Ending Diagonal Leading Diagonal and Wedge Definitions SP500

Apr 16, 2009: 11:20 AM CST

I’m finding the “Diagonal, Wedge, Trend Channel, or Rounded Reversal” discussion to be interesting, and so I thought I’d take a moment to define what a Leading Diagonal and Ending Diagonal are as defined from A.J. Frost and Robert Prechter’s Elliott Wave Principle book.

Let’s start first with an Ending Diagonal:

According to Robert Prechter (p. 37),

“An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone ‘too far, too fast.”  A Very small percentage of diagonals appear in the C-Wave position of A-B-C formations…. In all cases, they are found at the termination points of larger patterns.  A contracting diagonal takes the wedge shape within two converging lines.”

“A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level from which it began and typically much further.”

On the other hand, let’s look now at Prechter’s definition of a “Leading Diagonal:”

“It has recently come to light that a diagonal occasionally appears in the Wave 1 position of impulses and in the Wave A position of Zig-Zags.  In the few examples we have, the subdivisions appear to be the same:  3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is still out on a strict definition.”

“Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves.  A Leading Diagonal in the Wave 1 position is typically followed by a deep retracement.”

Further, “[leading diagonals] were not originally discovered by Ralph N. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity.”

In today’s pattern

As some readers have astutely indicated, what we have shaping up today is more of a “Leading Diagonal” instead of an “Ending Diagonal,” and have noted the subtle differences.

If we assume that March 6th was Primary Wave 3’s low, then we are now in Primary Wave 4, and have most likely just seen the majority of Wave A take place, and should be expecting a Wave B down which will be followed by a Wave C as I’ve drawn out in the above image.

As such, we need to eliminate “Ending Diagonal” as a consideration and look into whether this pattern is forming a “Leading Diagonal” under the definitions I have quoted from Mr. Prechter.

Either way, the implication is the same for the next likely swing – down – but the future predicted swings change after that… and also we are not in a bull market and can in no way count four waves of an impulse pattern, and thus cannot consider this ‘wedge’ formation an “Ending Diagonal.”

It’s also quite possible that we just experienced Wave 3 of the Leading Diagonal and not the final 5th wave – indeed it does seem there could be a slight bit of room for price to ‘play’ inside the trend channels.

Laying Elliott Wave aside, this all could just be a very simple bearish rising wedge – to chart this pattern, just take off the specific numbers from the diagram and note the converging trendlines.

Keep watching the S&P 500 price very closely for further clues as we get them.

Corey Rosenbloom
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”

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Comments
  • Apt resource

    hummmm...market is never wrong and has its own way to hunt for short selling like this we just have to make sure each set up ratio is 1-3 even some may caught for intra short or long to higher higher from the daily pattern after all false reversal always occur in wave label like this.... ...be careful out there and NO Thrill for conscious... 

  • Anonymous

    Thanks Corey and appreciate your honesty and stance. My comments were directed toward those people who are new to playing the markets. Always maintain rigorous standards to weed out methods that are no better than hit or miss. Otherwise, it will be a very costly endeavor. Too many people see one count work and adopt EW as the Holy Grail only to regret it later.
    FWIW, it works better as a tool to fade than rely upon. Most people currently label the recent high as just wave "a" of a larger a-b-c rebound. If the majority expects one scenario, the market will not accomodate them. You should be short now, with your stop above the recent highs.

  • Anon,

    I'll allow your comment to add an alternate perspective but remember I am not here to be a defender/guardian of Elliott Wave, nor do I advocate using Elliott Wave in isolation. It is but one indicator/method among many.

  • Rob,

    I'm aware that is Prechter's count (that we finished primary 1 and are in primary 2 and then primary 3, 4, and 5 are yet to come, taking us down to Dow Jones 400), but it is respectfully not a count I am willing to entertain in the slightest.

  • Anthony,

    Thank you - yes, Prechter/Frost book is the next best thing to reading Ralph Elliott's original work which would be much more expensive to collect and not contain modern charts/updates.

    Glenn Neely has an excellent Elliott book out too that I'm reading now, but the Elliott Wave Principle is regarded as the modern day EW standard.

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