Two Competing Elliott Wave Counts on the SP 500

Jan 12, 2009: 12:20 PM CST

Revisiting our discussion on “Which Elliott Wave 3 are we in Currently?” the question has now shifted to “Which Elliott Wave 4 are we in Currently?” as evidenced by these two possible wave counts below.  Let’s take a look at these competing interpretations and discuss which might be the more probable – or palatable – scenario.

First, the “Wave 3 is Finished” Chart with Projection:

I’ll try to let the charts speak for themselves.  Most Elliott interpretations are in sync with the circled 1 and 2 waves, but it’s the other circled or ‘large scale’ waves that are open to interpretation.  I’ll jump into discussing these waves only.

Under the first scenario – which I deem the more ‘bullish’ assessment because the termination point of Wave 5 is higher and the down impulse is only 5 more waves away from ending completely – we have already completed fractal wave 3 and are now in… or perhaps even ending… Corrective Wave 4 up.

If this is the case, then look to the bottom left of the chart where I’ve drawn a projection of the next expected 5-wave decline which should take us to S&P value 700 or beneath.  We’ll know this is the official count if we break the 750 November low.

This scenario fractalizes the 3rd wave and has the “third of third” be extended as expected.  You can see how I’ve labeled each fractal wave.

I did want to note a similarity between the currently labeled circled “Wave 4” and the circled corrective Wave 2 – both of which look quite similar (and might suggest there’s still a little bit of time left in this wave for equality of time).  However, the corrective wave looks like a ‘flag’ or perhaps a ‘wedge,’ both of which are bearish short-term.

Let’s now look at a more ‘bearish’ count that has us still in large-scale (circled) Wave 3 down.

Second, the “Wave 3 is Still Going On” Chart with Projections:

I feel bad even bringing up this possibility, and I refer to this count as a more ‘bearish’ count because it assumes that we have 13 more ‘waves’ to go until we reach the official ‘bottom’ and that the bottom will occur perhaps much lower than the previous count – perhaps as low as 550 (some counts even have us going to 450).

Under this count, large-scale (circled) wave 3 is still going on, and that we are either in fractal 4 of circled 3 or are just beginning the first wave of fractal 5 down which would imply that the end of the 3rd wave down – which started in May 2008 – would end at or beneath the November lows.

To add a bit of bullish spice to this count, if this is the case, then we’ll have a large-scale circled 4 wave up which could take us as high as 1,100 or beyond… before price collapsed into the final circled 5th wave which could take us down to new lows not seen in over a decade.  I’ve idealized the projected count at the bottom left of the chart for you.

The red arrow marks a “you are here” point.

I wanted to share these competing counts and open up the page for discussion for your thoughts and analysis to share with each other.

Corey Rosenbloom
Afraid to Trade.com

28 Comments

28 Responses to “Two Competing Elliott Wave Counts on the SP 500”

  1. samir ghadiali India Says:

    Hello Mr.Corey,
    I still believe that we are in very much of 3rd wave as spx500 not even touch 38% retracement(May 08 high to Nov 08 low) level in weekly chart

  2. Corey Rosenbloom Says:

    Samir,

    It’s quite possible. I’m trying to be objective and present both sides but either way it looks like odds favor lower prices yet to come.

  3. dacian Says:

    I post this here as well, sorry Corey, but I don’t know how often you look back on previous posts.

    You said in one of your commentaries:
    “After we finish the C wave, we don’t necessarily have to return to a bull – we could start an impulse wave down.”

    Could you detail on that? I guess the bear market in 1930 behaved this way, don’t you think? I mean how you would interpret a new impulse down after the 5-wave completes? And how many waves that impulse might have? I was looking for this and there is only one place where I found it (a french blog) which states in 2009/2010 we might have 9 waves down actually. Is that an extension of wave-5 down? And is it something magic about 9 subwaves for an extended 5-wave down?

    and btw, thx for this update on SPX in terms of EW.

    samir, I don’t think wave 4 needs to retrace minimum 38%; I think 24% is still ok in terms of price for wave 4-up. Even if Corey privileges the 1st scenario, the 2nd can’t be yet ignored. (Corey, correct me if I’m wrong).

  4. adrian Says:

    so, i guess, when nothing else works, one turns to elliott wave. i thought this blog had more quality but it seems i was wrong

  5. Andrew Stanton Says:

    All the wave twos were sharp corrections so the expectation is that the fourth waves will be complex. This makes me lean to the second count, just move iii over to the left to make iv a flat. Wave (4) may or may not become a flat or triangle although if it did it would become out of proportion to wave (2); either way it already hit the price area of the fourth wave of one lower degree. The short term message of either chart is bearish.

  6. Corey Rosenbloom Says:

    Andrew,

    Seems like we got that complex fourth wave! It’s throwing everyone off it seems. Two was over too easily it seemed.

    I think the benefit of Elliott is just as it’s happening now – seeing points of confluence of alternate wave counts in a certain direction.

