Elliott Wave Structure and Trading Lesson in SDS

Apr 20, 2009: 1:12 PM CST

I wanted to highlight the near perfect Elliott Wave structure that formed intraday on SDS (S&P 500 UltraShort), including a focus on trading opportunities and set-ups within the developing wave structure.

(Click for larger image)

First and second waves are notoriously difficult to predict or trade, but once you know what you’re looking for and how to recognize a powerful Third Wave, a few excellent trading opportunities open up that you miss if you’re not applying some sort of Elliott Wave analysis, even intraday.

Notice the “Third Wave” on this chart and how it subdivides – in my opinion, third waves hold the key to real-time analysis and trading with the Elliott Wave principle.

If you do recognize that a third wave is underway, you can trade that structure, though two specific opportunities arise if you correctly identify the developing structure.

First, you can (in this case) Sell-Short on the “A-B-C” three-wave pullback that comprises Wave 4.
Second, you can buy (trade aggressively counter-trend) if you recognize a full, 5-wave structure has completed.

Both of these ‘trades’ have excellent risk-reward (tight stop relative to the target if the wave structure plays out as you expect), meaning they have edge from the monetary standpoint.

You don’t have to be an Elliott Wave purist to recognize these opportunities and use them as confirmation to the analysis you’re already using.  Maybe your stochastic showed an overbought reading at the A-B-C peak of Wave 4.  Maybe we pulled back into key resistance you identified (Fibonacci and Elliott Wave work well together).

No, Elliott Wave is not perfect, and no, you won’t win on every trade, but no indicator or trading system can give you that. To me, getting the ‘main idea’ is more important than absolute precision in your wave-count.  Do the best you can with the data you have and don’t get discouraged.

For me, it’s a compliment to all the analysis and trading I already do, and I might use higher leverage if I feel I’m identifying an Elliott Wave structure in real-time (provided a trade sets up according to my parameters).  Often, Waves 2 or 4 (which form “ABCs”) will correspond with a bull or bear flag.  Sometimes Wave 2 retraces to form the “Cradle Trade.”

In the end, we’re looking to assess the probabilities of the next likely price swing, and then position ourselves with a stop-loss that is smaller than our profit target, and using money management to make sure that if we take an expected loss, then it won’t damage our portfolio.

I’ve been using Elliott Wave in some capacity for just over a year now (thanks to the Chartered Market Technician coursework – I was very, very skeptical it had any value before that) and I have found it compliments my trading and analysis very well.  It’s just one more tool in an ever-increasing personal toolbox of methods and strategies – I hope you can find benefit in it as well.

Corey Rosenbloom
Afraid to Trade.com

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13 Comments

13 Responses to “Elliott Wave Structure and Trading Lesson in SDS”

  1. Garuda Says:

    Great stuff — my only hesitation is the application of e-wave to derivatives-related ETF’s such as SDS. It can get goofy here and there. I think it’s better to count the underlying index (SPX) and then trade the double-short or triple short based on that count.

  2. Corey Rosenbloom Says:

    Garuda,

    I agree 100% but I was trading the SDS (when you’re in a trade you get a different perspective, for better or worse!) and noticed this clean pattern and wanted to show it/document it quickly while it was still on my mind.

    In managing a portfolio, I’ve definitely found it’s best to watch the S&P and then use other vehicles as derivatives, or else your stops go in goofy places or something else happens – if the S&P breaches a key level, then exit your derivative. This only comes through the experience of a few losses where you scratch your head and regroup.

  3. String Says:

    I was following the same count on SPY last week and trading SSO/SDS. During the day, I was posting on a chat room where someone was telling me ‘EWT doesn’t work’ . Pretty funny.

    The counts are text-book.

  4. Chris Says:

    Corey,

    I took some SDS Friday at $64.75 once SPX hit 874 and appeared to be Wave 5 completion.

    I also exited long my swing long 401K …

    Your training on chart patterns have been great

    Please keep up the good work as there really helped me etc.

    Chris

  5. Anonymous Says:

    Cory or someone else out there,
    Could you suggest a good book on Elliott Wave for a beginner?
    Thanks

  6. Anonymous Says:

    I really like your blog, very good information. I’ve found myself long at this juncture. I’m not sure whether to sell tomorrow or to wait for a bounce. What does the Elliot Wave count suggest will be the next bouncing point? Thanks.

  7. Corey Rosenbloom Says:

    String,

    My thoughts exactly.

    Hearing that is like hearing the stochastic doesn’t work or something.

    There’s 100 ways to make money in the market. I don’t see the point in criticizing people who are making money.

  8. Corey Rosenbloom Says:

    Thanks Chris!

    It’s supportive comments like yours that keep me going. I’m glad to help.

  9. Corey Rosenbloom Says:

    AJ Frost and R. Prechter’s “Elliott Wave Principle” is the standard. It’s a textbook so it isn’t fun reading.

  10. Corey Rosenbloom Says:

    Anon,

    The breaking of a wedge formation or an Elliott diagonal has expectation to lead to a decent push lower. I can’t tell you exactly what to do – and we might get a bounce back to test the lower trendline of the wedge – but I wouldn’t want to be long now while we’ve broken out of the wedge.

  11. Anonymous Says:

    I have stayed away from EW until a few weeks ago…. That was dumb.!! I find that now I am seeing the different patterns, I am staying away from chop trades and getting into larger moves.

    Many writers estimate that EW works about 50 percent of the time….. however, the awareness of the end of wave 2 or 4 or 5 can lead to huge profits… ABC trades have great risk reward……

    I use a couple stochastics to help with decision making…

  12. Corey Rosenbloom Says:

    Anon,

    Exactly! Very well spoken.

    I don’t sit here and count waves all day. But when I’m deciding whether to take a trade and how much leverage to use intraday, if I see what I think might be a pattern, it helps my decision making.

    It’s helped me hold on to trades longer than I would have (if I suspected I was picking up a 3rd wave, or about to enter into a 5th wave or the like) but it’s not the end-all-to-end-all.

    The thing is, when it ‘works,’ it tends to work big. When it doesn’t ‘work,’ then the stop is small. No big deal. Move on.

    But if EW helps you capture larger profits you otherwise would be missing, then there’s where it becomes effective and profitable.

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