February 21st, 2010
If you’ve been confused by the notions of practitioners of Elliot Wave then there’s no better way of clearing the air than by contrasting and comparing the concept with other modes of technical analysis … especially the sort of stock chart reading that I practice. Different approaches and different conclusions.
Take, for example, the following chart that offered by an Elliotican on another site (click on image to enlarge):
According to this writer, “what I know about Elliott Wave is that 1) it is fractal and 2) the pattern is 5-3. However, that is enough information to help me draw some interesting conclusions.[note: the writer elected to display the Index on an arithmetical scale rather than the more accurate logarithmic scale; had the chart been on a logarithmic scale, the trendlines would not have been curved and diverging rather than parallel]”
He concludes that the market, after having sliced two up and two down waves, is about to embark on the 5th wave of this move, one that he expects is heading higher. He draws two trendlines, the bottom support trendline connecting the March 6 low with the low [so far] of the current correction at 1045.
The writer goes further and generates some interesting arithmetic: both wave 1 and 3 covered an average of 285 points (each between 280-290 points in length) which, added to the 1045 low takes you to a 1330 high of this hypothical wave 5. He then proceeds to dismiss this target as interesting but instead believes, for no reason other than gut instinct, that the high will actually be 1240-1275. However, the important conclusion according to this writer is that wave 5 has already begun.
Unfortunately, I don’t necessarily see it that way. When we’re not riding in a good strong trend, we chartist spend most of our time trying to divine whether a horizontal zone of trading, and area where bulls and buyers, buyers and sellers, supply and demand are struggling for control of the next trend leg will, in the end, turn out to be a reversal or consolidation pattern:
- First, the shortest distance between two points may be a straight line but it may not necessarily be a supporting trendline. Meaningful supporting trendlines are those resting on 3 or more pivot points and are closer to being horizontal than steeply sloped. The bottom line he drew, in my opinion, is no supporting trendline.
- The US stock market along with those of the rest of the world have been in such a tug of war since last October. Last Friday’s S&P 500 close of 1109 is just 28 points higher than its close on September 22 of 1074. If the graph above is representative of what most Elliot Wavers believe, the chart I included in “The Market Offers Something For Everyone“. That chart, at best is a consolidation and at worst could be a head-and-shoulder reversal pattern.
- The tug-of-war at the market Index level is reflected at the level of many individual stocks and ETFs, many of which have been caught in narrow trading ranges.
Rather than trying to predict the bottom and allowing our optimism mistake a top for a consolidation, I’ll wait for the market to tell me which side won. That decision will come either when the market crosses above the previous 1154 high or breaks below the neckline of the head-and-shoulder formation at 1050 on its way to the 200-DMA at 1025. When either happens, we’ll finally be able to say that the lateral movement had ended and a new tradable trend launched.