Elliott Wave Update - Possible Count for March 26

Mar 26, 2009: 12:01 PM CST

Here’s an update and comments to the possible Elliott Wave Scenario playing out on the S&P 500 - this is just one possible count - a very bullish interpretation - which hints that we’ve bottomed and are now in a corrective or perhaps even impulse phase.


(You’ll need to click for a larger chart)

Let me first state that price breaking above 805 in the S&P ‘messed up’ the obvious count, which is that the current rally was a fractal Wave 4 of the final Wave (5) … or alternately of final 5 of Wave (3), but we’ll side-step that discussion for the moment.

According to one of only 3 basic Elliott Wave Rules (that’s right - as complicated as Elliott Theory is, it only has three hard rules)…

“Wave 4 Can Not Enter the Price Territory of Wave 1″

That’s why so many traders were watching the 800/805 level so intently on the S&P, and why it had so much trouble breaking above it, and that when it finally did break, we got a surge off that level because so many stop-losses (from the short sellers) were being covered.

Because this happened, it forced Elliotticians to defer to their alternate counts.  The count I have posted above is one of those alternate counts which implies that we achieved a full, five-wave count in the prior downswing from 950 to 665 on the S&P 500 Index.

IF this count is correct, it implies one of two things:

1)  If we accept the count at face value, it would imply we have bottomed out here and that we are perhaps beginning a primary new impulse up - that is extremely hard to believe given the current negative economic environment, and that’s not necessarily an implication I’m willing to make right here.

2)  If we assume that Primary Wave 3 has not yet completed, and that the down-move here just officially completed Wave 3, then we will be launching into a strong ABC (perhaps even Zig-Zag) Primary Wave 4 that could take us as high as 1,200 (but more realistically, 1,000/1,100).  This ABC pattern could last months.

Let’s look at Scenario 2, which implies that we just completed (or are completing) Primary Wave 3:

I tend to lean more bullish at this time because other indicators hint at least an intermediate bottom is in place - for example, the lengthy positive momentum divergence, the “Three Push” Pattern, and the Government’s willingness to print money at will (which will perhaps catch up to us later… but not right now), and record low sentiment readings that came just prior to the absolute 665 low.

As much as it might ‘feel’ like we need to put in a final leg lower, that view may have officially changed with price breaking 805.  Nothing’s to say we don’t come down and make new lows, but it just seems that the odds have shifted more bullishly for the time being.  A solid break beneath 800 might challenge that assumption, but it just seems the winds are changing for whatever reason.

I’ll keep you posted with alternate scenarios and counts as needed and as more data (price) is revealed to us.

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”

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  • Austin
    The above was written by me. Sorry forgot to log in
  • Anonymous
    Corey
    I just wanted to highlight something that i have re-read of late in the Wave Principle that i think is invaluable to bear in mind at this point. It states, "there are times when several different wave counts are perfectly admissable under all Elliot know rules. It is at these junctures that a knowledge of wave personality can be invaluable".

    Therefore, if we take a step back we can should try and characterise the three major moves down in the market since the highs and their personality. In doing so, it confirms we have seen (5) down. For instance, look at the NYSE new lows for wave 1,3 and 5 circle that you have labelled. You will notice, that on each leg down, the number of new lows is getting smaller and smaller (555 in march vs 2901 in nov). Furthermore, in terms of breadth and downside volume, the most dramatic readings all occured in circle wave 3 you have labelled (advance decline ratio 0.0754 in march vs 0.05 in nov, downside vol -1.876m in march vs -1.962m in nov). The advance decline line failed to make any new meaningful lows as the market pressed down in March. There are more things that i could expand upon but my point is- the character and personality of circle 5 down shows important divergences vs the other major lows we have seen in this bear market. This shows a major loss of downside momentum. This is in keeping with the character and wave personality of Wave 5s.
  • SKJ
    I agree w/ Prechter's analysis of this being the end for the short-term for SPX. Just out of curiosity - does anyone with a subscription to EWI know how he is characterizing the '00-'03 bear market, the '03-'07 bull and the current decline? Is the first his A, second the B, and this the beginning of C?

