degree trend.If a market appears to be in a Wave-5, a reliable signal the W.5 iscomplete is a trade beyond the W.4:5 extreme. An entry one tick beyondthe W.4:5 extreme would be followed by a protective stop one tick beyondthe W.5:5 extreme.If a Wave-5 appears complete, and waves 1 and 2 in the oppositedirection appear complete, a trade beyond the W.1 extreme confirms theW.5 should be complete. This signal may be made before the W.4:5extreme is exceeded. An entry one tick beyond the extreme of W.1 wouldbe followed by a protective stop just one tick beyond the extreme of W.2.
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Practical Elliott Wave Trading StrategiesPart 4Robert Miner, Dynamic Traders Group, Inc.
This Week’s Lesson
Don’t forget the EW rules and guidelines.You must constantly keep in mind the Elliott wave rules and guidelines asa market unfolds in order to be alert to if a pattern is a correction or animpulse and where it should be within the correction or impulse. The rulesand guidelines are few and simple. Be alert to the subdivisions (smallerdegree) of each wave to help identify when a wave is at or near itstermination. The EW rules and guidelines will also give you what patternstructure will confirm and invalidate a wave pattern.
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Identify The Main DivisionsTake a look at the data below. For just this data, can we determine if themarket is making an impulsive trend or a correction? What would be thedefinitive signal that would confirm which it is?
Rather than immediately begin to put labels on the chart, the first thingto do is identify different degrees of change. For the bearish period of thisdata, there are two rallies that stand out as greater in time and/or pricethan the others. They are probably of the same degree and a largerdegree than the minor corrections.Very simply, we have a declining section, sideways correction, anotherdeclining section and a rally. Is the last rally that began at the May 22 lowa correction or the beginning of a bull trend? Can we tell which it shouldbe from this data alone?
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The next chart includes the obvious labels for the trends and countertrends of similar degree we have identified so far.
The three completed pivots of similar degree should be W.1 or A, W.2or B and W.3 or C. From just this data, there is no way to tell if it is a 1-2-3or A-B-C. We may be biased one way or the other depending on howconfident we are of the potential wave pattern up to the May 17 high, butlets assume we do not have a confident opinion. What can the market dofrom a pattern perspective to signal if the May 22 low completed an ABCor if it is just a W.3 in a bear trend?A W.4 should not trade into the range of the W.1. If the S&P tradedabove 1091.50, the potential W.1 low, it would indicate May 22 is a W.Clow, not a W.3. If this should happen, the larger degree trend should be upand the S&P should continue to advance to above the May 17 high.
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If the S&P first traded below 1075.70, the potential W.3 low, we mustassume it is making an impulsive five-wave trend and the larger degreetrend is down.We could get very creative with labeling the small subdivisions andminor swings on this data. The clear fact is – there is no clearly definedsub-division pattern for the data above. We could make the subdivisionlabels almost anything we want to fit any one outlook. That is what manyElliott wave analysts do. Force a wave count to fit the forecast. For thisdata, the 1-2-3 or A-B-C count is the only reliable one at this time.Always Keep In Mind The EW Rules and GuidelinesWhich pattern is more likely for the data shown on the chart below – A-BC or 1-2-3-4-5? There is enough information from this data to put the oddsstrongly in favor or one or the other pattern.
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Note the pattern of the first section up from the May 14 low to the May16 high. Does the first section appear to subdivide into a five or a three?That will be the key to the larger degree pattern position.
The first section has three clearly defined swings of similar degree. Ifthis is the case, it is labeled an ABC. A Wave-A may subdivide into eitherthree or five waves. A Wave-1 should never subdivide into three waves.The three-wave rally from the May 14 low to the May 16 high can only beconsidered an A-wave.If this is the case, the May 17 low should be the Wave-(B) and bondsshould be completing a Wave-(C) and the end of a corrective rally fromthe May 14 low. Most traders would become very bullish with bondsmaking a new high on a wide-range outside-day. But EW pattern traderswould be alert that the odds are bonds are in the very final stage of acorrective rally from the May 14 low.
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What could bonds do to confirm a W.(C) top is complete? A tradebelow 101’00, the probable W.(A) high confirms the rally is a correctionand the W.(C) high should be complete. A trade below 101’00 confirmsMay 16 could not be a W.1 high as the W.4 should not trade into the rangeof a W.1.
Lessons LearnedElliott wave traders often get hung up trying to label every zig and zag ona chart. If the minor swings are not in an obvious structure, the tendency isto force a wave count to fit the prejudice of the forecast. We have all seenthis over and over again. Trying to pretend that every bump on an intradaychart always fits into an Elliott wave pattern structure may be very costly.At the least, it is simply foolish. It just doesn’t work that way.Begin a wave count by separating the obvious divisions of similardegree. Place the probable count and the alternate if there is one on theseobvious divisions. Then identify what the market can do to confirm orinvalidate the most probable count.Two key questions to consider once you have decided on the labels forthe obvious divisions –Have the main swings basically sub-divided according to the EW rulesand guidelines for the labels I have given it?What pattern structure should unfold from the last confirmed pivot if itis the label I have given it?By working in a relatively simple and logical manner, Elliott wavepattern analysis can be the key to identify the main trend direction andwhen trends are at or near their reversals.
