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