  7. Corey Rosenbloom Says:

    Dacian,

    I’m just saying that it’s not guaranteed after finishing a C wave that the next elliott impulse will be up – it means we have a fresh start in the wave count cycle.

    I have no idea about magic 9 waves, but each Elliott Impulse can contain one (but not all) wave that ‘extends’ and it’s possible this final fifth wave down could extend, but I’d argue we’ve already gotten that extension in the 3rd wave so the 5th should by no means extend.

    Don’t get too far ahead of yourself in trying to categorize every wave in the future. My advice is to take it one wave, one swing at a time and seek profit/manage risk within that one wave rather than try to figure out exact targets for the next cycle. To me, it’s just far easier that way.

    And as to the second point, it’s good to keep primary and at least 1 alternate count, but also know exactly at what point you abandon one of those view in favor of something more concrete. I wouldn’t ignore anything just yet.

  8. toad37 Says:

    Excellent post Corey. This is a tough market to call, you efforts are appreciated.

  9. NotAfraidofTrend Says:

    adrian, there is nothing wrong with using Elliott Waves. But not everyone does. So, take your pick! But, please do let us know if you have the holy grail.

    I was wondering if the upward slanting channel comprising the wave 4, or fractal 4 of 3, look like a bear flag? Moreover, it appears that the channel has been broken, though not yet decisively.

    Corey, what do you think?

  10. Corey Rosenbloom Says:

    Thank you, Toad.

    We’re all just doing the best we can.

  11. toad37 Says:

    Notafraid, have you ever used or heard of Dr. Robert McHugh? He has a great newsletter for TA. He thinks we are still likely in 4 up and sees 1000-1050 before breathtaking plunge into 5 down. I can email you his latest newsletter if you want to see it. Same to you Corey.

  12. dacian Says:

    thx Corey; I’ll try to not get ahead of myself 🙂 I was just intrigued with this continuation of the wave 5 as I asked for an explanation on the blog I was mentioning with no answer. Is more because I never saw such a continuation call anywhere else.

    adrian, there is for sure more than just Eliot Waves here and you can convince yourself by looking through the previous posts; btw, EW is just a way to look at things. Corey mentioned in a previous post that with an EW counting the bottom in 2003 couldn’t have been declared (looking back at things now, some find arguments for putting that in EW waves :))

  13. DaveB Says:

    I guess I’m not the only one who had been wondering if the recent upward move (wave 4 in scenario 1, 4 of 3 in scenario 2) was a bear flag.

  14. Adrian Says:

    Adrian,

    Since adopting elliot wave I have added xx% to my account. Its all in intepretation and appropriate risk management as always and when combined with more traditional TA can give you increased confidence and an edge . I used to dismiss it as voodoo untill i resolved to learn something about it and you would be amazed…

    Corey,

    Thanks for both sides of the coin. I remain open to 3 possibilities near term.

    1. Your most bearish count
    2. Triangle intermediate 4, bounce at 810
    3. Double 3 with this decline being the X wave into 850s, bounce and then double bottom for the 5th.

    So far im leaning towards 1 and 2 but a solid bounce with good breath at 850s would have me cover a decent chunk of shorts pending re evaluation. If we bears make it to 810 again ill be watching to see if we touch and go or chew on that level.

  15. Corey Rosenbloom Says:

    NotAfraid,

    I’ve had that same thought and I think I’ve said a little about it on a prior post – that we’re forming either a wedge or perhaps bear flag on a large scale or something.

    The angular move (retracement) to the upside particularly on the weekly chart looks quite ‘flag’ like where you can almost feel us coming up to a point before we break sharply lower. There also seems to be good symmetry there as well.

    If so, today indeed helped break that lower trendline and we’ll see if the sellers have follow-through.

  16. Corey Rosenbloom Says:

    Toad,

    I’m not familiar with McHugh, though I think you or perhaps another reader have mentioned him previously in the comments here – he was recommended. I appreciate all points of view and am always encouraged when multiple viewpoints come to similar conclusions. Though sometimes the contrarian in me thinks otherwise!

  17. Corey Rosenbloom Says:

    Dacian,

    You inspired me to lay out the possible Elliott Pathway going forward which I’ve done on the bottom left sides of each chart. I’ve found pictures are far easier than lengthy paragraphs.

    I don’t know exactly how the 5th wave will play out, but we have a confluence of analysis from various individuals that see us heading into a 5th wave. I’m only trying here to provide two main-stream interpretations of the upcoming potential move in the market. I’m also trying to apply the Elliott principle as I understand it and reach out for feedback.

    I don’t think anyone has the tools to trace out the exact pathway. Wouldn’t that be nice if we could!

