: I don't put a lot of faith in this count. Perhaps if Bernake cuts rates will I consider this count to be the operative one.

Summary: The Elliott Wave outlook is bearish on at least the intermediate trend, with a potentially sharp sell off in the small cap sector. This could also be the beginning of a larger bear market that could violate the 2005 lows.

Some of my prior Elliott Wave Posts:

Any Elliott Wave students here?

Today likely marked a significant bottom...

Fibonacci retracements Time Counts and the SP-500.

Don't be fooled by this rally, long term outlook isn't good.

Longer term Market Patterns...

(links cleaned up by Moderator)

HaveNoCents

Posted : Saturday, February 4, 2006 8:23:58 PM

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Joined: 12/8/2004
Posts: 1,301

I have never been a follower of Elliot wave theory, but I am certainly going to learn as much as I can about it over the coming weeks.

bknight

Posted : Saturday, February 4, 2006 9:22:17 PM

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Posts: 415

There is a very valid impulse count for the SP500 from Oct 03, with wave 3 starting Aug 04, with wave 3 starting Apr 05, with wave 4 of this move starting in Jan 06. We have to finish wave 4 then a push to new highs. This will end the wave 3 from Apr 05, starting a wave 4 correction. Then wave 5 with much higher highs.

The move from Oct 03 could be a corrective wave also with the highs either already achieved or slightly higher during the year.

I favor the bull case as having a higher probability.

HaveNoCents

Posted : Saturday, February 4, 2006 9:54:55 PM

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Posts: 1,301

I just purchased the following on elliot wave theory.

1 "Applying Elliott Wave Theory Profitably"
Steven W. Poser; Hardcover;
1 "Elliott Wave Principle : Key to Market Behavior (Wiley Trading Advantage)"
A.J. Frost; Paperback;
Shipping estimate for these items: February 6, 2006

Delivery estimate: February 7, 2006
1 "Mastering Elliot Wave: Presenting the Neely Method: The First Scientific, Objective Approach to Market Forecasting with the Elliott Wave Theory (version 2)"
Glenn Neely; Hardcover;

HaveNoCents

Posted : Saturday, February 4, 2006 9:56:56 PM

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Posts: 1,301

Has anyone used the MT predictor software which works with Tc2005 and predicts elliott wave patterns?

rmr1976

Posted : Saturday, February 4, 2006 11:27:51 PM

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Posts: 457

QUOTE (bknight)

I don't like that POV for the following reasons:

1. The move from the October low does not look impulsive to me, on the large cap indexes. This count makes more sense for small caps like the Russell 2000, which I have in an ending diagonal.

2. You could make the case that the bear market decline was a 5 wave affair, which would imply that this is correcive bull market within a larger bear market.

3. After such a bubble that ended in 2000 I can count as a complete 5 waves. That would imply the bear market was wave A, with this bull market being wave B. Wave C down is to come.

4. Fundamentals favor the bear count--inverted yield curve, little doubt that consumer spending will decline, a slow down in housing at the very least, no reason for wages to grow due to global competition, and the growing debt in all sectors of the economy--consumer, govt. and corporate (including off balance sheet liabilities), cause me concern.

rmr1976

Posted : Sunday, February 5, 2006 4:22:14 AM

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Posts: 457

Regarding point 2 from above.

The key point in Elliott Wave, at least if you follow Pretchers formulation, is internal structure.

I have found many of Pretcher's guidelines helpful, even though I don't necessarily agree with his real time analysis. He has let his desire to call the major top distort his thinking, even though there is much to recommend about that outlook.

Back to the waves:

The Nasdaq is definitely 5 waves down, so the correction of the 1990's excesses is not over. If the bear market in tech is not over, I don't see how the other indexes could buck the trend in the Nasdaq.

