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Monday, June 8, 2009

Why a Double Zigzag P2?

I was reading Elliott Wave Principle on zigzags. Of course I have Primary Wave 2 charted as a double zigzag playing out to peak (999 target). Why am I so locked on this pattern when others are seeing other things to include Elliott Wave International? Well for one thing I always have my Elliott Wave "bible", or the Elliott Wave Principle by Frost/Prechter. I have found that their work is so excellent that this book truly is a source book for waves. I often like to quote passages.

Here are some things about zigzags in the book and you'll see why it seems to apply for P2 as a whole:

1.) "Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target."

Me: I believe the market hit 930 and that target was short. Another zigzag was needed so it traced an (X) wave connecting triangle pattern. Now the post breakout is part of the second zigzag to peak.

2.) "A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e.....or the final X wave in a double or triple zigzag."

Me: The (X) wave Intermediate-sized triangle (in red) therefore indicates this next connecting zigzag is the LAST pattern. Simply put, there will be no triple zigzag.

3.) "...double zigzags....can be characterized as non-horizontal combinations... In a double zigzag, the first zigzag is rarely large enough to constitute an adequate price (their emphasis not mine) correction of the proceeding wave. The doubling or tripling of the initial form is usually necessary to create an adequately sized price retracement. "

Me: What is interesting is I show that the first Intermediate zigzag from 666 to 930 SPX had a running-type triangle in the Minor blue B wave position. The current ABC Minor blue B wave I have as a ....running triangle! Indeed the market is not only creating another zigzag, but it may be recreating the initial form, complete with another running B wave (in blue) Minor triangle just as the book says!

So there you have it. Straight from the "bible" and that's no bull. Should this all pan out, there is no reason for the market to have to trace higher in price nor time.

Here are some things in the book concerning time factors: Answer: not a whole lot. Time was not important and can be a great variable. What is important is form. And if you look on a log scale chart, you will indeed see a great rise that is an unmistakable wave 2 from the October 2007 peak.

Here is my answer: Fear has been correcting from peak since October. So in that sense, it has been longer than 3 months.

So in a nutshell, the market traced a giant zigzag for P2 from 666 to 930. It was not enough in price. So it traced an (X) wave consolidation period to allow another breakout to occur to a higher retrace price. This Intermediate sized (X) wave connecting triangle means that the subsequent pattern will be the last pattern in a double zigzag. The triangle indicates there will be no triple zigzag and no second Intermediate-sized (X) wave to allow for a triple zigzag.

The second zigzag is a doubling of the initial form. The initial zigzag had a running triangle in the minor B wave position. This one (so far - if it pans out in the next few days) also appears to have a running triangle in the Minor B wave position. How uncanny is that?

Does it matter the size of the second zigzag? No! It has to be a plausible size but really all the market is trying to do is tack on more price correction and perhaps some more time.

Let me just finish that many of you readers suppose that P2 is gonna run for a while. And I probably contributed to that thinking because I too was stuck on imagining 6 and 10 month rallies. But I am no longer because I am sticking with the basic theory right out of the book. And sometimes that always proves to be the best path.

I have noticed permabears who believe in EW theory have convinced themselves somewhat that they "expect" the market to take longer to work itself out. So in that sense, P2 has indeed done its job: it has sewn seeds of doubt, even if only in terms of time. At the very least, it has taken only 3+ months to breed a sense of complacency. So maybe P2 has done its job magically after all. Don't be expected to be in total disbelief. SPX back at nearly 1000 might do the trick anyway.

The market works on all of us different. Some will indeed have doubts and declare the bear over and dead. Some will just be too complacent in their time frames.

One last thing about time; Prechter thought the Supercycle final wave would peak in the year 1987. It lasted until 2000. He then misjudged the B wave rally that lasted 4 years until 2007. So we have been bred to think rallies will take their time. But....

So what may be happening is that social mood has not only been on borrowed money (credit bubbles), but has been on borrowed time! Now the payback in P1 occurred in rapid fashion as the market chopped off 55% in only 17 months!