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Practical Elliott Wave Trading StrategiesPart 5Robert Miner, Dynamic Traders Group, Inc.
This Week’s Lesson
Every zip and zag is not a perfect EW.We always begin with the assumption that a market will unfold accordingto the EW rules and guidelines. However, this is not always the case.Rather than try to fit a convoluted wave count after-the-fact to make themarket conform to the rules and guidelines, move on. We are traders, notEW academics. We are interested in making money, not in being right.I can show you lots of examples of five wave corrections that fit all ofthe rules and guidelines of an impulse wave structure. EW academics willrelabel them with all sorts of complex labels with Xs, Ws, Ys and morewhen the reality is – it was a five wave correction.Prepare for the most probable, but adapt to the improbable.
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Trend or Counter-Trend?From the first low on the left of the chart below, the S&P clearly made animpulsive rally which is labeled a W.1. A sideways flat ABC followed with agap up to a new high signaling the correction should be over.If we consider the gap up rally a W.1 of a new impulsive trend, whatcould the market do to void that idea?A trade below the W.C:2 low would signal a larger degree correctionwas being made, not a new impulse trend, and the bear trend should thendecline to a new low.
If the market traded below the W.C:2 low, how would the pattern berelabeled and what would we then anticipate?
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We would then relabel the rally as an ABC and expect the market todecline in an impulse trend to well below the extreme low on the chart.Several bars later, the market declined below what was labeled theW.c:2 low. Now we consider the rally an ABC as shown below andanticipate the continuation of the bear trend to a new low.
We now know which side of the market to trade for some time – short.A trading strategy would be to wait to identify a W.2 correction in order toposition short.
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How Long To Be Short?If a correction is complete at the W.C high, we would want to only considershort trades until it appears a five-wave decline is complete. The five-wavedecline should be lower than the beginning of the corrective rally which isthe low point on the chart below.The market made an almost ideal ABC which probably completed aW.2 high. The trade below the W.1 low signals W.2 should be completeand the market should decline to well below the 875.50 low to completewaves 3-5.
What form should the W.3 take? A W.3 should sub-divide into fivewaves. Typically, a W.3 is greater in time and price than the W.1 so themarket should have a long way to decline before the W.3 is complete.
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As long as the market does not trade above the W.2 high, short tradesshould be taken with a stop no higher than one tick above the W.2 high.There are a lot of points between where the market is as of the last baron the chart below and the probable next low well below the 875.50 lowand not many points to above the W.2 high, the maximum stop on a shorttrade. You don’t need to make complicated risk/reward ratios do know thisis a great pattern position for a short trade.The market declined sharply. As of the last bar on the chart below, acorrection of the same degree as the W.2 or W.2:3 does not appear tohave been made which means W.4 is still to come.
The next chart show the market eventually made a rally at least greaterin price than any since the W.2 high. The assumption is the W.3 iscomplete and a W.4 is in progress. The assumption is a W.4 should be at
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least a three wave correction. As of the last bar on the chart below, itappears a W.a of 4 is complete and a W.b and W.c will finish off W.4. Atrade below the W.3 low indicates the W.4 is complete.
The market does not make a typical ABC-W.4 correction but declinesstraight below the W.3 low signaling W.4 is complete. From a tradingperspective, we should always anticipate a market will make a typicalwave pattern until proven otherwise. The W.4 rally shown below is not atypical correction since it is a single wave up. But, it only fits into the largerdegree pattern position as a W.4 so that is how we label it, Elliott waveobsessives not withstanding.
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W.5 appears to be subdividing into five waves as it should. If 814.90 isthe W.4:5 high, a trade above it signals the W.5:5 is complete and theentire decline from the W.C high is also complete.The pattern position is now telling us the entire decline from the W.Chigh is almost complete. The pattern position gives us a tremendoustrading advantage. If short, we are aware that the downside is relativelylimited and a significant rally is likely to be made soon. We should alsoprepare to consider a long trade.At a minimum, once the W.5:5 low is complete, we would anticipate acorrection of the entire decline shown above. If the low is a larger degree,we would anticipate an even greater advance.The following day, the market gaps lower and later in the day tradesabove the W.4:5 high signaling a W.5:5 low is complete.