    Fundamentally: The only way we don't end up with a deflationary great depression in the West is by manufacturing inflation or printing a tremendous amount of Western currencies to make up for the tremendous contraction of credit in the West underway. However, in the long run, the Western nations should still end up being in a long-term bear market like Japan post 1990 with the low cost of financing being introduced by the fed leading to the creation of cross-border carry trades, ie if the fed's plan works, any asset price globally that would have appreciated in Western currency terms in absence of the fed's printing money should go into a parabolic bubble. There is a very cogent argument to be made (as Soros, Bill Gross, and Christopher Wood are making), that many Asian markets will create such carry trades vs the West as they will continue to grow in the face of recessions in the West (whether it be due to large reserves/ability to provide stimulus having been built up as in the case of China, or having an economy that simply isn't exposed to the global economy via exports as in the cases of India and Indonesia). If this is true, then you have setup a carry trade where the effective cost of borrowing in the US is less than the stuctural rate of asset price appreciation or return on equity is in Asian markets. Thus, in the long run, even though the Western central banks may print a ton of money, it may not only reach its desired target of Western assets. Furthermore, if EWI's recent analysis on SENSEX being a corrective wave is correct, it matches this fundamental argument (I also cannot find a way to show HSCEI in Hong Kong, the index with a 97-98% correlation to FXI, being in an impulse wave). In a sentence: the trillions of dollars of money being printed in the West to stem the deflation in Western assets may create an insane amount of inflation in places where there was never going to be deflation in the first place (ie Asian assets and equities), and where it only takes tens of billions of dollars for equities to go into a bubble.

    As much as I favor scenario 1 in the blog post, I do not like the 3-wave seeming wave circle 5 however it appears that wave 5's in this entire fractal are all quite poorly defined. Either way, I think it is probably the correct one.
  • joe
    Corey
    no need to reply to those who feel there is no rythem in the market , whay they even come to any web site only to complain bash or just state the negative is only because
    they have no clue or intrest in learning anything.
    as for the dow and the spx for that matter i still think we already completed wave A with the 5 waves up on the hourly chart from march 6th to monday march 23rd m the expanding triangle B wave still fits also . my bias is we
    are closer to the end of wave B and the start of wave C back to the upside .weather we saw the low today or not
    im not sure but there are a few signs we may have .
    im a bit confused short term due to a few cycles i follow
    yet the 5 up and the decline looks for the most part
    finished or very close to finished .
    joe
  • Readers,

    As a policy, I will no longer be responding to "Elliott Wave is a Scam" comments.

    My take is what Andrew said in comment 43.

    Please respect fellow traders here.
  • Joe,

    Excellent point! Monday and next week should bring us some sort of resolution of the structure that developed last week.
  • Anon #39

    That's a count I haven't considered. I'll have to label it and look into it.

    I do agree that markets must consolidate that have moved too much/too far/too fast. Sometimes it's difficult to get wave counts that represent the consolidation concept - and corrective patterns are notoriously difficult.
  • Mike,

    That's what this price move up feels like, doesn't it? A diagonal. The trendlines are converging and price almost appears now to be forming a 'rounded reversal.' It does look like one more swift push up is needed.
  • Andrew,

    haha that's a great saying! I expect alternation here but also am not married to that opinion - I'm being flexible in my counts and I need to start eliminating some of my alternate counts. I have too many!
  • Andrew Stanton
    Swan, Elliott Wave is not a scam. It is a tool to identify occasional low risk, high reward opportunities in the market. The problem is people expect it to deliver more. If you think it will give you an exact road map of where the market is going then you will inevitably be disappointed and come to the conclusion you have. There is no Holy Grail in trading or market analysis, only tools to help in the job.
  • SWAN
    EW IS GREAT SCAM NO ONE PREDICT THE WAVE EXACTLY .EVERY TIME TUNE THE CHART ACCORDING TO MARKET CONDITION
  • joe
    mark
    i think you have a good point .
    but what if the dow anyway completed 5 up
    already into monday last week on thehourly chart
    the same pattern is in the spx . and all of last
    week was the B wave which was an expanding triangle
    friday the dow came back and hit the apex of that triangle . if this hold true then we will see 8050
    to 8100 next week . which will be the initial leg
    up of wave C hence wave A would be 5 up from march
    6th to march 23rd wave B completed an expaning triangle
    which is the fibonacii relations were to hold ,would be a .382 time retracement and would call for a bottom early monday and then wave C up . yet the price structure
    call already be considered complete .
    well know monday
  • Mark
    Corey,