Social mood is paying back that borrowed money with interest so-to-speak. It may also be paying back that borrowed time with interest!

P2 will end soon and there will be no need to look back.

One last thing concerning about how much P3 price drop is required. After all, most think that P3 needs to be a bigger point drop than P1. It does not! It need only be a more severe market drop in terms of downside extremes and market percentages. So if P1 chopped off 55% of the market, look for P3 to chop off maybe 65-70%! So a move from 1000 to 300 will achieve that indeed!

From 1000 to 300 (or even 400) is a severe move and will simply be devastating. Remember a move from 600 to 300 chops the market in half! From 500 to 250 does the same!

50% losses no matter at what level they occur are crushing. You all should know this.

So stop getting hung up in terms of "how much P2 should trace to allow for a proper P3 price move". That is simply the wrong way to look at it! Remember form is what matters! It will look "correct" on my long term chart in log scale, don't worry, it'll look like a P3! And it will crush all like a P3....

Are you complacent? You should be, fear has been in decline since that fateful day in October....

And if none of this pans out, well, nevermind, I am just following the book.


  1. Yep...previous sub 4 high. From what I've read, that's a classic wave 2 (corrective) target. For the record that number is 1005.75 which was reached on 11/4/8.

    Dan...very germane post, especially at this point in time.


  2. Dan,

    Great analysis and rationale in your counts!

    However, I would like your comments on the following:

    1) Though the Elliott Wave Principle by Front/Pretcher says "Each reactionary wave, labeled X, can take the shape of any corrective pattern but is most commonly a zigzag", the illustrations (if not all) in the book shows all the X waves are "Any 3". If the X wave is a zigzag (even a small zigzag) instead, would that affect your overall count?

    2) If the market is getting out of control, it may end up with a triple zigzag: WXYXZ to complete P2. What do you think about this possibility? If that's the case, what would be the revised P2 target?

    Look forward to hearing your comments. Thank you very much!


  3. 1) X waves in "double threes" are typically zigzags. A double three is horizontal in nature, a doubel zig zag is not. My (X) wave is a triangle which is a valid connecting pattern bewteen 2 zigzags.

    2) A triple zig zag cannot happen because we had a triangle (X) wave. A triangle occurs just prior to the last actionary pattern. In this case the last pattern is a Minor sized ABC zig zag.

    I thought my post answered both of these questions.

  4. Bonds getting dislocated. Something to consider:

  5. If one looks at the long term SPX 60 min chart, it would be easy to believe an inverted h&s with neckline formed -somewhere- in the P1W4 to the P2B triangle areas. Measuring out a fuzzy target for something like that would yield a target of ~1000.


  6. >>> P2 has a sense of urgency about it. Maybe it only has a small window of opportunity.

    All right. How true. That's why I love this blog.

  7. dan the man is unstoppable today

  8. It shouldn't be a surprise the bond market is going apes. The O-team has tried to force Chrysler's secured debt holders to accept 26 cents/dollar while giving the UAW the majority stake in the company.

    If bondholders can't be assured of a company's breakup value, there's precious little reason to buy debt in the first place.

    Even (liberal!) Justice Ginsberg is having doubts about it ! If this isn't a move toward Communism (the UNION is to receive controlling equity in the new company), I don't know what is.


  9. Daneric, you're doing a great job. I enjoy reading you on a regular basis. Your work is very appreciated!

  10. Dan , Do you think the Government is controlling the market with those late day injections, to prop up the market so the financials can raise private $ and give theirs back?
    If so it will hit the fan when they stop!

  11. Has the font on Dan's blog gotten bigger to the rest of you ? It looks like it's gotten 2pts bigger here all of a sudden...(don't know if I've accidentally changed something or its a blog setting)


  12. Dan,

    Are all the Trojan ads showing up on your blog a sign that we are about to be screwed?

  13. The market looking for a dive tomorrow. as the triangle break to the downside.

  14. Hope so,went short into the close