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Thursday, May 28, 2009

2 More Charts and a Bit on WXY Correctives

These 2 charts show my previous post in the bigger picture.

The fun in EW charting is that if your truly understand the theory, yes you can chart microsquiggles and the more you do it, the better you become. The hardest part I think is corrective waves, particularly when double correctives start stacking up at numerous degrees.

Why are there double (or triple) correctives ? Its simple. When the market performs a corrective pattern, if that pattern is not "sufficient" in either a) time b) price (or both) then the market will trace another corrective pattern. The "connecting" or combining wave between the two correctives patterns is known as the "X" wave. And it also is a corrective pattern, usually a zig zag. So actually you can say a combination consists of 3 patterns but the proper way to approach it is to call it 2 patterns with a connecting X, or a simply a combination . The term "double three" is also used and this implies a general sideways movement. The better term to use is "combination".

We then label the first corrective pattern in the "double three" or "combination" as a W. The last corrective pattern is labeled Y. If there is a third corrective pattern it will be labeled "Z" with a second X wave in between the second and third patterns. Triple combinations are rare at any degree. I don't think I ever charted a bonafide triple three at any degree.

My one chart here shows numerous double corrective patterns (mostly double zig zags) at several different degrees. Its an excellent example of how confusing it can all be unless a light bulb just went on in your head like it did me over time. However it is proper EW theory application. Simple? Once you learn the "rules" and guidelines, its not too hard. But yes it takes practice and I have been counting most every squiggle for about 8-9 months running.

Let me explain it another way: Primary wave 2 is a corrective wave pattern, or an ABC "three". If the market decides P2 needs to trace from 666 to 1000 it will try and perform that in a giant 5-3-5 zig zag. But it already traced a zig zag and it left it short of the mark. I call this wave Intermediate (W) So apparently it isn't done and now there needs to be an (X) wave corrective pattern and then a (Y) wave pattern to peak.

This Intermediate Red (X) wave will itself, consist of a valid ABC pattern or a "three". But suppose the market traced a 3-3-5 flat (it did) but there wasn't enough time (or price or both) spent in corrective mode so it needs to perform a double corrective. The connecting wave will be known as Minor Blue X. After the X wave, the last corrective pattern plays out.

Now lets suppose that inside that Minor Blue X, the market needed to trace higher than 915 and perform more "time" in corrective mode. It fell short of 915 and the time was insufficient so it also was a double corrective with its own Minute degree green [x] wave.

See how that works? Depending on what degree your referencing, it can be tricky. Whats even trickier is when I change the degree labels every other night trying to "tune in" the proper degree labeling. It can be maddening yes. You don't know which X your in at any one time hehe.

I have to get better with that I agree. I hope this post helps a bit on double correctives.

24 comments:

  1. Dan,

    What are your thoughts on the XLF. It seems to have formed a very beautiful contracting triangle on the 60 minutes. I have counted 5 touches or a completed E without a breakout on the bottom. It is now sitting pretty in the middle. Would love to hear your thoughts on this as the banks will probably drag the market either way.

    ReplyDelete
  2. Dan, on the first chart your blue C (in the middle of triangle) is five.Fives are not allowable combination for triangle formation.There must be only threes.So this is not a triangle.It looks like ,but it isn't.I am sure,that this stucture will develops into another combination.We must follow the guidelines.

    ReplyDelete
  3. Anon yes I mentioned that fact several times now and have a possible explanation.

    ReplyDelete
  4. Oil goes over $66 and gold approaching $1000 based on overseas's bullish indication of market bottoming and recovering. Unbelievable! If the oil and mining industry are doing so fantastically by big demand, why for the continuously increased jobless forecast over 10% by the Fed? Unless these whole thing is just a big manipulatioln. I remember the repeated warnings by the analysts based on continuing falling price and business by steel industry along with the shipping business is facing strong head wind ahead. Something doesn't match up.

    ReplyDelete
  5. I suggest everyone to stay out of the Bull/Bear fight today...

    ReplyDelete
  6. Mandy,

    I am in the steel business and can tell you that it has never been worse with zero sign of improvement. Prices weakening still and demand worse each day. Intl trade has come to abrupt halt. The steel/materials stocks are being bid up on "reflation" play but we are in serious deflation. Dont buy the green shoots theory.

    ReplyDelete
  7. Thanks, JPBomber. All the mining stocks have gone up so much as well like the economy is having a wonderful time and demand. Such as steel, copper, coal, ag and so on will need to be shipped if indeed there is a lot of business happening out there, but I have noticed all these stocks have gone up so huge while shipping stocks seriously lag behind. I appreciate your information. Things really don't match up.

    ReplyDelete
  8. JPBomber, take a look at NUE. Many downgrades and warnings due to the steep drop of steel price, but the stock keeps on having a big come back. If you visit the msg board, you'll find many troubled frustrated traders. Same as X, it has come back each time from its low after it keeps on missing its earning, though not nearly as ridiculous as nue. I have box position in NUE.

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  9. Dan, I came across your blog when I was googling for more info on 'WXY' waves / patterns. I read thro' this article alongwith the graphs. I had a query on one of the points you have mentioned in your article i.e., "When the market performs a corrective pattern, if that pattern is not "sufficient" in either a) time b) price (or both) then the market will trace another corrective pattern. "

    1) Are there any quantifiable rules for time?
    2) We get to know that a wave 'X' is formed only after immediate subsequent correction takes out the low of previous correction. Right?

    Looking eagerly for your clarification.

    /John

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