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Sunday, June 13, 2010

Alternate Counts and Other Wave Discussion Stuff

First I'd like to say, the reason(s) for the long-winded post http://danericselliottwaves.blogspot.com/2010/06/primary-count-explained.html about explaining the now primary count is because the markets have given us a rare instance in which to apply the entire Elliott Wave theory and see how it all works out so we get better in the future.  Its...fun, and hey this is an EW blog.


REGARDLESS OF THE SQUIGGLES, THE PRIMARY WAVE TREND APPEARS TO HAVE CHANGED TO BEAR
Second, and this is the most important thing, this market is as dangerous as ever. So yes we may be writing way too many words on possible squiggle gyrations over the next days/weeks, but what really matters is that somewhere in here we likely have a Minor 1 low.   And soon enough, either this week, or yes, maybe 3 weeks down the road, the market should head down in a nasty Minor wave 3. That larger picture certainly hasn't changed.


WAVE TWO THEORY
Third, the basic gist of what I am suggesting in projecting a Minor wave 2 a bit higher eventually is that it may wish to challenge the 1107-1115 gap area with one possible close above that area because my own theories on wave two's suggest that could happen.  I've pondered an awful lot on wave two's over the months because they are some of the most difficult waves to judge since the retrace range can vary a great deal.  And when dealing with such huge market waves, even on an intraday basis, this matters somewhat.  So this is a chance to put my theories to the test so I am flushing it all out in the open so we can all learn no matter what happens. The market isn't even that far away in terms of SPX points considering Friday closed at 1091. But form matters first.

FORM AND TIME
Form is paramount, or the "right look".  Time is always a wildcard although time elements help determine form. As an example, Minor 1 in Primary [1] in 2007 took 32 trading days to complete. It only took 11 trading days for a Minor 2 price peak but the overall form of all 43 trading days looked good collectively as Minor 1 and 2.  Currently my primary count has 31 trading days to complete Minor 1 http://3.bp.blogspot.com/_TwUS3GyHKsQ/TBL4cAxq7TI/AAAAAAAAFvY/alKJuxNvMOg/s1600/spxdailycandles.png Minor 2 can take as long or as short in time as it needs as long as it "looks right" and has good form.

SENTIMENT
What also matters is sentiment and changes in sentiment helps determine the time element of the various waves depending on what degree you are talking about. When an appropriate sentiment level is reached for a particular wave count, that sentiment will gyrate the other way to correspond with the next wave due up.  Of course there are no perfect sentiment meters.  This is the true art of applying EW theory.

True extremes in sentiment determine historic market turn points. In March 2009, there was an historic extreme in negative sentiment.  Since wave form suggested we were nearing an important low, one surmised a great rally was coming. And it did. Sentiment climbed back to the opposite extreme. Is it kumbaya exteme as in 2000? Heck no. But as Robert Prechter says, this is a Supercycle bear market and taking that larger context into account, its safe to say that we likely hit about as high a sentiment as we can hit considering the entire world's financial system is on the verge of being exposed for the Ponzi scheme it largely is.

Getting back to the near term count, we would expect a Minor-sized wave to be a decent wave size and should generate appropriate gyrations in sentiment that is measurable in some form or another.  At least that is what past history suggest.  For instance take a look at my BPSPX chart which works very well as a stand-alone sentiment indicator.

HOW MUCH SHOULD PRIMARY WAVE THREE BE DIFFERENT?
Assuming this is now Primary wave [3] and that 1219 was a [2] high, can we expect that all the factors of sentiment, wave personality, form, time, and the "right look" that make up Elliott Wave theory be that much different than Primary wave [1]?  The answer in the aggregate is no.  The only thing we expect is that since this is supposedly a wave three (of cycle wave c), and wave threes are usually the strongest, then we expect it to be more extreme in nature.  And so far that has certainly held true.

We have a reasonable expectation that retracements may be shallower, but right after the post-flash crash day, did it not retrace deeply from 1065-1173?  So we can suggest it, but it will not necessarily be so.

[Side note: I would expect shallower retracements once they start to more heavily "regulate" the market mechanics with tighter circuit breakers and such.  In the end it may work against the market and prevent large rebound waves. As the market declines further the more they interfere with the current market mechanics - they will likely get the opposite of what they intend.]

But overall the theory will not change. Waves will behave in the same EW fashion as we can expect all waves to behave. And that means form, time, wave personality and certainly sentiment come into play in some measurable fashion.  We can however expect it to be more extreme.  The heart of Minor 3 of Intermediate (3) of P[3] can be where the financial system comes unglued in such a way that entire sectors of the financial systems stop functioning.  But somehow I think stock prices will always reflect waves no matter if priced in dollars, euros or whatever.

