Divergences and a Potential Completed Elliott Pattern with Projection

Nov 21, 2008: 6:45 PM CST

Wow – what another surprise today’s final hour of trading brought us.  I’m sensing a pattern developing here.  Let’s see the 15-minute chart structure and observe the divergence that preceded the action, and then see if we can count a completed 5 wave impulse – complete with mini-fractal waves – of the final potential wave of the devastating Wave 3 down we just experienced.

DIA 15-min (divergence):

I didn’t want to spend too much time on this chart, other than to point out the major short-sell signal (two bearish dojis at key EMA resistance) mid-day Thursday which preceded a stunning collapse in the market that pushed us to new lows on a double-swing momentum divergence that preceded today’s end of day rally.  Remember the goal here is to build your pattern recognition skills so that you can perceive and act on developing price structures in real-time.

The new lows set this morning occurred on a positive momentum divergence – it was a “flat-line” divergence which carries less ‘weight’ than a strict positive divergence, but it was a clue nonetheless.

The more powerful signal came as price came into new lows about the 2:00pm hour which clearly (and unmistakably) formed a positive swing divergence just prior to price skyrocketing into new highs on the day thanks to some end-of-day good news and oversold technical conditions.

I actually wanted to draw your attention mainly to the potential that the final fractal wave of the current large-scale Wave 3 (which has devastated investors endlessly) might be ending, meaning we could (I underscore *could*) be ready to begin a corrective Wave 4 back to the upside which would certainly be welcome news to battered investors.

DIA 60-min (focus on Elliott Wave 5):

Check out my earlier posts “Elliott on the Dow” and “Elliott on the S&P 500” for the larger, weekly (and even monthly) structures.

That being said, let’s focus on the current fractal wave 5 down.  It appears now (at the close) to have completed a full, five-impulse Elliott pattern, which – if official – would finally put an end to the selling short-term and end this most vicious large-scale Wave 3 (perhaps of a large-scale corrective ABC pattern) for the time being.

Wave 1 took us from $96.00 to just above $86.00 which was painful.

Wave 2 formed a typical and straightforward “ABC” Corrective pattern that retraced just over the 38.2% Fibonacci retracement of Wave 1.

Wave 3 was brutal, as most third waves are.  Price formed a complete fractal 5-wave impulse, though a questionable one – from $91.00 to $80.00 which was a near “measured move” or 100% projection of the prior Wave 1.

Wave 4 was quite violent and puzzling, but that fits in with Elliott principles because Wave 2 was calmer and less ‘severe.’  Applying the guideline of alternation (if Wave 2 is flat/calm, then Wave 4 will be sharp/violent), we could argue that Elliott’s principles played out in real time yet again for us, with the only questionable action being that Wave 4 slightly nipped into the price territory of Wave 1… but also keep in mind this whole structure is a fractal wave.  Wave A was steep and stunning; B retraced a near exact 38.2% retracement of Wave A; Wave C stopped as wave A did at the falling 200 period SMA.

Wave 5 most likely has just terminated into new price lows (and on a divergence as well), having formed its own 5-wave Elliott impulse as you see above.

Consult your own analysis before making trading decisions, but it *could* be a low-risk trade idea to buy in for a potential large scale swing trade while placing a stop beneath the $75.00 level.  The ultimate Wave 4 price target *could* take us all the way to $100.00 on the DIA or beyond (10,000 Dow). That’s about a $20.00 target with a $5.00 stop or 4 to 1 reward to risk.

Take it day-by-day, but realize that sometimes price structures offers irresistible risk/reward conditions, knowing that the ‘edge’ will bear out long-term if you properly manage your trades in terms of price structure and risk-reward.

24 Comments

24 Responses to “Divergences and a Potential Completed Elliott Pattern with Projection”

  1. Anonymous Says:

    Corey,
    Visually, (fractal 5) seems to be longer than (fractal 3)?

  2. Corey Rosenbloom Says:

    That’s fine, according to basic Elliott principles. The major rule (#2) is that Wave 3 can never be the shortest drawn wave. It doesn’t have to be the longest (though usually it is), it just can’t be the shortest.

    In this case, we have an extended 5th wave with Wave 1 being the shortest, but not by much.

  3. Anonymous Says:

    This wave 5 of (3) is an expanding diagonal. The way Corey labeled it satisfies every rule and guidance for a “expanding diagonal”.

  4. Corey Rosenbloom Says:

    A reader brought to my attention as well that in an expanding diagonal Elliott pattern, Robert Prechter made it virtually a requirement that wave 4 overlap gently some of the price territory of Wave 1 to complete the ‘expanding’ pattern as we see here. Each subsequent impulse wave increased in size as did each corrective wave, making for quite an interesting pattern indeed.

  5. john Says:

    am quickly realizing your analysis is as good as some so called “bigger” names, usually better, i have seen and i find myself checking your thoughts now every day. well done.

  6. Anonymous Says:

    >your analysis is as good as some so called “bigger” names

    totally agree, too

  7. Corey Rosenbloom Says:

    John and Anon,

    Thank you so much for your compliments – I’m strongly encouraged and motivated by your continued support.