    My hourly count has (a) where you have labeled Wave 3 in the move up off the 666 SPX low. I then have (i), then (ii) where you have labeled the word “support” on your chart, with (iii) where your Wave 5 is.

    (iv) was Friday’s action and we should see one more push up to complete this DIAGONAL.
  • Anonymous
    Corey,

    I have a very different take. I very much struggle to happily break the 875 to 666 wave as a five formation, instead I see it as a the start of a 5 waves sequence of an -- ending diagonal pattern. Elliot said that ending diagonal patterns occur when the previous wave has gone "to far to fast" -- which seems highly applicable here. I see the move from 875 to 666 move as wave 1 of a 5 wave sequence, each of which will subdivide into an ABC. So the overall C move will be 3-3-3-3-3. We are just about to (or have) complete(d) wave ii, somewhere between 830 and 855 is my guess. This will be followed by wave iii to new lows, a further two ABC moves up and down. This then will complete the final C wave and primary wave 1. The rally from there could be quite impressive...
  • Mike
    Corey,

    My hourly count has (a) where you have labeled Wave 3 in the move up off the 666 SPX low. I then have (i), then (ii) where you have labeled the word "support" on your chart, with (iii) where your Wave 5 is.

    (iv) was Friday's action and we should see one more push up to complete this DIAGONAL.
  • Andrew Stanton
    Alternation between waves 2 and 4 is a guideline not a fixed rule. However it is the normal thing to expect until proven wrong. As the old saying goes, when you hear hoof beats expect horses not zebras.
  • this long correction from october 2008 count not match with fibonacci ,so most probable it will prove wrong, for my own count visit my blog vijaybaroda.blogspot.com... my own count follows fibonacci and all other rules of elliot wave..
  • this long correction from october 2008 count not match with fibonacci ,so most probable it will prove wrong for my own count visit my blog vijaybaroda.blogspot.com my own count follows fibonacci and all other rules of elliot wave
  • jeremy
    Thank you Corey,

    Mr.Prechter has always made very good bear calls to my knowledge, not so good on the bullish side, so once again he maybe over embracing the downside.

    He appears to suggesting this wave may have further legs, according to his last "hint".

    I see a zig zag sideways too, i must confess i am having difficulty applying EW at the moment.
  • Jeremy,

    I'm leaning to the 'sideways' to up theory now.

    Regarding Prechter's views - I'd love to hear readers' views as well.

    From what I understand, Mr. Prechter regards that the 5-wave impulse down has completed this month, but instead of labeling the move as a primary 3 or a primary 5 (as I've shown above), he calls it a Primary 1... and that this rally now is part of a Primary 2.

    I hate to use the word 'heretical' but I cannot believe such a bearish count. That would imply that - after this counter-rally up to 1,000 or 1,100 that we get a big Primary Wave 3 and then a Primary 4 up then a Primary 5 down which could take us all the way to 150 or 200 or less perhaps on the S&P; 500.

    What do readers think?
  • Joe,

    You hit on something good there - the "Which Wave 5" debate is still valid as I show in the post above. And like other readers have said, the Fractal (5) wave doesn't 'feel' complete. I did a measure and it turns out Wave 5 - as so labeled - is .868 (or roughly 87%) of Wave 1. Generally, we expect W5 to have Equality with Wave 1 or be related by a Fibonacci number (particularly 1.618 times Wave 1).

