I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Saturday, March 27, 2010

Not All Five-Wave Moves Are Impulses: A Short Treatise on Elliott Wave

I am not Robert Prechter. I am not Steven Hochberg. I am not nor have I ever been a subscriber to EWI. I am not an Elliott Wave "expert".

I mention this because I come from Elliott Wave from a student's perspective. I like to figure out what the market is telling me and to try to interpret that through Elliott Wave. I pore over charts, probably more than is healthy (probably more than my wife likes). I do like looking at other people's counts, but I always perform my own counts first and see what makes sense to me before I consider how others see the waves.

I have read Frost and Prechter's Elliott Wave Principle many times. Probably over a dozen. It is an absolutely fantastic and indispensable resource. I have also read Robert Balan's Elliot Wave Principle Applied to The Foreign Exchange Market many times as well.

I mention this also because these two resources give you everything you need to understand wave movements. If you are rigorous in your charting, and a reasonably intelligent person (and I believe I am one), then de facto you are an "expert". The truth is, the concept is just not that hard to understand, which is the way any *true* concept should be.

So let's talk about waves for a minute.

Not any wave is strictly impulsive, nor is it strictly corrective. The are impulsive components to corrections and corrective components to impulses. I expect, I am hearing "no sh*t binve" through the internet backbone right about now. But what I am getting at is there is never a "perfect" waveform. But we derive meaning from the waves and how they develop and assign them labels.

The crowd doesn't get together and say "today lets be bullish" and from an impulse wave, nor does it say "time to correct". The waves are always a tug of war.

But when the tug of war sees one team getting stronger temporarily than the other team, we get an impulse. But more specifically we get the third wave of an impulse

This is the *biggest* defining characteristic between an impulse and a correction. ACCELERATION ON THE THIRD WAVE!! Otherwise it is just a tug of war, more or less evenly matched. A FIVE WAVE STRUCTURE IS *NOT* SUFFICIENT TO DEFINE AN IMPULSE! ACCELERATION OF THE THIRD WAVE IS KEY!

Like I said above, this concept is just not that hard to understand. We all know there are bulls and bears acting all the time. And when the market direction is determined by the herd, it does so dramatically and impulsively to break out of the tug of war. We see third wave accelerations in impulses from a 1 minute chart to a 100 year chart. And it is obvious that it is more than simply a 5-wave sequence that defines an impulse.

A 5-wave structure, that does not exhibit true dynamics in the third wave: acceleration (faster channel) compared to the first wave, increased breadth and volume, long candles that slice through resistance, etc. is nothing more that a complex correction (a triple-three). It is important to look at the subwave behavior, not simply the overall structure

What I am getting at, of course, is the move since March 2009. Currently it is exhibiting a 5-wave structure. But is it an impulse? As my chart below shows, no it is not. I have heard many people argue for it, but it does not make any sense to me.

Just an opinion from a lay-person.

(from my post: Examination of the Large Technical Landscape / Possible Paths)

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