  18. NotAfraidofTrend Says:

    toad37, Thanks for your tip. You did mention Dr. Robert McHugh earlier and I did look him up. His newsletter is purely on subscription basis. So, please keep telling us what he says, assuming you have access to his service. However, there were reports on him having lost his touch, and, historically, he has been right only 38% or so times. It is good to listen to everyone but, eventually, we are all on our own when it comes time to pull the trigger. It is hard to act unless you have formed your own opinion, be it right or wrong.

  19. Corey Rosenbloom Says:

    Dave,

    It’s appearing quite like a bear flag, yes.

    One thing that I find useful about Elliott is for confirmation or – as Martin Pring says – adding to the “Weight of the Evidence”. In other words, it can help put a possible bear flag pattern into a larger price structure for additional analysis.

    All and all, it’s another tool – nothing magical.

  20. Corey Rosenbloom Says:

    Adrian,

    I entered the CMT coursework quite negative on Elliott but exited quite in awe. I’m now applying it and finding it rather complementary to my developing toolbox and I find it helpful for assessing possible structure and context.

    Ouch. Double 3. I feel horrible posting publicly the second possibility because it takes us so low. I know of other counts that take us even lower but – for now – those aren’t mainstream.

    I always try to keep it on the next probable swing and not get too far out, but I’m finding a larger structure or context to be helpful.

  21. Anonymous Says:

    Nice debate on the EW Count…all I know is that expansion leads to contraction, and contraction leads to expansion… and I think we all know which way we will eventually expand.

  22. Corey Rosenbloom Says:

    Anon,

    Exactly – and it could be the case that we’re expanding out of a month-long contraction to the downside.

    This pattern now looks extremely similar to the July to September 2008 contraction… and that didn’t end well for investors.

  23. Adrian Says:

    Corey,

    Maybe im not using the correct term but the double 3 to me means abcxabc with us now in the X wave. 851 breached would throw that out the window which why im watching it closely.

  24. Corey Rosenbloom Says:

    Oh, Ok. For some reason I thought you meant we’d have two “wave 3’s” in a row – I’ve never heard of that possibility. I shutter to think what two wave threes back-to-back would do! Take us to 0?

    I think the more common term is “double zig-zag” or “double flat” or also “complex correction” depending on how the waves form.

    I also like Elliott because it clues you in to exact prices where – if hit – you know you’re wrong and need to go with an alternate count. Similar to pattern projections (like flags, etc) as well.

  25. adrian Says:

    ok, i agree that elliott wave is a valid technique for trading. in my opinion it keeps you disciplined, it puts things into perspective. with good money mangement you cand have positive results.
    still. do you guys really believe that the market moves in 5 waves? do this exercise: assume that there should be 7 waves instead of 5 (4 impulse, 3 corrective). if you can fit the market action into that, then elliott wave is not valid. i tried and i could do it. (tip: you can use the same “tricks” like failed waves, double corrections and so on)

  26. Corey Rosenbloom Says:

    Adrian,

    The main ‘theory’ behind large-scale 5 waves is the following:

    Imagine we’re in a downtrend and prices have been moving down, perhaps like after 2002.

    Wave 1 is up, but it’s seen as another chance to “Get short” so no one is really bullish.

    Wave 2 is an “I told you so” wave where people are still selling and shorting, but there’s hidden strength, as Wave 2 doesn’t go beneath wave 1 but forms a higher low (precursor for reversal).

    As Wave 3 goes up, there are buyers but the public is still bearish. However, when Wave 3 breaks above Wave 2, a lot of short’s stops are taken out and people start to catch on one by one that we’ve put in a bottom and they start to buy. That’s why 3rd waves can be so dramatic – shorts are covering and longs are getting aggressive.

    Wave 4 is a profit-taking wave which often yields a comfortable retracement back to support and people start to buy back into…

    The final 5th wave as everyone gets bullish and is convinced a bull market will stay for some time. Unfortunately, funds who accumulated in the ‘wave 1’ environment are distributing to the eager and excited public, which creates a top.

    That’s a quick primer as to the theory of the 5 waves from both an accumulation/distribution and crowd participation/psychology standpoint.

    Elliott – they say – is best viewed on indexes where the forces of crowd psychology is evident.

  27. NotAfraidofTrend Says:

    Corey, Thanks for a meaningful primer. If we could just remember and PRACTICE this much, we should do pretty good.

    Talking about “crowd psychology”, SPY has the the highest $ volume. Traders of futures, like E-mini, are probably better trained than the “crowd”. Manipulation is also easier in the E-mini futures than in SPY.

    Would it be better to look at and get our market cues from SPY charts instead of E-mini charts, even though we are trading E-minis?

  28. Corey Rosenbloom Says:

    Possibly.

    The way I do it is to focus 90% of my intraday analysis on the DIA but trade the patterns through the @YM for a variety of reasons.

    For whatever reason, I don’t like the pricing structure of the S&P and e-mini and am much more comfortable with the Dow. I suspect the patterns would perhaps be better in terms of Elliott in the S&P but I find the price structures to be nearly identical between the DIA and SPY more times than not.