Possible Elliott Wave on the SP 500 Daily Chart

Feb 2, 2009: 12:27 PM CST

It’s time to update the Elliott Wave count and see what might be happening in the S&P 500 and how we might manage risk accordingly.

Possible Elliott Wave Interpretation on the S&P 500 Index:

SP 500 Elliott Wave Count

This count assumes that the larger Third Wave has indeed completed.  Refer back to my December post that asked “Which Elliott Fourth Wave are we in Currently?” as well as “Two Competing Elliott Wave Counts” for more perspective than this daily chart gives.

If indeed the monster third wave completed in late November, then we just experienced a complex corrective Fourth Wave that ended in the “Bear Trap” in early January 2009.  If so, then we are perhaps in the Third Fractal Wave of the final larger Fifth Wave that will end the downward corrective impulse that began in late 2007 (which many believe is a “C” Wave of a much larger corrective pattern that began in 2000).

I know there are other interpretations, but it’s helpful to have a primary (main) count and known levels where your count will be confirmed or disconfirmed.  For example, we will know if this count is most likely correct if price does make a new low beneath the November 750 lows – it will then have to become the dominant count.  However, we will know the count is wrong if price breaches 900 and especially if price can make a new swing high above 950 – if that were the case, we would have to put this back into “Complex Correction” territory.

The debate with Elliott Wave should not be focused on perfect foreknowledge – there is no such thing.  The benefit Elliott Wave interpretation gives you – or me at least – is knowing a probable path and then knowing exact points where that probable path will either be confirmed or discredited.  In that case, you can set logical targets and stop-losses and use your own indicators and methods of technical analysis in addition to your projected pathway.

Think of Elliott as one more tool just like an RSI or Stochastic or moving average.  Nothing is perfect alone but if we combine different, non-related forms of analysis, we increase the odds of being correct and in the end, that’s really all we can expect to do.

Corey Rosenbloom
Afraid to Trade.com

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Comments
  • Don,

    Thank you for providing that link. I've added it to the blog post.

    It's possible we've moved now into "Which 5th Wave are we in" if the 4 is finished. We still may be in a major complex corrective 4 (which would hint that the circled 3 was over if so). If we break 800 on the S&P;, odds will shift dramatically that we'll be in a 5th and virtually put the nail in the 4th's coffin.

    I don't have the Elliott skills yet to distinguish definitively between the circled 3 as being finished or completing.
  • Jack,

    I wouldn't go as far as to say a new government will form. I haven't read Dr. Hugh's letter.

    I tend to be turned off by rampant bearishness and try to play the market one swing at a time and not get caught up too far into the future that I miss developments in the present.

    Things aren't good. And I do think we'll crack new lows, but once we do, we'll need to reassess the probabilities then.
  • Dave,

    I'd rather not say what the final target is. We would be expecting Wave 5 to equal (roughly) Wave 1.

    I hate to say it but that's the way the market cycle works. It starts with investors distrusting the market then headlines are made as price keeps going up and there's a sense of complacency. Eventually, people will feel so confident that they'll invest all but that's often when the market tops - there's no one left to buy.

    Price then begins heading lower and people keep buying more if they can, thinking it's a good opportunity then finally we get way down like we are now and people just are in so much pain that they just can't take it so they sell. And when no one is left to sell, there is the bottom.

    I kept mocking TV Financial shows earlier this summer when they kept saying the word "Bottom" every 5 minutes. The bottom will occur when the TV People stop using the word "bottom" and start saying "everyone, sell now, this bear market will continue forever" or something.

    The only way to learn this truly is to experience it for a cycle or two. The market is a backwards game.
  • I see my confusion now. I was looking at a different old post when refering to symbols in my previous post.
    http://blog.afraidtotrade.com/two-competing-ell...
  • Don-Da-Mon
    Trying not to split hairs, but the interpretation I've stated is neither of the "which 4" in the old post. Circle 3 is complete (Like the one interpretation - but I have 4 is not complete) The other interpretation didn't have Circle 3 complete.
  • Jack
    I'm with Dr. McHugh, looking for a rally into Spring/Summer, before a devastating plunge to new lows, and ,possibly, a new form of government.
  • DaveB
    So, if the target for the 3rd of the 5th is 600 what is the target the completion of wave 5? That is scary! I have some family members who have money in mutual funds that are way under water, but they don't want to sell now - they're waiting for higher prices. I told them to get out back at the start of the year when the Dow got over 9000 but they thought it could go higher. I'm worried they're going to panic and sell out at the bottom, never to trust the market again. I guess I can't blame them for not listening to me since I've only been doing this for 9 months, but it saddens me to think of them losing so much of their savings and there's nothing I can do about it. But all the pundits on Fox Business and CNN say the worst is over, yes, these are the same people who 2 yrs ago said housing prices would never decline and that Bear Stearns was a bargain....

