Which Elliott 4th Wave Are We In Currently?

Dec 16, 2008: 1:10 PM CST

There’s a rather large debate currently brewing among Ellioticians regarding exactly which Elliott 4th Wave we are experiencing – though there’s widespread agreement we are in a 4th Wave Counter-rally.  Let’s look briefly at both sides of the argument, and what it might mean for the near future – don’t miss this post.

I’ll present the first argument first.  Elliotticians are generally in agreement until October 2008, in that we all generally agree that Waves 1 and 2 have transpired… but that’s where the agreement stops.  The first argument states that the massive (and destructive) 3rd Wave down has completed at the November price low of 746 on the S&P 500, and that we are currently in a large-scale 4th Wave which should take us to at least 1,000 to 1,100 on the S&P 500 … before embarking on a final 5th Wave down perhaps mid-2009.

Let’s look at the proposed wave count for this argument:

The agreement stops roughly in August where the fractal 2nd wave (around 1,325) takes place.  These believe fractal wave iii of the larger 3rd wave ended in October, iv ended a week later, and the v fractal wave of 3 completed also in October, and we got a quick rally up to complete Fractal 4 and then the final fifth fractal (5) of the 3rd wave completed in November.  Look closely at the chart if the textual description doesn’t make sense.

(Note – in my labeling a circle means a large-scale wave, a 1 means a fractal of the large scale wave, and Roman numerals – i – mean a fractal of the ‘fractal’ wave).

The implication of this view is that we are *currently* in a large scale Fourth Wave which should play out similarly (perhaps) to the pathway I’ve drawn above.  Also, this would put the final price low projection somewhere around 650 to 600 when the Final 5th Wave completes.  This is the more tame or mild view in terms of what’s in store for the market.

The weakness of this argument is in the fact that the fractal 4 and 5 waves do not match proportionally with the fractal wave 2 of the larger 3rd Wave Impulse.  The fractal 2 took 2 months to complete while fractal 4 took 2 weeks and fractal 5 took three weeks – clearly that is not in proportion and should cause alarm from a time-perspective.

What is the alternate Elliott view?

The projection is a little more complex on this one, but it seems to meet the proportion argument a little better.

In this case, the September lows ended fractal iii of 3 while we gave a little more time for fractal iv of 3 to play out, and still more time for fractal v of 3 to play out, which terminated at the November lows.  If fractal 3 of large-scale three completed there, then we are currently in *Fractal 4* of large scale 3… meaning we still have more downside to go soon in this hideous Third Wave.

Technically, we would be somewhere in a “b” or perhaps even the “c” wave of the 4th wave… though others interpret the recent action as an Elliott Triangle consolidation 4th Wave (which would require me showing the daily and intraday charts for a better explanation – I mean to keep this to top-level analysis for the moment).  Either way, it’s a 4th wave movement.

I must admit that I am leaning more towards this interpretation… but I encourage you to do your own analysis.

This seems to satisfy the time requirements generally accepted in Elliott Analysis better than the first interpretation.  Perhaps it also satisfies the overall economic realities – that we’re in for a long and difficult 2009.

The implication for this view is far more bearish for the market.  It implies that the rally we’re experiencing now will be weaker, raise to a lower level, and then plunge quickly to take out the November lows before marking a final end to this devastating large-scale 3rd Wave.

Of course, after the 3rd Wave completes, we’ll likely get a large-scale 4th Wave rally (into a lower level that the prior interpretation allows) and then plunge lower (perhaps to the S&P level of 450 to 500) before the final 5th Wave is in – this clearly would not be the view you would want to go around expousing publicly.

Remember that Elliott Wave analysis is only one of the many ways to interpret the market, and we’re all trying to figure out the probabilities as we understand them and then manage our risk appropriately.

I’m new to the Elliott world, so I strongly encourage readers to share your thoughts and opinions in the comment section, and to discuss among yourselves here as well.

Corey Rosenbloom
Afraid to Trade.com

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Trends and Timing in the FOREX Market

Dec 16, 2008: 12:08 PM CST

Adam Hewison of the Market Club released a new video entitled “Trends and Timing in the FOREX Market,” in which he describes how to analyze a FOREX chart and how to generate and confirm trading signals using the weekly and daily charts in conjunction.

Here’s a portion of the introductory text, reprinted with permission:

“In this week’s video, we will be exploring the world of Foreign Exchange, or FOREX.

The FOREX market is the biggest market in the world with trillions of dollars changing hands everyday. This truly is the most fluid and liquid marketplace on earth. This market trades 24 hours a day, 6 1/2 days a week and it is traded by every major bank in the world.

One of the cool things about FOREX is the fact that markets tend to trend very well and therefore they are very suitable for technical analysis and the use of trend following techniques such as MarketClub’s “Trade Triangle.”