THE GRAND SCALE OF THINGS
One of the most frustrating aspect of applying EW theory and having it broadcast for all to see is that it is subjected to scorn at varying degrees of when a practitioner seems "wrong" in his or her counts.  But that is where the nuance of the theory comes into play. Usually this criticism is from a non-waver and the cherry pick some aspect or some squiggle count or a larger count that did not pan out.

Elliott Wave theory practically requires one to have a stance on where the market is in its wave count not only at any particular smaller degree of trend, but of a generational timeline.  One must first take a stance on where humankind is in the very large scheme of things really to be able to predict and follow-through with a count and projection such as a Primary wave [3].  It just so happens I was severely market-ignorant until the Spring of 2008 when I decided after a 30 year market period which heavily favored the bulls, I was going to play the stock market.  I got waxed in June that year and in July started to ponder EW theory and latched onto Robert Prechter since he did write was is considered the definitive "bible" on it..

But what fascinated me, was not only trying to keep from losing money, but the entire deeper meaning in that I think Elliott Wave theory is the most profound and important theories in the history of mankind.  To be able to explain and predict the human experience on a grand scale absolutely engrosses me to this day and I yearn to understand more.  That nature governs man's social progression and retreats makes so much sense to me.  And this blog helps me channel that energy in a hopefully positive way.

DECIDE IF YOU ADHERE TO THE THEORY OR NOT
Elliott Wave theory is not just about squiggles on a chart. Its much more profound. You either accept the theory and try and understand it fully and how it applies to social progress or else you take the view that its "just another tool in the toolbox".   There is of course a big difference.  Now I am not knocking if you may not subscribe to the deeper meaning of Wave theroy, that is perfectly fine. However one who thinks EW theory is just another tool and then comes on this blog and spews stuff that goes against my tenet beliefs in the underlying theory will probably not get a response.


THIS BLOG'S POSITION SIDES WITH ROBERT PRECHTER'S CYCLE WAVE C COUNT
After many hours of reading and reaching my own internal conclusions I agreed in the largest scheme of the wave count that we are in a Supercycle wave bear market. I accept Robert Prechter's grand scheme of where the human experience is currently positioned on the millennial scale of Elliott Wave theory.  I could not count the smaller sized waves if I did not believe this. It is where practitioners commit serious errors in my estimation. They not only change their larger Primary of larger degree wave counts, they change from month to month or even week to week on where humankind is in the larger scheme of things.  Take a position and count it until it proves untenable.

So I have taken my position and agree with EWI in the larger count of things. I agree on the scale of things from Grand Supercycle on down to Primary wave degree.  I agree with the DJIA expanded Supercycle flat and that we are in 5 primary degree waves in cycle wave c starting in 2007.  That will not change unless something warrants that it change. And so far that "something" has not happened. Quite the contrary, everything that has happened since 2008 has reinforced this view.  You mostly are wasting your time in trying to convince me otherwise. Only the market can change it at this point.

This blog is not intended to usurp EWI's reasoning and research on things. First, I don't have the time nor resources to be able to do what they do. And they do it remarkably well with vast and original research.  Second, I don't believe in copying their material and its prohibited anyways. In fact I don't like to even speak too much of their current counts except in occasional passing reference.  But do they "own" cycle wave c count? Of course not.  Robert Prechter has spent his lifetime convincing people where humankind is on the count of things and he convinced me.

If though you are merely interested in the charting side of things, ignore the banter as many probably do. That is ok too. Just please refrain from commenting flippantly without at least a sound argument in favor for or against things. Criticism is always sought unless it is completely ungrounded.

THE PERILS OF WAVE COUNTING
Now this is not to say that Prechter didn't became a victim of his own success and wave counts - he did somewhat.  Was he wrong on his cycle wave v of Supercycle (V)? In my estimation no, he simply vastly underestimated how much the human experience would take things in a supreme Grand Supercycle top.  The idea of a Supercyle wave (V) seems more than correct.

And did that make him wrong in his theory of a Grand Supercycle wave [III] of several centuries? From a common sense standpoint, it seems correct.  Messing up the projections of a cycle degree wave ultimately erodes your fan base.  And then doing it again on a cycle wave corrective is a double whammy.  I did not have to suffer through that so I am lucky in that regard.   Hence, I am also not scarred from that as I caught Prechter's "hot hand" at the right moment.