The SP-500 can be correctly identified as a complete 3 waves down to the 2002 low. But that does not justify considering this rally as an impulse. If anything, I'd have expected (and did expect) a bull market from the 2002 levels, simply due to the numerous Fed rate cuts, as well as the multiple momentum divergences on the weekly and monthly charts. But the rally is a bear market rally, and I do not expect new highs in the SP to be made this time around.

A more plausible bullish count would start at the August 2004 low, which would have been wave 1 of 5 of C. My bullish scenario (given in the links above) had considered that possibility, which is my 3rd scenario.

Finally, the risk premiums in the market are just too low. Corporates vs. treasuries are just too narrow. Most, based on their behavior in the market, seem to think that the good times of easy money will continue to roll. That is usually a sign that they are mistaken.

If Central Banks continue to drive up gold, and Japan starts to raise rates, this round of easy money would be over. The BOJ rate policy certainly affects the U.S. markets in ways most don't currently understand.

HaveNoCents

Posted : Sunday, February 5, 2006 11:43:22 AM

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As a complete novice in elliot wave theory, help me out here. As I see it on the Nasdaq, wave 1 occured between Oct 8, 2002 and completed 12/3/2002. Wave 2 completed 3/14/03. Wave 3 completed on 1/21/04. Wave 4 completed on 8/12/04, and basically we are still in wave 5.

When looking at it on a weekly long term chart we are still in wave three. Am I missing something here?

rmr1976

Posted : Sunday, February 5, 2006 12:41:11 PM

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Posts: 457

HnC

Yes. Everyone likes to call that wave 1 becaue 5 wave swings also easier to count. No one likes to deal with corrective waves. They literally cause headaches.
But markets are in a corrective wave most of the time. Five wave swings are the exception, not the norm.

At least if you follow the rules of Elliott himself, in order to count something as a 5 wave move, you would have to be able to ID 5 waves in most cases.

On either the weekly or the daily, I can't count the initial rise from October 2002 as a 5 wave swing. I only see 3 swings.

Especially considering the size of the correction from December to March 2003 low, which is also 3 swings, I am comfortable calling this entire bull market a complex correction from 2002.

Why is that important? If this is correct, then the next bear market should be very long in time, and ultimately violate the 2002 lows by a significant margin.

I don't think a bear market this year would lose that much that fast. But we could break below the 2005 lows without much of a problem.

Ultimately, the correct count isn't all that important in the short to intermediate term. It is where you project the end points of the waves that is important, and what level violates your scenario.

You can place tight stops with Elliott that you cannot do with other trend following methods.

Right now, the Nasdaq is very close to the 23% retracement of the entire bear market. I had projected a potential target of 2400, which is still possible if my second scenario for the Russell 2000 is correct. That would mean we are inside of a triangle pattern that extends in time and has 9 waves instead of the usual 5.

It should be pretty interesting the next few months.

Posted : Sunday, February 5, 2006 3:48:26 PM

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Joined: 4/6/2005
Posts: 239

rmr,

Thank you for you wave analysis, I have found them very infomative and helpful. I am trying to learn Ellitot wave theory and find it somewhat daunting to get a good wave count.

I believe that the peak in early 2000 was the 5th wave of Grand supercycle, supercycle and cycle degree; and that the bottom in late 2002 was corrective wave A of cycle degree, meaning we are in wave B and probobably near it's end, which of course means that another leg down, wave C is at hand. Between wave theory and the current global political and economic situation (as mentioned above) I foresee a significant retracement in the coming wave C that will make the 2000-2002 retracement a mere blip (triple digits for the Dow and Nas?). I hope I'm wrong but I'd rather be prepared and wrong than not prepared and right.

S2

rmr1976

Posted : Sunday, February 5, 2006 10:44:43 PM

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Posts: 457

S2,

I don't bother worrying about grand supercycles and the like. That time frame is too long, and the data over such a long period is not comparable.

I prefer to stick with data that has a long history. Going back to the 1800's, as Pretcher does, is not valid, in my opinion.

