Intraday Elliott Wave and Flags in SPY Apr 21
I wanted to point out a 5-wave Elliott structure and two bull flags that offered trading opportunities in today’s (April 21, 2009) intraday SPY structure.
We started the day with a medium overnight gap which was quickly filled (small to medium gaps have greater odds of filling than large gaps), so that should have been the initial trade. Once a gap fills, often the second trade is a move back down to test the lows off the open, and an evening star which formed into confluence resistance (yesterday’s close and the 20 EMA) set-up the second (short) trade of the day.
Those proficient in pattern recognition saw the ominous converging trendlines and narrow candles (dojis) of a falling wedge (which is bullish), and the trade entry came when price surged with a bullish candle out of the wedge. This could also have been treated like a bull flag, which targeted the 50 EMA, though price surged well-beyond these targets.
Since price surged up in a strong move to new highs (price and momentum) on the day, it was a sign to experienced Elliott Wave traders that we could be experiencing a “third wave” which indeed turned out to be the case. Remember, first and second waves are difficult to identify – you almost have to see them in the hindsight of a powerful 3rd wave. Only then can you prepare yourself to buy after Wave 4 is complete.
Within the 3rd wave, a “Three Push” reversal pattern (triple swing negative momentum divergence) formed which led to the 4th Wave pullback into EMA support.
At the bottom of Wave 4, a doji formed (which is often a reversal signal) which was followed by a bullish breakout that began your “Wave 5” Trade.
A unique opportunity arose – that of a Bull Flag within Wave 5. Look closely as price formed a clean retracement to the rising 20 EMA which set-up the Bull Flag “Measured Move” trade. Price actually exceeded the price projection into new highs on the day, though the new highs formed on a slight negative TICK divergence (not shown).
Remember, 5th waves are expected to have a 5-wave subdivision, and you can count that into the day’s close (which set-up scalp trades in the structure for very aggressive traders, particularly on the one-minute chart).
The more you see these patterns, the better you’ll be able to recognize then trade them in real time – that’s why I find “Idealized Trade Journals” and visual charting of your own patterns to be very valuable in your development as a trader.
Corey Rosenbloom
Afraid to Trade.com
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Cory,
Thanks for the update. I am wondering, for those of us not yet initiated in Elliot Wave theory – how do you know when a new pattern starts, or when the pattern from the previous has not yet completed? I’m just wondering if it would be more dangerous for someone not yet proficient in EW to try to utilize the theory. Also, aren’t 5 waves patterns usually impulse waves, and wasn’t today’s move most likely a correction wave of the larger wave B down? Thanks!
Corey,
I stuggled with this pattern yesterday — if that’s an impulse, then of what larger structure? The best I could come up with is the first limb of a zigzag 2.
Kevin
Also, wave 5 has an internal overlap between 2 and 4, which makes me wonder if it’s an ending triangle Y of a double three. Kevin
Shelly,
This move up probably counts best as an “ABC” (with A being at “3”; B being at “4”; and C continuing or ending at “5”).
Good point – there’s the “Know enough to be dangerous” syndrome.
But for me, I’m moving away from Elliott purism and more towards “Elliott in action” or “Elliott as a tool only,” meaning I’m not as much concerned with the precision in wave labels as I am the psychology/theory behind the waves. It’s serving as confirmation/non-confirmation to what I’m doing already.
For example, if I’m about to take a bull flag into support, I’ll note the preceding structure and determine if it’s more likely to be a W2 or a W4 or something else. If I can count out what looks to be a reasonable Elliott count, then I’ll be more confident in taking the trade.
I’m trying to side more with the ‘realism’ than the ‘theoretical’ the more I use Elliott and find it powerful, but not in a purist sense.
Kevin,
I’m leaning to the “this is a Wave 2 up of (5)” right now but the ‘counter-move up’ is lasting longer than would make us comfortable. Maybe we’re zig-zagging in our W2 indeed.
Though it seems easy, it’s actually difficult to distinguish between impulses and corrections in short-time frames that make up the larger structures.
Heh. It doesn’t seem easy at all, at least not anymore. At first it seemed easy, then I got burned a bunch of times. Kevin
Corey, you mean leaning to the “this is a wave 2 up of 1 down of (5), right? I’ve been burned by double and triple zigzags and threes a bunch of times now… “OK, the correction is over… oops, no it’s not!”
I had another question. When you’re looking at intraday Elliott Wave fractals, can meaningful parts of the wave “hide” in the premarket and aftermarket action? I want Monday’s down to be a 5-part impulse, and while I can muscle that count in if I force it, I’m wondering. Could, for example, fractal wave ii be hidden in extended trading between Friday and Monday?
P.S. Congratulations on your CMT.
Kevin,
No, unless we break the highs, I think it could be W2 up of primary (final) Wave 5 down. Or it could be still part of the hideous Primary Wave 4 correction.
Complex Corrections are killers indeed!
Yes, Prechter himself said that entire waves can hide in single bars, which is why lower timeframes are quite helpful. If you’re looking at a weekly chart, it’s possible that one bar (week) can contain two waves, and that the daily chart would confirm (plus the 60 min).
Using that logic, it’s feasible to have a full wave immersed in an overnight gap like I suggest happened here.
> unless we break the highs, I think it could be W2 up of primary (final) Wave 5 down.
I think I might be misunderstanding you. I have primary Wave 1 down from Oct 07 to Mar 08. So if we just started primary Wave 5 down, wouldn’t we expect fractal wave 1 primary wave 5 to last more on the order of weeks? That’s why I thought Thu-Mon was 1 of 1 of 5.