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The pattern position suggests we should now only consider long tradesas long as the market does not trade below the W.5:5 low.If the W.5:5 low was not made at the ideal time and price targets for aW.5:5 low, we do not have to buy the bottom for a long trade. One of W.D. Gann’s most useful trading advice was – “The safest trade is to buy(sell) the first correction to the new trend.” In other words, wait to go longon the first correction to the new trend.The Elliott wave pattern position gives us the tools to help identify veryearly if a new trend is being made. In this case, the pattern position hassignaled a W.5:5 low should be complete and the trend should be up forsome time.The initial advance should be a Wave 1 or A which typically subdividesinto five waves. If a five-wave advance is made, it is often followed by anABC correction. We would be alert to the pattern of the advance and initial
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decline to help identify if a W.C of 2 or B low is being make to positionlong.The chart below shows the idealized pattern. The market may or notunfold in the idealized pattern but we do have a framework to work with toprepare for a low risk, high probability long trade.
How Long To Be Long?If the rally is only a correction, the minimum expectation is for an ABCwhich typically subdivides 5-3-5. As long as the market has not tradedbelow the probable W.5:5 low, we would expect at least a three wave rallythat would be a correction to the advance from the W.C high where thefive-wave decline began.
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Lessons LearnedElliott wave gives us a framework to make a trading decision although itdoes not guarantee any particular wave structure will unfold. Remember,all trading is probabilities. We use Elliott wave pattern analysis to help putthe probabilities on our side.We use the Elliott wave position to help identify the main trenddirection, the maximum stop loss and what the market must do to be in aposition to complete a trend or counter-trend.If we don’t expect more from Elliott wave analysis than it can provide, itwill be one of the most important trading tools you use.
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Practical Elliott Wave Trading StrategiesPart 6Robert Miner, Dynamic Traders Group, Inc.
This Week’s Lesson
Always Be Aware of the Big PictureWe must continually be aware of the probable larger degree patternposition to keep the short term in perspective.
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S&P – Is a corrective rally over?The current position of the S&P as of the end of today (July 30) is in aposition for an important Elliott wave lesson. First, let’s take a look at the15-minute chart from the July 24 low.
Today’s high appears to have completed a text book three waveadvance from the July 24 low. Is it a 1-2-3 or A-B-C? From just the datashown above, there is no way to tell. We don’t have to guess. We can usethe simple EW guidelines and let the market let us know. What could themarket do to signal which it is?A W.4 should not trade into the range of the W.1. If the S&P declinesbelow 854.50, the W.1 or A high, it signals the high should be a W.C.Does that mean a corrective ABC rally high is complete and the trendshould continue to new lows? What do you think?There is an important Elliott wave guideline that will help us answerthis question. First, we have to move back and review how this potentialABC fits into the larger degree picture.
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The next chart is the daily SPX from the March high.
The assumption is July 24 completed a W.3 low and the rally is a W.4correction, not the beginning of a bull trend. Today reached the minimumof the W.4 retracement zone at 902-942 (SPX).Is the W.4 correction over? Today’s high could have completed anABC, the most typical corrective wave structure, at the ideal W.4retracement zone. However, today’s high is probably not the end of a W.4.A W.4 will typically last longer in time than the W.2. In this case, W.2was eight trading days and so far, the W.4 rally off the July 24 low haslasted just four trading days. Let’s consider the short-term pattern on the15-minute chart again.
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A W.4 should not trade into the range of the W.1. If the S&P declinesbelow 854.50, the W.1 or A high, it signals the high should be a W.C.Even if this were to unfold, it is unlikely the W.4 correction is complete fortwo important reasons.Firstly, Wave-2 (May 7-17) was a simple ABC (see the daily chartabove). If we consider the guideline of alternation, if W.2 is a simple ABCW.4 will typically be something other than a simple ABC. A decline below854.50 would indicate the decline should be either an X-Wave, or today’shigh completed an abc:A of larger degree. A Wave-A may be an ABCitself. In either case, the S&P would continue the correction for at leastseveral more days and probably test or exceed today’s high. The Elliottwave guideline of alternation clearly warns that a Wave-4 high should notbe complete today.
Secondly, W.4 should have at least several more days to go to equalor exceed the time range of the W.2. While this is not an Elliott wave “rule”or “guideline” it is a high-probability time relationship with W.4 and W.2. A
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W.4 is rarely shorter in time than a W.2 so we always anticipate it willequal or exceed the time range of W.2.Short term traders should be aware that today’s high appears to havecompleted a five-wave advance from the July 24 (W.2 or B) low. As longas the S&P has not taken out today’s high, short term traders should beprepared for a day or two of sideways to down trading.If the S&P declines below the potential W.1 or A high at 854.50, itshould not signal the end of an ABC.W.4 which should then continue insome form of complex correction.
Lessons LearnedThe Elliott wave rules and guidelines help us to not only determine thehigh-probability pattern position of a market, but what the market can do toconfirm or invalidate the most probable position.It is very important to keep aware of the big picture and how the shortterm pattern may fit into the big picture. Simple price and time factors willoften help to clarify the pattern position.While no thing is for certain in the markets, the pattern position at leastgives us the high-probability position and what to anticipated for anypotential market activity.
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