That said, the long term count for the dow (from the 1920's) shows 5 waves up that ended in 2000. It has barely even started its correction.

I look at it like this.
During the 1930's, the U.S. was still on some sort of gold standard. At the end of wave 3, the U.S. got involved in Vietnam. In wave 4, Nixon took the U.S. off the gold standard.

Now we are in a wave 5, due to the money and credit expansion, that has no precedent in history.

Never has there been a successful paper currency, and now world trade is based on one. The boom came in the 80's and 90's. The distortions and imbalances caused by it are starting to get the big players (central banks) concerned.

We suffer from the Chinese curse. We certainly do live in interesting times.

Posted : Monday, February 6, 2006 12:02:55 AM

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Joined: 4/6/2005
Posts: 239

rmr,

Your points on currency backing are well taken; and I tend to agree with your thought of not worrying about the grand supercycle and supercycle. That being said however I liken it to orienting yourself; if you step out the door and find yourself on third street that is good to know, but it is also beneficial to know third street in what city, state and country to really be meaningful. So, if 2000 was the end of a 5th wave, which I too think it was, it also appears to be the 5th of the 5th of the 5th of all impulse waves, meaning a huge correction has just started. If that is true then we may be in for a bearish market for years to come, not that there won't be bullish corrections to this bearish correction.

I think this is why Prechter has been calling crash for so long, not that he is wrong but probably premature. As you mention since we have transitioned to a fiat currency I imagine that too will have an impact on the waves and how they play out, making for unsure and intersting times as you point out.

I, for one, plan on honing my short game, just in case I'm correct.

Plese continue to share your thoughts and insights.

rmr1976

Posted : Tuesday, February 7, 2006 10:57:27 PM

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Posts: 457

Market Update:

The Large Caps continue to demonstrate the weakness I'm expecting. The SP, Nasdaq and Dow all closed below their 55 day moving averages, confirming the view that this is at least an intermediate downtrend.

Small caps, measured by the Russell 2000, continue to look strong, despite the fact they sold off rather sharply today. They lost 1.47%. Yet, they still remain above the 21 day and well above the 55 day moving averages (exponential).

I believe a significant acceleration in the downward momentum will only occur when small caps can close below the 55 day average.

All things considered, I still can't narrow down which count is to be preferred at this point. As much as I'd like to say I'm calling THE top of the market, my working assumption is that we are in an intermediate downtrend (wave 4) of a diagonal triangle, and could have support between 650 and 680, if the 55 day moving average is taken out.

From there, it would be possible for the market to rally and set some marginal new highs.

HaveNoCents

Posted : Tuesday, February 7, 2006 11:03:11 PM

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Posts: 1,301

rmr, I am reading up on elliott waves right now. Your thread on HOV was so astoundingly accurate I felt I had to learn about this.

rmr1976

Posted : Thursday, February 9, 2006 5:08:33 PM

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Joined: 12/19/2004
Posts: 457

Interesting day on Wall St.

I listen to Bloomberg at work. When I left earlier in the day, the market was up near 1%. I check online after the close, and I see the market is down slightly.

Looking at the charts, the Nasdaq, SP, and Russell 2000 all have ugly looking candles, with long upper shadows.

The SP formed what could arguably be a shooting star. The Nasdaq formed what could be called a bearish engulfing pattern. The problem with calling these "reversal" patterns is that there wasn't a defined uptrend preceeding them. There was only one rising day before these patterns.

Despite these reservations, the appearance of these formations strengthens the bearish case, IMHO.

HaveNoCents

Posted : Thursday, February 9, 2006 6:11:48 PM

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Today's complete reversal is bearish. I know the market is going to drop more than 10%, I just don't know when that downward trend will begin, but I still believe it will be this month.

HaveNoCents

Posted : Friday, February 10, 2006 3:24:01 PM

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Posts: 1,301

Today we had a postive reversal of our negative reversal. This market doesn't know what it wants to do yet.

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