Elliott Wave and Double Divergence Set up Great Trade in SPY April 27

Apr 27, 2009: 6:57 PM CST

There I go again with the long titles, but I had to fit it all in.  Today, there were two excellent trading opportunities I wanted to highlight in today’s intraday structure.  One was a “buy the 4th wave” into confluence support (with a TICK divergence) and the second was a “sell short the 5th wave” that formed on a negative TICK and Momentum Divergence.  Let’s see both of these trade set-ups and how they played out.

Let’s start with the 1-minute structure:


(You’ll need to click for full image)

I’m only showing part of the day in this large chart so I can focus on the fractal Elliott Wave structure intraday and more than that, focus on the two trades that set-up in the highlighted zones. Let’s take this chart step-by-step – don’t get overwhelmed just yet.  Let’s walk through slowly.

First, we had a large gap-down that meandered its way up to fill early in the morning session.  Then we had a fractalized Elliott structure set-up in to the intraday highs just after 10:00am (CST).  You can also see a rising wedge that formed into those highs.

The way I use Elliott Wave intraday is not perfectly like you’re seeing here in hindsight, but to target the yellow zones.  The key to Elliott Wave is the “Third” Wave which clues you in to the possibilities or the “Ripples” in price that are expected to form.  In short, once you recognize a “third wave” (which is usually a large move), your trading strategy becomes the following:

1.  Look to buy the pullback/retracement into confluence support which comprises a 4th Wave

2.  Look to Sell Short the top of the fractalized 5th Wave to anticipate an A-B-C correction.

I argue that you can’t easily identify the first, second, or even the 3rd wave as they develop, but once you see what looks like a 3rd wave (aka – big impulse) you can look back to see if there might have been a possible Wave 1 and then Wave 2.  In today’s action, we had it.  Also, the 3rd wave itself subdivided.

So, jumping ahead, we want to buy when we think the 4th wave completed.  In the 1-minute chart, the 4th wave formed an “A-B-C” 3-wave pullback into confluence support via the 200 SMA and yesterday’s close.  On the 5-minute chart (see below), we pulled back into the confluence of yesterday’s close, the 20 EMA, and the 50 EMA.  You could have placed your stop beneath the (blue) 50 EMA and played for a target of a new swing high – which we got quickly after.  Look closely and you’ll see a slight positive TICK divergence as price came into confluence support.

Price then made a 5-wave fractal advance – of which you could have been long – into new highs, though this time we formed a negative TICK divergence (which leaps off the chart at you).  At this time, you could have exited your “4th wave long” and then entered a “sell after the 5th wave short” and played for an ABC wave (which actually went far lower than most people expected).

Notice how the fractal 5th wave (see 1-min chart) formed on a negative 3/10 Oscillator Momentum Divergence and TICK Divergence – both of which heightened the probabilities of a successful trade (you could have placed your stop just beyond your entry when you felt the final wave completed).

SPY 5-min structure:

The 5-min structure clearly highlights the negative divergence.

Now, in conclusion, do you *have* to use Elliott Wave in your intraday trading?  Absolutely not.  You could have simply bought a pullback into support and then sold a negative momentum and TICK divergence.

However, if you add Elliott Wave into your trading as a confirmation/non-confirmation tool, you might be able to add a little more alpha by putting on a larger position due to increased confidence and probability, or you’ll decide to take a trade that you might not otherwise have taken. 

Yes you can do it because a client of mine pointed this out to me excitedly in real time today and we discussed all this as it happened (buying wave 4 and then anticipating the end of the 5th wave).  We had discussed some of the nuances of intraday Elliott during our weekend phone call and here was a great opportunity to walk through a real-time example that played out very nicely.  I couldn’t have asked for a better example!

The point of this is to show you that Elliott Wave is just one of many indicators (or strategies) that can help you in your trading – no, it’s not perfect but no indicator is perfect.  All we can do is place the odds as much in our favor as possible and then honor our stops (manage our risk) accordingly… and try to have fun while doing it.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Travel to the LA Trader’s Expo in June to hear Corey speak on “Idealized Trades for Intraday Traders”

16 Comments

16 Responses to “Elliott Wave and Double Divergence Set up Great Trade in SPY April 27”

  1. Anonymous Says:

    Your a genius man – Thanks for supplying info like this. Helps me in learning. Btw you still in daytrader channel?

    Keep it coming!

    Loyal Follower

  2. Corey Rosenbloom Says:

    Thanks!

    No, I don’t participate in any chatrooms during the day. I’ve got too much else going on.

  3. Anonymous Says:

    “Corey Rosenbloom, CMT”

    Looks really good. Congratulations!