    About the analysis paralysis - yes, I definitely have a case of it. After losing money for 6 months (mainly due to impulsive overtrading to make back earlier losses) I made a commitment to learning this and decided to keep most of my trades as paper trades until I demonstrated more competence. That's worked out well but whenever I go to put real money down I start second-guessing my analysis and looking for further confirmation, which leads to me ending up sitting on the sidelines instead of sitting on tidy profits in my short positions.
  • NotAfraid,

    My thoughts exactly. There's pain on both sides. It's not as easy as "get short, rake in dough" though I wish it was that easy. Bulls are getting gored with at least two recent, valid bull traps but bears aren't getting the profits that easily either. That's the nature of corrective waves - they're horrific to trade.

    We need to have at least two or three plausible pathways for price but one thing seems certain - almost all counts have us making new lows sooner than later. If we don't make those lows, a lot of bears will be burned beyond recognition I'm afraid.
  • Don,

    Indeed. I showed a link back to an earlier post of mine which asked that question - which 4th are we in. I'm using this count under the assumption we've completed the 3rd. We may not have. If so, we are now in the 5th of the nasty 3rd wave and then we'll make a decent sized 4th into mid-year that could indeed take us to 1,000 or 1,100 before we break into the violent 5th wave to take us to lower lows than the count I displayed above would show.
  • Chris,

    I think if we break the 800 level, we'll see a 'knife through butter' trade as that level is carefully watched and guarded by the bulls. If they lose that zone, literally nothing will stop a run to test the lows and then we'll see what happens there. You're right - if this is the 3rd, it will take us beneath November then there will be a 4 up and then a 5 will take us to lows beyond that so we have - according to this count - two new lows to be made in price before we can consider the possibility for a bottom.
  • Dave,

    Oh no! You have to put analysis into practice! Turn possibilities into profit. Or at least risk-managed positions. I feel you though. A few years back, I got to where I did so much analysis that I just didn't take trades. It was more conflicting (too many indicators) than anything. And even earlier than that, I had the fear of trading pretty bad due to some nasty losses after a good string of profits (thanks to overconfidence).

    IF we're indeed in the third wave of the fifth, and our target is around 600 or so, you're not too late but you won't get a good stop-loss point if you're wrong. The stop would need to go above 900 which is about 100 points away so you're getting a 2 to 1 which is acceptable but not ideal. You could trail the stop as price heads lower.
  • NotAfraidofTrend
    Corey and Don-Da-Mon, Thanks for your counts. As the counts have a major conflict, it should be very interesting to see what the market does next.

    Personally, I prefer to stay out of the market during such conflicts.

    Sooner or later, the market will make a strong move, up or down.

    If the big move is down, we will be in 3 of circle 5. If the big move is up, we will be in 4C. We will know only after it happens.

    The big players will take the market up or down to ensure that most people lose the most money. The big players wait till most others have already placed their bets. This way the dice is loaded in their favor.

    Just follow the big players after they make their move. Even wait a while after the move to make sure that the move is not a trap. Meanwhile, why even bother to second-guess them.
  • Don-Da-Mon
    Would the downward movement from 2 resemble the downward movement that started 4 (down to 1)? If so that would mean a pretty steady decline for a little more than a week.
    I remember one comment in the past that indicated that circle 4 hadn't completed. The ABC (upto 4) after Circle 3 hadn't completed. Meaning that A completed at Circle 4. B completed at(1) and we are now entering C upward to complete ABC to end 4. I like that interpretation also since the weekly just had an inverted hammer which in the last couple of occurances has mean a short term upward move (and there haven't been many of those!) Otherwise, if we go lower than 804, then we are in 4.
    I've heard other commentary that states we'll rally upto April. This too could fit.
  • Chris
    Corey,

    Good stuff. Were currently oversold there we should get a small bounce Wave 2 up with overall main 5 down still which could take use up to SPX 835-840 .. That's my target to get short .... It's not a question of if but when. Wave 3 down of 5 were currently in should take out November lows. It should be quick and sell should really pick up.

    Thoughts/Do you agree - Thanks
  • DaveB
    The sad part about this for me is I've been aware of this count all along, and the bear flag and breakdown out of it on the weekly chart, yet have done nothing about it.

    I took so many losses in my first 6 months of doing this that I've become almost paralyzed when it comes to putting any money on the line. Heh, I guess I'm afraid to trade! ;)

    If we're in wave 3 right now then there should be a lot more downside yet to come. But I have a hard time bringing myself to buy any short ETF's because I feel we're too far into the move and my stops would be too far away. For the record I don't have time to day trade the 5-min charts because I have a day job, so I'm looking to trade moves that will last more than a couple of hours.

    Now let me ask an opinion on this strategy. On the hourly timeframe I'm a couple of days too late, the ideal entry was Thursday when 20ema crossed under the 50ema and contained prices. But I could still go short and put a stop around that 82.90 level where prices had reverse confluence resistance on Thursday, or could I just put it above the 50ema which is at 81.40 now? Or is there a better idea? Just trying to balance my fear of being on the sidelines for the big move down and my fear of taking on too much risk by buying in late and having stops that are too wide.
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