    It really does 'feel' like we need one more swing down to at least give us a 100% measured move of Wave 1 but with everything else going on, odds seem reduced now that we'll get that final swing - and that we may already be getting the sustained rally we've been expecting for some time now (after the (5) completes).
  • Austin,

    You sum up the dilemma facing me currently. Everything seemed 'right' in terms of the structure forecasting one more swing down to test or exceed the 665 lows. The 'zone if proven wrong' was a break above 805 which is what triggered a re-evaluation. At this point, that re-evaluation triggers about 5 or 6 possibilities, none of them being very clear and obvious.

    It's when you factor in all the things you mentioned that I'm seeing too (divergences, other indexes, extreme negative sentiment off the 665 low, strength in commodities) that forces me to abandon - for now - any further bearish count.

    You can't ignore those things for the time being and stick with an overly bearish count. So the count has to be changed.

    But to what? The good readers here are sharing their thoughts and all opinions I believe are valid and fit the rules and guidelines. It's more difficult now to decide on a preferred count among various alternates.
  • Maximum,

    Thank you for sharing your link and for your kind words about my site.
  • Anon #22

    That was my thinking - though more privately than on the blog.

    First, that a trading range would be most logical (but I couldn't fit that into an Elliott Count - there are just too many possibilities)

    Second, IF the market is being driven higher (by a series of positive news announcements and Presidential/Treasury primetime speeches), then you're exactly right. I wrote something similar in an email last night:

    When they remove the 'campaign' (or heavy hand), then the fall will be steeper/worse than had they done nothing.

    So in a sense, that throws off all types of analysis.
  • Anon #20,

    There's debate whether the Alternation Principle should be a Rule (Basic 3) or a Guideline. I'm not sure if anything's official yet but my thinking it is that it's a guideline to help you assess current structure rather than an undeniable Rule.

    Andrew Stanton above makes a case that we are still in a lengthy Wave 4.

    I'm torn - taking Elliott out of the picture for a minute - in that after such a steep decline, we will need a lengthy trading range (or basing area developing) to consolidate those losses from Sept/Oct which seems to be what we're getting, only that we made new lows this March.

    A lengthy correction/consolidation would seem logical, but how that fits into a complex Wave Count is beyond me.

    They always say professional Elliotticians master Corrections.
  • Anonymous
    Anonymous #20. I'm no EW expert, but I'm pretty sure that waves 2 and 4 don't have to alternate.

    Prechter's book has rules and guidelines. The alternation idea is a guideline if I remember correctly.
  • jeremy
    Multiple sideways corrective waves makes sense, as the MA's come down, cyclical PE still too high-i am a bit confused now as to what wave we are at?

    Does anyone care to comment on Mr.Prechters views, he seems to be hinting that this rally maybe more than a blip, not sure what that means?
  • joe
    my bias is this market goes higher into june july
    i have a problem with the wave count . it counts
    better as only 3 waves down into march 9th
    for me the problem lies im the initial wave 1
    that wave count just does not look clean, if you look
    at the nasdaq 100 you will see a similar wave .
    what im getting at it wave 1 is to me more of a 1 2 1
    set up . this is why it apears to be 5 down even though
    my thinking is it is only 3 waves . now to add to this
    is the time it took this entire decline to form .
    from this perspective the market should rally for a longer period then just into june 2009 ,
    the upside into june even if a 4th wave can run up as high
    as 9700 in the dow . thats a long ways from where we are today . www.tradersaffiliates.com
  • Austin
    Corey,
    Firstly, great site and i am thoroughly enjoying it. Keep up the good work.

    In regards to your wave count- i agree that your original count is now eliminated given 800/805 was taken out. The problem i have is that your count for Circle 5 down just doesn't look right. From your wave (2) of Circle 5 top, i struggle to count the subsequent waves down to the lows at 666 on the hourly sufficiently.

    Therefore, it appears that either we are in a larger ABC expanded flat (where (B) bottomed at 666 as highlighted by several people), or that Circle 4 was a Contracting Triangle (ending on 10/02/09 at 874- as per the EWI forecast). The latter would also imply that your Circle 3 down count needs to be altered.

