One-Minute Elliott Wave Example on today’s DIA

I know – probably the last thing you want to read on a day when the US Equity Indexes are down over 5% is an example of the Elliott Wave Theory applied to a one-minute chart of the DIA, but sometimes it helps to envision structure in an environment of perceived chaos and randomness.  If anything, we can use it as an educational example of applying Elliott to all time frames.  Let’s see it in action.

Recall back to my previous post on the “Three Hard Rules of Elliott Wave Theory.”  Let’s see it on the 1-minute chart of today’s (October 6th, 2008) DIA chart:

Elliott Wave Theory is fractal, meaning the structure (5-wave move) can be observed and applied to all timeframes – even the one-minute chart.

Price makes the first wave into the 20 period EMA resistance just before 11:00am.  The resistance holds but price makes a higher low and then breaks above the EMA, signaling strength.  Momentum makes a new high and price rockets through the 50 period EMA resistance.  The structure is actually a counter-trend wave up against a pervasive downtrend day which began with a large gap.

Price then finds support as it retests EMA support but forms a momentum divergence and fails soon after.

Was there a clearer structure that could have given more clues about price’s probable (or possible) short-term swings ahead?  Now, of course, on this short of time frame, it is extremely difficult to implement trading strategies, but keep in mind that some professional traders utilize tick charts, which can even require faster trading tactics than the 1-minute chart – and I scarcely ever recommend trading off the 1-minute chart.  The 5-minute chart is ‘as low as I’ll go” usually.

There was actually a complete, picture-perfect Elliott Wave full cycle example, complete with the “ABC” Corrective Wave following the standard 5-wave impulse.  I’ve labeled it for you in the above chart, and simplified the full wave motion in a diagram below:

In today’s example, Wave 3 was an extended wave which actually contained a Full Elliott Wave Cycle inside it – complete with the ABC Corrective Wave – I had to point out this fractal pattern for its education implications.

Also, notice that the bottom pane momentum oscillator formed a clear negative divergence as price completed the 5th Wave of the larger impulse – the odds were overwhelmingly high for a new down-swing, not only as a result of a completed Elliott 5-Wave Pattern and the Negative Momentum Divergence, but due to the larger time frame (5-minute, 15-minute, 30-minute, daily, etc) structure.  As of this writing, price is making new lows on the day after this Elliott Impulse formed and completed.

The more I apply Elliott Wave Theory, the more impressed I am with the understanding of price structure both in hindsight and in real time as I apply my current interpretation of price structure (momentum, support/resistance, etc).

Elliott is just one of the many tools to provide interpretation of price action and to establish price targets and risk-management points.