Today, we will be focusing in on the EUR/USD exchange rate. As of right now, the dollar continues to be gaining for the year against the Euro. However, we still have about another week left to trade in 2008 and we could see the USD end up being flat for the year.

This gets back to a point I have made before… never buy-and-hold a security or a currency as events are constantly changing in the financial arena.

My new video runs about seven minutes. In the online video, which you can view with my compliments, I will show you step-by-step exactly how we approach both trends and market timing in the forex markets.

Every success in the coming year and every success in trading the FOREX markets.”

**

The FOREX market has begun to captivate newer traders, thanks to very low (or even non-existent) commissions and low account sizes (and the ability to trade mini-contracts as well).  It’s clearly not without risk, so learn as much as you can and always guard your account through tactical trading and money/risk management strategies.

Corey Rosenbloom
Afraid to Trade.com

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Inside Monday’s Intraday Trading Action

Dec 15, 2008: 10:36 PM CST

Monday offered us a variety of interesting trading opportunities, many of us were instructional moments.  Let’s step inside the 5-minute chart of the SPY – the S&P 500 ETF – spot some of these opportunities and locate some of the ‘idealized trade’ locations.

SPY 5-min:

To those of you who are regular readers, you know I prefer examining the DIA (Dow Jones ETF) which is my natural preference.  Today, it seemed like the price action was a little clearer to show as examples in the SPY rather than the DIA for once, so that’s why there’s a slight change in the analysis vehicle.

The DIA actually experienced an upside gap-fill this morning which resolved quickly.

Moving back to the SPY, price fell straight out of the opening bell into new lows and a high-probability short early in the day.  The 20 period EMA crossed beneath the flattening 50 EMA and price rallied quickly to this level, setting up a high-probability, low-risk confluence resistance short-sell trade (I need to come up for a name for this trade set-up – if anyone has any suggestions).

Ultimately the short didn’t give much profit, as price quickly began a 45 degree angle retracement upwards, which I recognized and commented as a potential bear flag once the price broke back down beneath the key averages.  Ultimately, price did make new lows on the day, but it formed more of a ‘measured move’ structure rather than a pure bear flag.

It fell just shy of its target before price rallied into an even steeper retracement back into confluence resistance before rolling back over, completing another bear flag/measured move trade that exceeded its target and yet again made new lows on the day just after 3:00pm.

The surprising ‘late day surge’ came off a triple swing positive (or flat-line) momentum divergence which preceded the quick end-of-day rally.  A reader asked me to comment on possible causes and I suspect it was due to market acceptance either of the upcoming Federal Reserve Rate Cut or renewed hope in the “Big 3 Automotive” bail-out resolution – or perhaps it was simply an oversold market where funds (or traders) did not want to hold short ahead of a Fed decision meeting.

One thing I did want to highlight was the “Three Push” Pattern that formed for the whole day on the 5-minute chart (which, of course, was only evident after the third push resolved after 3:00pm EST).  The “3 Push” Pattern is akin to Elliott Wave (though it does not strictly follow Elliott tenents) where price makes three successive new lows (or highs) on a growing positive (or negative) momentum divergence.  It is also valid if the momentum oscillator forms a ‘flatline’ divergence, as was the case today (though it appears each down-swing was on a slightly higher oscillator value).

The “Three Push” pattern signals price exhaustion and often precedes a major (on the respective timeframe) reversal, similarly to what a 5th Wave in Elliott Wave means.

Continue to learn from Monday’s action as it yielded good educational opportunities for you to study in order to internalize these patterns and be able to recognize then act on them in real time.

Corey Rosenbloom
Afraid to Trade.com

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If You Really Want to Trade Crude Oil Aggressively try DXO and DTO

Dec 15, 2008: 2:20 PM CST

Warning – this post is not for the faint trading heart!  A few readers have asked alternate methods to trade crude oil price moves and I’ve generally suggested the USO fund and a few others, but if you have some experience under your belt and want to take the most advantage of your directional bias, why not try two relatively new double-leveraged ETFs (actually ‘exchange traded notes’):  DXO and DTO.

The DXO is an ETF that is double-leveraged Long Crude Oil (prices);
The DTO is an ETF that is double-leveraged Short Crude Oil (prices).

Since inception mid-2008, the Double-Leveraged Long fund DXO has fallen 90% from a peak of $26.00 to a low of $2.43 earlier this month – I told you trading these leveraged ETFs was not for the weaker players out there!  However, the 2x short fund DTO rose 700% from $20 to a peak of $140 also early in December – a move that occurred virtually straight up as crude oil prices fell almost straight down.

Let’s take a look at these two ETFs and determine whether or not you would like to add them to your developing trading arsenal.

