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Wednesday, August 10, 2011

August 10

Is the panic phase over? Yes, I think it is.

The 60-min Cycle Chart from my Trend System finally bottomed and issued a buy signal from my main indicator. Yesterday August 9 (Updated) it had an early buy signal that needed one more candle to confirm.... Well, today's open negated that. But the action today consolidated the bottom and the buy signal was confirmed as of 2:00 pm today.

So my cycle chart says that at the very least we are in a new sub-cycle up, and depending on how much it moves it will be confirmed as a new up cycle. (I will discuss that later as it becomes relevant).

The point being that I think the low is in, at least temporarily, and I am not expecting a downtrend continuation any time soon.

On to an EW count:

Like I have been saying for the last several days, an EW count in a panic is useless. ZimZeb and I have been discussing this point, and so let me qualify what useless means in this context.

From a trading perspective, an EW count helps (me at least) to identify low risk trade setups and entry points. You do this by identifying the structures of advances and declines, in both price and time to identify the wave sequences at likely turning points. Under 'normal' conditions this works out quite well (i.e. is profitable). In other words, EW helps me to reduce risk.

In a panic environment the only thing you have are volatile and spiky price moves. The 'time' portion of the signal is lost. You can't count waves and figure out their relative importance (i.e. is this wave part of an extension or not in an impulse, is it an X wave and likely to be followed by another 3-wave sequence, etc.) by price moves alone. Time is as important to figuring out the wave structure and hierarchy. And within a panic the time series is so compressed relative to the price series that the signal to noise makes such counts unusable (i.e. have no predictive value).

This means that real time wave analysis of a 'panic' is useless, because it not only doesn't retire risk (the EW count is not doing its original job), but it can lead you to hugely false conclusions (ask anybody who was still short the day after the Flash Crash under the assumption that it was a 1-2, 1-2, 1-2, etc. down with several 3-4's yet to come) which *amplifies* the risk of trying to pick entry points.

In short, my position is that EW micro-counts under normal conditions retires risk in identifying entry points, but in panics does the opposite and amplifies risks.

So since the move down developed into a panic, I have not shown my micro-count.

I did not use it to predict the bottom of this wave. I intentionally waited until my cycle chart issued a bottom signal.

As such this count is a post-panic analysis.

(Lower chart idea is thanks to ZimZeb). And it looks to me like it is corrective, not impulsive.

I still see so many Ewavers trying to call any sharp move as a '5', and frankly I am getting pretty sick of it (see: Regarding Tops and Sloppy / Misleading EW Practices). So yet again I am now willfully ignoring the counts of the greater EW community (who as a whole are claiming that this is 'P3' down. There are a few exceptions to this position, however).
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