    Either way, both counts imply higher prices to at least 950-1000+. I have to be impressed by the impulsive nature of this recent advance from the lows. Furthermore, not only are momentum indicators showing positive divergence, but other indicies such as the Nasdaq, Hang Seng, Nikkei have all either double bottomed or formed truncations. Other factors supporting the move include the patterns and moves in copper, the dollar, bond prices and the Shanghai Composite. Therefore, i am swaying towards the Contracting Triangle Count and that we have made an important bottom for now.

    Short term, the market seems overdone and resistance at 840/850 seems important. I guess we will have to see how the market reacts in the upcoming retracement (if it does retrace at all!).
  • Maximus aspires to be a philosopher forecasting and describing the history of these world changing times....

    But tonight, because people are looking for RESEARCH, Einstein makes his point and links to key techinical analysis and market analysis is provided (including this excellent blog post)....


    Best to all....

    Maximus
    http://4best4worst.wordpress.com/
  • Anonymous
    Corey, it appears that the market will make a series of corrective waves for a quite some time as the major moves down that has taken place needs to be digested.

    As the price cannot be very far from the moving averages for very long, there are two ways in which they can come closer:

    1] The price moves up.
    2] The price stays side ways and the moving averages come down.

    It is more likely that 2] will happen.

    Any prediction which calls for a rapid increase in price is not very likely, considering the damage that has been done to the market. The damage will be digested by the side way movement and not by the an upward movement. Until there is an improved outlook for earnings, any expectation of price increase is risky speculation.

    Manipulation can not take the market very far. If it does, the next fall will be harder. Maybe, that will be net result of the desperate efforts by the government to jack up the market and that is happening just to make 401Ks and Obama look good. So far, there are no signs of improvement of the underlying economy.
  • Vijay
    i like this one.fits my theory
  • Anonymous
    Dave,

    I'm the thesis guy from a few weeks ago.

    Corey, your first count (Bullish) looks correct except..Your second count might be right but let me explain my counts from a 28 year EWT veteran - not that I use it often (I'm really a quant-oriented trader who employs some TA in my models);

    Corey was right that unless it is a Wave 5 count, 4 can not overlap 1. However, another crucial rule that most of you seem to miss is that corrective waves MUST alternate. Thus, the bullish count's major Wave 4 should have been a triangle or a flat correction and ended 11/20/08. It can not be a zig-zag like major Wave 2. The bullish count suggests major Wave 5 ended on 3/09.

    The second idea (Bearish count) that encompasses this multi-month trading range from 11/20 could be construed as a triangle of some sort, or another flat correction. IOW, major Wave 2 was a zig-zag as we all agree. Accordingly, major Wave 4 must alternate, hence a triangle or a flat correction. If we are in major Wave 4, the first leg of the correction (A) ended 1/06/09, (B) on 3/09 and we are either going to "triangulate" or possibly form a double top or slightly exceed the 1/06 (A) @ SP 940ish. That is my preferred count but a complex major Wave 4 triangle is feasible. Therefore, major Wave 4 has not been completed (late April?) and the SP will break the 3/09 lows and probably trade below SP 600 ending major Wave 5!!

    Any opinions on my alternation idea and the possibility we are still in major Wave 4?
  • Andrew Stanton
    I don't see an ending diagonal, at least not yet, but if the SPX stops below the high of circle 4, invalidating the extended flat count, and then drops to new lows in a three then I would start thinking about an ending diagonal wave circle 5 of C.
  • Anon #12

    Let's call it a tool like any other in the trader's toolbox.

    To me, it's like the stochastic, RSI, MACD, cycles, candles, etc.

    It's the weight of the evidence that matters. That and risk/reward.
  • Anon 9 & 10,

    That's a relief to think we could have that possibility. From my education, I knew that but for some reason wasn't including it as a possibility until now.

    It just seems to 'feel' like we've got at least one more swing down to test or exceed the lows (625 would be a reasonable target) and then we could launch a larger corrective pattern.

    However, we also can't ignore those screaming positive momentum divergences as well, and it's the weight of the evidence that matters in the end (that and supply and demand!)
  • Bret,

    I'm torn in my counts like you and perhaps most people are. On one hand, I want this bear market to be over asap because it breaks my heart to hear the effects on what this is doing to the average person's retirement account and long-term investment accounts. That's why I tend to shy away from overly bearish assumptions, be they fundamental, technical, or quantitative.