It almost seems fitting that a guy who correctly predicted a great bull market in the 1980's would suffer after it actually panned out. It seems fitting that sentiment toward the genius of Prechter oscillates from extremes just like the stock market. Is that ironic or what?   Hailed as a financial guru of the 1980's by 2007 he was being laughed at on CNBC. Then the hot hand in 2007-2009. Yes he had his own minor setback with the early calls for short leverage in 2009, but hey, his sentiment reading was "too high" so the market had to again knock him back a notch. I also suffered the same knockback as I too (along with many others) thought the market looked ripe for the onslaught of P[3].

Prechter made up for it by studying time cycles in depth to explain why he was wrong in his early calls. His April and May EW Theorist newsletters are brilliant in this regard.  Me? I instead took a different approach and studied wave two's and their intending characteristics and my hypothesis that a wave two will try and challenge its breakdown spot of the previous wave one and may even have one close above it until it ultimately fails.  Then the wave two turns into a wave three is the natural course of things.  I find that this hypothesis may indeed be useful on P[3] in its entirety since the waves could be very large.  I eagerly await to see if my hypothesis will pan out here at Minor degree and hence all the "hubbub" about things. This is why I think a challenge of the 1107-1115 gap is more than possible before Minor 3 comes.

So when criticizing a fellow waver, one must have a sense of scale to be fair.  If this is Primary wave [3], by rule a low under 666 will be attained prior to any high above 1219. This is simple wave logic.  If correct,  arguing endlessly on the path it takes to get there seems silly considering the direction would be 100% correct.  We think we have found the sentiment extreme and now the market is in a painful process of going to another bearish extreme in P[3]. And being a wave three, it could be and indeed is expected to be very violent.

So that leaves me sticking with Prechter, because in my estimation after pondering greatly on wave two's, the market fell back right where it was reasonably expected to. It failed its "Lehman Day" test.  That means we must be in Primary Wave [3].  What will knock me off that track? A new price high obviously. But for the immediate scale, having the market re-conquer and hold as support the 19:1 decliner candle that produced the 1107-1115 gap is what is required me to re-think things higher.  Until that happens, I won't expend too much energy toward that endeavor.

What would it take for Prechter's larger cycle and hence primary count to be wrong?  For me, if the market conquers "Lehman Day" and holds it as support, then something else may be happening.  If the market decides it wants another crack at it, I won't argue but it has to be now or never it seems just using wave logic. On the flipside, P[3] is supposed to be a huge five wave move of Intermediate size that is expected to drop the markets in a historic collapse and reach many extremes.  There really is no getting around that is there?  It is either happening or it isn't and time will prove it one way or another!     The extremes are rolling in every day so that is supportive of the count.

And since these are the first gyrations off the top, it is correct in pondering them with a great deal of care. And it is fun and more than useful because what we count here is built upon day after day. So when critical of other's counts, keep things in perspective.

One final thought on EWI: Without their ground-breaking work and Robert Prechter's work, I wonder where the theory would have been. Dormant?   I am indebted to the genius of his socionomic theory and the month to month work they do over there. Without it would be a much lonelier market. Hochberg may like to rush things, but then that is something all us with a larger bearish bias tend to do.

INDEPENDENT THINKING
So being a believer in the P[3] count, how it executes will be half the fun of it. More and more as I gain experience I hope I am getting better.  But if I did not have P[3] as my top count, then how would I know how to label the current move? One has to have a bias first and a larger overall count. Since I have my bias, and since we have a solid theory that wave one's of the next lower degree should, in theory advance prices of the previous wave one of next higher degree, we have an Intermediate (1) target. What does this mean? It means that Intermediate (1) price low should be somewhere in the ballpark of 666 SPX. And if we look at a chart, and we suppose that wave (1) will itself divide into 5 waves, then we surmise that Minor 1 low has to "look right" and have some decent proportions.

So in the end, take a larger stance, stick with it until it no longer makes sense.


TOP ALTERNATE COUNT
For a quick review of the primary count, reference this SPX charthttp://3.bp.blogspot.com/_TwUS3GyHKsQ/TBL4cAxq7TI/AAAAAAAAFvY/alKJuxNvMOg/s1600/spxdailycandles.png

For the alternates counts I use the NASDAQ so there can be no ambiguity since it has distinct price lows. That is one rule that is unbendable. Wave 2's can never start beyond the end of wave 1.

Despite the long-winded post on the primary count and this post, there are certainly viable alternates and we would be remiss if we didn't include them.  Having at least two alternate counts at any one time is almost required.

SECONDARY ALTERNATE COUNT
In the end, don't lose the bigger picture count: There is a wave 1 in here somewhere and eventually a wave 2. What comes next is wave 3.
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