DXO:  Double-Leveraged Long Crude Oil:

Just like crude oil prices, we see a multi-swing positive momentum divergence and a similar volume surge as we’re seeing in USO (and other oil related ETFs as well).  The thinking has to be “there’s no way price could go any lower so let’s pour in to these funds like there’s no tomorrow.”  Still, be careful – just because something is cheap is no reason to buy it – but as I’ve said plenty of times before, there are additional reasons to be bullish crude oil short term (the positive divergence, the supposed ’rounded reversal’ or saucer bottom pattern, the long-term support at $40 per barrel, etc).

The purpose of this post is more to introduce you to these relatively new funds rather than give my take on crude oil at the moment, and I encourage you to do your own analysis on this topic.

While the double-long fund has taken a beating since inception, the double-short fund has rallied and rewarded strong-stomached investors with immense profits.

DTO:  Double-Leveraged Short Crude Oil:

Wouldn’t it be nice if we could find more stable uptrends like this one in the current environment?  Well, actually you can… through inverse ETFs (and the US Dollar Index).

Now might not be the most opportune time to begin trading such vehicles aggressively, but you need to know that the possibility is out there if you so desire and have the skills and discipline to do so.

After bouncing off the rising 20 day EMA two times previously, price is making another support test of this level today after filling a deep down-gap this morning.  The question is – will support hold?

The opposite volume pattern is occurring in DTO in terms of volume trailing off and decreasing as price has reached higher and higher levels – in a stock, that would signal a strong non-confirmation and would be immensely bearish.  Let’s see how it plays out (probably similarly) in this new ETF.

Of course, I wouldn’t be objective if I didn’t point out alternate ways to play crude oil outside of the futures contract.

Here’s an article from Gary Gordon, the ETF Expert:  Crude Oil ETFs… Double Down, Double Up.

In addition to the DXO and DTO, Gary mentions the OLO (Regular exposure Long) and SZO (Regular exposure Short).  He also notes:  “These are not meant for buying-n-holding; rather, they are meant for making a calculated bet and exiting when you’ve reached your profit target or stop-loss.”

Please pay attention to his last sentence in the article:

“Stay vigilant… use stop-loss protection.”

Corey Rosenbloom
Afraid to Trade.com

8 Comments

A Look at the Strengthening Euro Index

Dec 15, 2008: 11:33 AM CST

As the US Dollar has been weakening recently, foreign currencies have been strengthening, as have commodity prices.  Let’s focus on the Euro Index to see what insights we can gain from the daily and weekly chart views.

Euro Weekly:

Price has clearly broken the strong uptrend which has persisted since 2002, roughly in line with the US Stock Market bottom.  The Euro actually peaked after the US Market peak in October 2007, putting the Euro more in line roughly with commodities such as crude oil (in terms of chart structure).

Any time price retested the rising 20 week EMA was a key buy point until price broke through the average in August ‘08.  At this point, the uptrend was threatened, but not broken… until price then quickly broke the rising 50 week EMA and formed a counter-rally into the confluence zone ($148) where the moving averages crossed, confirming a new downtrend in price (red arrow).

Ultimately price plunged from this point, falling sharply as the US Dollar Index rose just as sharply.  Not even the 200 week SMA was support for the Euro as the index made brief new lows not seen since 2006.

What’s happening now is a different story, and for that, let’s turn to the Daily chart.

Euro Daily:

Price formed a key sell signal in September as price came off a momentum divergence (not labeled) and found key resistance at the falling 50 day EMA, plunging price to new 2008 lows into October.

November saw an interesting technical juncture, as the momentum oscillator revealed bullish strength yet price was unable to overcome the resistance given by the 20 day EMA and almost formed some sort of a bearish descending triangle… that resolved to the upside, soon breaking both the 20 and 50 day EMAs.

I wanted to use this as an example to caution against reading too much bias into triangle patterns.  Classical technical analysis would have us believe that descending triangles are bearish and ascending triangles are bullish, and while that might be a decent classification, clearly it is not an absolute fact.  To me, triangles represent consolidation only, and represent areas of balance, wherein we can expect price to burst out in an impulse move at the breakout… though I argue we cannot know in which direction price will break.

Nevertheless, price did break above the 50 day EMA and the momentum oscillator has registered a new momentum high, indicating that the odds of higher prices are more likely than of lower prices… but not before some sort of pullback occurs, most likely to test the confluence support zone when (and if) the 20 day EMA crosses (bullishly) above the (now) rising 50 day EMA.

Continue to watch the Euro, US Dollar Index, and other key currency indexes for insights into how the commodities and ultimately equity markets might react to changes in price trends.

Throughout December, take advantage of the Market Club’s two-month trial membership if you’ve not joined already.  From them you receive education, analysis, scans, signals, and insights from their team.  They do a great job at showing FOREX charts and signals.

Corey Rosenbloom
Afraid to Trade.com

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