    However, I do think it's important to be open to further downside projections, it's just that most of my projections from the past converged at the 600 to 650 level which we've (pretty much) achieved.

    I do have one more downside target of 450 but I try to keep that projection as a distant possibility, or a "if we get it, we get it" mentality.

    I'm not an expert in fundamentals, so I appreciate reader comments sharing valuation models and the like. I think those benefit us all to look at those.
  • Andrew,

    I hope the permabears are wrong too! But it can be irresponsible not to consider those possibilities (for lower prices). I just feel prognostications for S&P; values around 200 or less are way out of line, but I say that now that the market is around 800.
  • Andrew,

    In this case, if an ending diagonal Wave 5 is forming, it would be part of an impulse wave, would it not? Given that the larger trend (5-wave structure) is down within a C Corrective Wave?
  • Anon #5,

    Indeed! I had not considered that but it's possible. It looks like it'd be an expanding (ending) diagonal. The waves would be elongating as they developed, which would imply we were due for a final (5) down to new lows.

    I just got so caught up in adhering to the basic rules, and the Fibonacci confluence at 805.
  • Anon
    Let's say EW is a scam.
  • Corey,

    I personally believe in your first option that Major Wave A down is in. People better understand the BEAR market is NOT over by a long shot. This is just a bear market Major Wave B up however final BEAR market low isn't in yet.

    I've adjusted my trading to swing longs and scalp shorts. SPX 1000-1100 area is fair target where this Major Wave B might end. It lines up with Fibs' & 200EMA's.

    I sold my scalp longs at SPX 780 and in cash waiting for a pull back. Market will pull back. I believe SPX 750-780 is area to postion long for Major Wave B up IMHO

    Corey - Breakpointtrades is a nice site. Steve and Matt do a great job helping traders. Very much like you do on your BLOG.
  • Anonymous
    Oops! Did not read the comments above
  • Anonymous
    Corey,

    What about the possibility of this being an ED? In this case you can enter the price territory of wav4.
  • Bret
    Corey thanks for the update and Andrew makes a good point about long term P/E not yet getting down to the levels we should see at the bottom of a secular bear market. Economic conditions have not turned the corner, this is just a bear market rally. So I will lean toward the more bearish wave count. I think it will be another 6-18 months before the true low is put in. But I do hope I am wrong and that 667 or a retest around that level is the low. Thanks Bret
  • Andrew Stanton
    If you study long-term P/E cycles you will see that it would be truly amazing for a secular bear market to end without much lower prices in the major indices. If that happens then this is only a cyclical bear and that just doesn't match the economic fundamentals and... I hope I'm wrong.
  • Andrew Stanton
    Wave 4 can overlap the territiory of wave 1 in a leading or ending diagonal but they are impulse waves not corrective waves although they can form part of a larger corrective structure.
  • Anonymous
    Corey,

    In a corrective, wave 4 can enter the body of wave 1 in a diagonal.
  • I've bought into the whole "the worst is behind us and that the stock market will recover before the economy" thinking. Plus, I've been bearish on the market since late 2006 so it's about time to admit I was right too early and perhaps now I'll be right too early again by getting bullish early.
  • That's the problem that I have with the count. We really did need this rally swing to stop, reverse, and test the prior lows - NOT make new highs above 805. That's what's really throwing me off. But if Elliott Waves were so obvious, 'everyone would be doing it' wouldn't they?

    If that's the case - that we're in a large ABC - then that implies sharply lower prices.

    The problem I have personally with my counts is that I tend to over-rule the more bearish counts in favor of more bullish counts because I don't want to see the indexes go that low for the sake of the country and global economies.
  • Andrew Stanton
    The flat circle 4 also alternates with the sharp circle 2.
  • Andrew Stanton
    Scenario 2 has a three wave (5) of circle 3. I still see your circle 4 and 5 in scenario 1 as A and B of an extended flat circle 4 where the current C will likely test the peak of (4) of circle 3.
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