Elliott Wave Interpretation for the Financials XLF

Dec 17, 2008: 3:57 PM CST

Reader Vasu requested that I give my interpretation of the current possible Elliott Wave Count on the Financial ETF (XLF) and without further hesitation, here is my current take on the Elliott count on the XLF.

XLF – Financials ETF:

On the normal site, this count is impossible to read – you’ll need to click the image to view the large-scale chart.

I’ll let the numbers speak for themselves in terms of the past count – to my knowledge, each Wave is internally valid in terms of how I labeled them (meaning each wave satisfies the Elliott Rules as I understand them).  In short, Large scale (circled) Wave 1 terminated in January (though an alternate interpretation has the termination point in March) while large scale (circled) Wave 2 terminated in May (any interpretation supports that count).

The question still remains:  Which Elliott Wave 4 Rally Are We Experiencing Currently?

There’s little doubt that we’re in a Wave 4 rally among Elliotticians, but there is indeed widespread debate about WHICH Wave 4 we are in.  Reader Vasu pointed out that the Financials tend to lead the market and that’s generally correct, to get ahead of the market, it might be beneficial to keep a close watch on the XLF.

I have us currently in small fractal wave iv of the fractal wave (3) of larger structural wave 3 (circled) down.  I know that’s not what a lot of people – myself included – want to hear but that’s the count I’m getting and I’m certainly open to other interpretation and discussion by readers.

IF this is the correct count, then we’re likely in the B wave of an “ABC” pattern.

I see it another way – we could be already starting the fractal v (fifth) wave of the 3rd wave down, provided you interpret my lowercase “abc” of A wave as a complete corrective wave in and of itself – a valid interpretation I believe.

To be ‘fair and balanced,’ (and hopefully less confusing) I wanted to provide a more Conservative Elliott Wave analysis on the same chart, which has us officially completing the 3rd Wave down in November.

If the more conservative count is correct, then we’re already in Large-Scale Wave 4, which means the final termination point for large-scale Wave 5 will be higher than under the previous, more ‘aggressive’ count (that still has us in Wave 3).

From a non-Elliott perspective, I want to point out that we’re experiencing overhead resistance via the 50 EMA and are forming this counter-trend rally on diminishing volume – both of which are bearish.  Nor is that a base upon which to build a large-scale Wave 4.

I do want to caution my hesitation for embracing this count fully (though I would like to do so) because this has fractal waves 4 and 5 of the Larger (circled) 3rd wave taking less time than fractal Wave 2 did.  In other words, Waves 4 and 5 played out in less time than it took for fractal Wave 2 to play out – that bothers me.

I again want to open the discussion to your counts and analysis – and strongly encourage you to do your own analysis.  These posts are for educational purposes and to help you apply possible Elliott counts in real time.

Corey Rosenbloom
Afraid to Trade.com

16 Comments

16 Responses to “Elliott Wave Interpretation for the Financials XLF”

  1. Tom, Wappingers Falls, NY Says:

    Thanks for the continuing analysis. With the downtrend caused by credit/mortgages and the tremendous outside influences trying to fit it (helicopters of $$ and 0% interest rates) it isn’t surprising that the trends are not operating at the speed of normal capitalism. Is it?

  2. NotAftraidofTrend Says:

    Looks like that fractal 4C up was completed today. Therefore, we should now be fractal 5 down.

    Incidentally, Emini S&P had a low of 887 last night but that was not tested during RTH today. Maybe, 887 will be tested tomorrow during RTH. Moreover, Emini S&P may even make a lower low tonight. The probability of making a higher high tonight looks very remote.

  3. brent Says:

    hello, it seems to me after 8 years of trading and listening to elliot wave diagnosis that if no one can agree where the count is then to use elliot as a way to trade the market is rather useless. best just stick with price and volume and trend and hard stops. just my opinion.

  4. NotAfraidofTrend Says:

    brent, I agree with you.

    A few years back, I was using an expensive Elliott wave program that labeled the waves. Once I took a long position on a pullback because the count said that we were in wave 3. But instead of a pullback, it turned out to be a new wave down. After the pullback had turned into a big down move, the program just relabled the original count from 1,2,3 to A,B,C. Of course, after the fact, i.e. after I has already lost some money!

    If even the hard-wired logic of the software program can be wrong, despite the program following a consistent set of rules, it is very easy for subjective humans to be wrong.

    But we can’t even blame the software because new information can always change the mood of the market.