    By the way, you have a lot of loyal readers in the Philippines…

  4. Anonymous Says:

    Hi!
    I found your blog not long ago and I have to tell you that it’s my favorite. Great work!

    I spent a few hours during the weekend reading all the posts about trading days and today I was expecting another one: big gap down below the pivot and previous day range, market breath negative, etc. So I did not try to fill the gap as you recommended and waited for the retracement. I successfully shorted the 2nd wave after the first oversold TICK but carefully took some profit at the 50MA and some more at the 200MA.
    Since I’ve been reading about your Elliot Wave posts as well, as soon as I saw the 2nd wave make a bottom above the previous low, I got out immediately. What I did not dare to do was to get long on the 3rd wave, even though I was suspecting it was the 3rd wave, just because it was splitted in parts. So I just looked at the price go up and up because I was expecting a trending day down which at that point thought it was not going to happen.
    However, SRS (Ultra Short Real State) looked very strong compared to the others and I got in, which made a very good tranding day! (except last 30min)
    As for the SPY, I left it because couldn’t follow the 3rd wave pushes.
    All in all, the day was pretty good thanks to your master lessons.

    Thank you!

  5. Corey Rosenbloom Says:

    Anon!

    Thanks! It took two years to achieve so I’m very proud of those three letters 🙂

    I’m glad to have you and others as a reader in the Philippines! I’d love to visit someday.

    I need to make it a point to visit my readers for inspiration!

  6. Corey Rosenbloom Says:

    Anon,

    Thank you for sharing! The more we see these patterns and ‘make them our own,’ then the better we’ll recognize them in real time and trade them. Very good job trading! I’m glad to hear from your experiences.

    The thing about trend days is that even if they fall apart into the close, you’ve made a good deal of profit scalping in the direction of the trend all day.

    All the best!

  7. Abe Says:

    Good one! I do not trade five minutes charts (yet) but the ‘concept’ helps me in my time frames too; I’ve seen some discussions about using indicators (as macd) to identify 5 waves, do you have any opinion about it?

    congratulations for the certification

  8. sam Says:

    ok

  9. meques Says:

    just want to add, its very useful for MetaTrader platform clients to use in such days script named recognizer of 3rd elliot wave. Here how it looks like (time on charts – CEST): 1, 2, 3
    script for free download available here

  10. meques Says:

    sorry, not coorect links. here correct: 1 2 3

  11. Corey Rosenbloom Says:

    Abe,

    Thanks!

    Meques just gave us a few examples of an indicator. Some people use a 5/35 MACD indicator to note peaks – I think the 3/10 Oscillator does just fine.

    You’ll normally notice a new price and momentum high ont he 3rd wave and a negative divergence on the 5th wave.

    I’m not sure there’s a magic indicator that does the work for you but take a look at Meques’ charts.

  12. Hardev Singh Says:

    Dear Sir,
    I tried to trade just by using Elliot waves alone but it did not work as we are no where so far the ratios are concerned & even in sideways pattern it is more difficult.we are not sure of which ration will workout from 21.4%,38.2%,50% 61.8% or 78.6% then I tried to know & got little clue that actually the formations /pattern trading is the basis (like MA, elliot wave ratio are also conluencial to the chain reaction of all the small vallys & troves )I feel one can keep the wider picture in mind & trade the patterns but the first tragets are always born out the nearest patterns & they can play out to fit the patterns of higher time horizone IF ONE CAN SUCCESSFULLY LINK UP & DETECT THE CHAIN REACTION IT BECOMES A BIG TRADE OF COURSE THE TURNING POINTS ARE MOSTLY IDENTIFIED BY DIVERSIONS.There is diffculty if the diversion continues I do not know if more than 3 counts also the diversion can continue…!

  13. Hardev Singh Says:

    Today it seems S&P will break out above 875.63 that may lead to break out from the wedge, however all other diversions in place, This case may be an example of continued diversion & break out happens will indicators turning positive Since it has broken above friday high with postive diversion on the indicators (price driven breakout..?)

  14. meques Says:

    here is some divergence on which we should pay attention. The same divergence with rsi14, stoch lines, 3/10 osc and etc. so, odds on we can back to 850-860 before rallying above 900.

  15. Metatrader programing Says:

    Thanks for sharing those charts. very much informative and helpful regarding trade, hope we would get more nice article like this in future. Thanks for sharing this nice article. Liked the post. Keep it up.

  16. Metatrader programing Says:

    Thanks for giving the detailed elaboration on the 4th wave and the 5th wave. Could you please give some detailed information on Eliott wave it would be very useful. The blog and your information provided is really helpfull to understanding both the waves.