  8. eh Says:

    I don’t see how you can develop and then pen an entire thesis about the action in the last hour yesterday without mentioning Geithner, since that news seemed to be the catalyst for it.

  9. david@freefalluni.co.uk Says:

    Corey call me a bottom fisher but i took some agressive longs of yesterdays higher low in anticipation. I hedged over the weekend as this might be a smaller ABC ( target 856 ). On the SPX we also took suppport from a long term steep support line , yesterdays low was a touch and go but now we have formidable resistance overhead, hopefully the weak hands short get.. well weak and the bulls can trash the bears a little . Loving the analysis here.

  10. Corey Rosenbloom Says:

    EH,

    I sort of left that part open-ended so I could focus on the technicals. There was a report the treasury would guarantee more financing for up to three years almost at the same time as the Obama Treasury Secretary nominee Geithner, and also it was going into the final hour of an options expiration Friday which meant even a small spark could have generated a large price swing either way. I try to make small reference to news events and leave it to other sites to digest and interpret the news while I focus on the technicals for that perspective as best I can.

  11. Corey Rosenbloom Says:

    David,

    Bottom Fisher! No, just kidding. We’ll of course see what plays out next week but my guess is there will need to (or could) be a short-covering phase where these aggressive shorts who dominated most of last week’s actions take their profits and either stand aside or perhaps with savvy play this potential up move if we get it.

    And that’s also part of the character of the market – one side dominates, then the other side dominates. It’s part of the swing-nature (or push/pull & impulse/counter-impulse) nature of the market.

    We need to watch this potential up-move carefully for signs of true strength or just normal counter-trend cyclical behavior.

    Good job on the longs!

  12. Don Da Mon Says:

    Thanks for this site. I read it regularly to help in my decision making on my 401K equity mutual funds which is limited to long only positions. I’m not a day trader but do use this analysis to understand the larger picture, too. Thanks.

    Doesn’t anyone see the reason for the bounce as options expiration? I hear very little of this on the news. With that assumption, I have a hard time seeing this as being a technical reversal (although I am hopeful). It seems the market club analysis predicts a lower target has yet to be reached. Market Club Descending Triangle and this Elliot Theory target reached are conflicting analyses.

    Does options expiration weaken this Elliot Theory – bounce expected?

    Also, can you please provide details how you set the target of 10000?

    Thanks for your daily posts.

  13. Don Da Mon Says:

    Corey, please consider this ..

    What if instead of completing wave 5, we are in the middle of wave 3. (i.e. the circle 1,2,3 is really just 1) That appears more clearly to me and would match the descending triangle pattern targets. (650 on S&P?)

    Options expiration just interrupted the pattern.

  14. Corey Rosenbloom Says:

    Don,

    You’re right I think. Options Exp. Fridays can lead to some erratic, volatile moves in both directions and with so much on the line (and having to balance out large positions), funds tend to arb and jump at any sort of news, so any spark can send price soaring or falling with a hideous bandwagon effect that occurs very quickly.

    My interpretation of Options Expiration days is that there’s neither a bullish nor a bearish bias in them, but that volume tends to run much higher, price moves often lack technical or fundamental explanations, and various stocks tend to ‘cluster’ or ‘pin’ to the strike with the most open interest which often leads to ’round number’ pricings at the end of the day – though of course not always.

    Regarding Hewison’s interpretation, that’s part of the beauty (or curse?) of charting and technical analysis as a way to interpret market information. People may look at the exact same chart and then hold radically divergent views based on their experience and methodology. Is it a descending triangle breakdown or is it a completed Elliott Impulse? It’s chart pattern analysis vs Elliott Wave Theory.

    Ultimately, so long as your methodology provides you with consistently low-risk, high-reward trading opportunities, that should give you the edge you need to succeed long-term, even when that means you have widely divergent views. Ultimately, it’s the risk/reward (and money management) that accompanies your analysis that determines trading success or not, not your accuracy in predicting market moves.

    What it could mean is that price is at a key inflection point – and the 2002 bear market lows is a major inflection point – where price cannot stay here for long. Place your bet as to which way it will go and place your stop on the opposite side of where you think price will head. Both positions would give a larger reward quotient vs the risk (stop) so over say a few dozen or few hundred similar trades, the edge *should* play out.

  15. Corey Rosenbloom Says:

    Don,

    Regarding the 10,000 to 11,000 target, if we base the current structure off Elliott Wave, then Wave 4 cannot retrace into the price territory of Wave 1, which terminated at 11,700 in March ’08. Thus, wave 4 could not retrace beyond that, but will most likely retrace some Fibonacci relationship either of the entire impulse or – most likely – of Wave 3. If that’s the case (Wave 3), here are the potential Fibonacci targets for Wave 4 (estimations):

    38.2%: 9,650
    50.0%: 10,300
    61.8%: 11,000

    My guess is that because Wave 2 was ‘normal,’ then Wave 4 could be violent or steep and could retrace greater than the 61% level. However, according to Elliott principles, it can’t retrace beyond 11,600 which would mark the bottom of Wave 1.