  5. AMA Says:

    Thanks for your continual excellent posts. How would you see the SKF as a an opposite move to the XLF. Would it be counter elliott wave counting?

  6. Anonymous Says:

    Hey Corey,

    Thanks for your great insights on the markets via EWT. Been reading for a while and learning a lot from your analysis. I was wondering if you wouldn’t mind looking at the NDX and give us your input via EWT analysis.

    Thanks in advance,
    Suchen

  7. NotAfraidofTrend Says:

    brent, I just wanted to add that it is not totally useless. It is actually quite useful though not 100% dependable. Nothing else is either! That’s why personal judgment needs to be developed.

    Moreover, it takes a lot more than just understanding of the market to make a successful trader.

    In short, Elliott waves is necessary but not sufficient.

  8. Corey Rosenbloom Says:

    Tom,

    You nailed it. I had a discussion over dinner tonight along those lines – the Fed is doing everything they can but it doesn’t seem to be stemming the tide. Other than giving people money left and right, there’s not much more they can do. Buying long maturity bonds is one thing but one wonders how far they will go and how much new ground they will break… and then one ponders what would be happening had they NOT been doing these things.

    Truly terrifying to me.

  9. Corey Rosenbloom Says:

    NotAfraid,

    It’s truly possible – I spent some time viewing and constructing wave counts and it’s certainly possible we could be about to head lower – certainly now feels that way. It ‘felt’ bullish when we tested the 2002 price lows. Now it ‘feels’ like that bullishness might be wearing thin.

  10. Corey Rosenbloom Says:

    Brent,

    The way I currently view Elliott is to add a possible extra dimension or layer to my analysis – I don’t hang my hat on it or make trading decisions solely off EW.

    I do believe the market experiences structured swings based on buying and selling impulses that alternate over time as the battle rages.

    I don’t see anything as 100% in the market, and all of it helps us assess high probability, low-risk set-ups as we understand them as best we can. Elliott is a tool.

  11. Corey Rosenbloom Says:

    NotAfraid,

    Right on. Sort of back to Brent’s point – we have very smart humans applying Elliott to the best of their knowledge and are coming up with internally valid, logical counts – I’m just showing two mainstream possibilities above.

    But still, nothing is, nor ever will be absolute in the markets.

    Take for example Apple’s shares dipping today on concerns of S. Job’s health. What if there had been a stellar buy-set up and maybe even confirmation of a big 3rd wave or something… and then price plunges because a rumor spread that Jobs might be resigning or being taken to the hospital or something else. I pick on Jobs here but it could be Gates or any other leader or respected icon of a company.

    It all still comes down to proper risk management as best we can given the information we have. Elliott to me is becoming helpful and fascinating much in the same way Gann and Fibonacci are. Not every retracement holds – it would be asinine to believe if we draw a Fibonacci grid, that the market would respect it (bounce off it) all the time. We know it doesn’t happen. But it does happen from time to time and even still it can serve as confirmation or non-confirmation of your analysis of price structure as it develops.

  12. Corey Rosenbloom Says:

    AMA,

    Counter-Elliott Waves. What a concept! I honestly hadn’t thought of that. Yes, exactly. Or at least that’s the idea and expectation.

    I can’t help now but imagine a parallel world where Elliott Waves up are actually Elliott Waves down, but the count is exactly the same.

  13. Corey Rosenbloom Says:

    NotAfraid,

    Your summary in post #7 is spot on. I wish I had read it before reading and responding to each post above – I would just refer to your concise and well-spoken summary.

    The name of the game is high-probability, low-risk opportunities. Edge and risk management over time. Elliott, Oscillators, Fibonacci, Gann, Point & Figure, Cycles, Candles… they’re all tools to assess probability as best you can and then manage risk based on what you feel the tools you’re choosing to use provide you.

  14. Corey Rosenbloom Says:

    Suchen,

    I tend not to look at the NAS that much, preferring the Dow and S&P as my analysis and trading vehicles (in both futures and ETFs). For some reason the NASDAQ eludes me.

    I’ll try to do that count which will be similar – I suspect – to that of the Dow & S&P but will contain its own little nuances to the count.

  15. NotAfraidofTrend Says:

    As of today’s closing, the 1,2,3 of the bear market rally have been relabeled to A, B, C. We now seem to be in fractal 1 of a bigger wave down. No Santa Claus this year? Maybe he will come next week?

  16. David Says:

    Awesome stuff Corey,

    One thing i would humbley ask is that you make the chat even bigger , especially these long ones which i would love to look at in detail but have to squint somewhat.