    Of course, I’m trying to interpret Elliott as best I can and I’m relatively new to the discipline so this is just my way to set logical targets and sort of play out the scenario in real time.

  16. Anonymous Says:

    Corey,
    The presence of the ‘5-waves pattern’, illustrated in the chart, indicated that we are still in a corrective wave.
    Here are my counts:
    Wave 3 (major 3) ended on Oct 10 with DIA at 7773.71.
    Wave 4 (major 4) ended on Nov 4 at 9711.46.
    (fractal 1) of major 5 ended on Nov 20 at 7464.51.
    We are now in (fractal 2) of major 5, with the top target of 8583.33.
    After that, we could be seeing the ‘watefall’ sequence of (fractal 3) of major 5.

  17. talcumboy Says:

    Hi there Corey – I recently discovered your blog and have really enjoyed your analysis!
    I was just wondering what momentum indicator you are using and which settings. I’m not sure I’m using the right one to replicate your charts.
    It might be cool to see which indicators and settings you are using for those of us who’d like to try your charts at home :).

  18. Anonymous Says:

    Ah the Beauty and the Beast of Elliot Wave. If its a triangle its a triangle but its interesting that a post on EW produces much discussion in fact more than i have seen here in a while . I personally think a rottenly complex and evolving 4th has thrown many an elliotician for a loop which has made risk management all the more prudent since we are dealing with small numbers. My action has been to very careful with position size to allow a looser stop.

  19. Corey Rosenbloom Says:

    Talcumboy,

    Thanks for reading!

    I did a post a few months ago entitled “How I Set-Up My Charts” which describes the process in far more detail than I can in the comment box here.

    A quick summary in terms of StockCharts.com:

    20 & 50 EMA
    200 SMA
    Default Bollinger Band
    MACD 3, 10, 16
    Mostly 5-min charts

    Let me know if I can be of further assistance.

  20. Corey Rosenbloom Says:

    Anon,

    Indeed it could all be a complex corrective phase, which is puzzling to us all, and I’m open to interpretations, but it just almost feels like this hideous third wave has run its course and projections. Your count takes us quite lower on the chart, but let’s see how the next couple of weeks play out for signs of new information.

  21. Corey Rosenbloom Says:

    Anon,

    That’s my thoughts exactly! This post is probably setting an AtT blog record, other than the congratulatory comment post – I’m always impressed by the knowledge and support of my readers.

    This 4th wave – if it indeed is classified as such – was difficult. Was it a diagonal? Was it a triangle? What exactly were the parameters? Did it sub-divide into a complex pattern? It was rough.

    I tend to err on the side of ‘my stops are too close’ but I’ve had to decrease the intraday sizes and go for larger stops against my comfort zone but within my research. Research consistently shows that if the initial target is small and the stop is larger, most strategies test out best (to the contrary of popular thought) but still. In highly volatile environments, particularly if you’re relying on ATR strategies, that stop needs to go a good distance from entry.

    Ultimately, it’s risk-management and proper position control that saves us in this tenuous environment.

  22. Don-Da-Mon Says:

    Extending this by yet another post.

    If this is a triangle which broke support at 830-50ish on the S&P, this two day rally might look like a test back up to for resistence. (i.e what was support becomes resistence) The downward target from a descending triangle appears to still be valid.

    I can’t help but wonder , if the downward target was met would all other upward signals/analysis still be valid? (i.e. still a divergence, fib %s still line up, still 10K plus upward targets)

    Is there a tool that could show what a FUTURE chart would look like given that a future target price is reached? (Sounds like a great tool, eh?) Is that even possible?(What would MACD, Momentum, RSI, others show then?)

    If all things line up at a future descending triangle lower target, then it might be a better place to enter.

  23. Corey Rosenbloom Says:

    Don,

    That would be nice wouldn’t it? It can be done using a good data feed like TradeStation (where you can record and DL indicator values) and Excel actually.

    You can deconstruct each formula (RSI, MACD) so that you can input future prices and then Excel will calculate the future values, or what the price must do to result in a given RSI value (such as ‘overbought/oversold’, etc). It’s a future projection so obviously it isn’t absolute, but it can be helpful if you want to know what price level will push a certain indicator to a certain point and what you believe will happen at that point.

    Let me break this comment to discuss the triangle.

  24. Corey Rosenbloom Says:

    Generally, it’s ‘either/or’ especially with potentially conflicting signals but sometimes they can be worked together. Keep in mind that most technical signals are accurate to the 60% or less level, so it really becomes a choice of “which seems to have the highest probability” or “which gives me a smaller risk relative to a higher reward” and then go with that decision and don’t try to be perfect.

    Try to set it up like a puzzle, which can be fun (or challenging). If virtually all signals lean one way, go that way. If signals contradict directly, then perhaps lighten your position from what it otherwise might have been and be more ready to take evasive action if need be.

    Signals are valid until disconfirmed, and each signal should have a certain price where the analysis (projection) is invalidated. Signals should not be generated in isolation.

    Also, we take it day by day and modify our analysis if needed as the structure becomes clearer.