Ewj: elliott wave
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here is a snippet of my chat with glen neely-- the only EW person worth reading:
DAVE: How are you today, Glenn?
GLENN: Doing great Dave, I appreciate you asking me to be on the show.
DAVE: Let's start at the very beginning. What exactly is Elliott Wave?
GLENN: Elliott Wave is the graphical representation of crowd
psychology. It allows the practitioner to structure and categorize
the seemingly random undulations of the stock market (and nearly any
other market) into two classes and various patterns. When a pattern
is identified, one can project what will occur next for a specified
period.
DAVE: Who came up with the concept? RN Elliott, correct?
GLENN: That's right, Ralph Nelson Elliott.
DAVE: How did Mr. Elliott first come up with the theory?
GLENN: He was sick for an extended period of time in the late 1920s
and early 1930s. He had lost lots of money in the stock market crash
of 1929 and wanted to understand why. While bedridden, this desire
caused him to study stock market data for years. From that process,
he began to notice repeating patterns, not on a sine-wave basis and
not based on specific time cycles, but based on structural price
patterns. He noticed repeating behavior in various up-and-down moves
that we now call pattern recognition. He started quantifying and
classifying all these price patterns into what we now call Elliott
Wave theory.
DAVE: Interesting. What was the next step in the discovery?
GLENN: Eventually, he discovered that these patterns had a relation
to the Fibonacci number series. All Elliott Wave patterns contain a
number of segments that total a Fibonacci number. He then started to
notice that the patterns also contained Fibonacci relationships -
what we now call the Golden Mean or Golden Ratio, which is .618.
DAVE: Ah, the Fibonacci sequence. Wasn't this number sequence the
result of a question given the mathematician Leonardo Fibonacci by a
King who wanted to know how to figure out how many rabbits there
would be after a certain number of mating periods?
GLENN: I don't know all the details, but that was supposedly how he
came up with this formula to figure out the answer, which created the
Fibonacci number sequence.
DAVE: I know the Fibonacci sequence is observable in many facets of
nature.
GLENN: Correct. The Fibonacci number series starts off with 0 and 1,
then each two adjacent numbers is added together to get the third.
So, you get a series that goes like this: 0, 1, 1, 2, 3, 5, 8, 13,
21, 34, 55, 89, 144, etc. In nature, you find that most plants have
either three or five leaves. A sunflower has 144 seeds, which is a
Fibonacci number. The spirals in a seashell are "created" based on
the Golden ratio: .618, which is the relationship between each
adjacent number in the Fibonacci number sequence.
DAVE: You mentioned the term sine wave initially. Can you go a little
bit deeper to what you mean when you say Elliott Waves are not sine
waves?
GLENN: By that, I meant Elliott Wave patterns are not tied to
specific time periodicities. In other words, market tops and bottoms
don't occur every five days, or five weeks or five years. Elliott is
not based on specific time requirements. It's based on the design of
price action. For example, let's say we are dealing with a three
legged formation called an ABC correction. In that situation wave A
may take 5 days, wave B may take 13 days, and wave C may take 8 days.
Each period which is a Fibonacci number and they relate to each other
by a Fibonacci relationship, but no wave takes the same amount of
time. So, you don't have reliable, consistent highs and lows at a
specified time, but once the pattern is over, it will possess
Fibonacci relationships that can be used to confirm the end of one
pattern and the start of the next.
DAVE: How are you today, Glenn?
GLENN: Doing great Dave, I appreciate you asking me to be on the show.
DAVE: Let's start at the very beginning. What exactly is Elliott Wave?
GLENN: Elliott Wave is the graphical representation of crowd
psychology. It allows the practitioner to structure and categorize
the seemingly random undulations of the stock market (and nearly any
other market) into two classes and various patterns. When a pattern
is identified, one can project what will occur next for a specified
period.
DAVE: Who came up with the concept? RN Elliott, correct?
GLENN: That's right, Ralph Nelson Elliott.
DAVE: How did Mr. Elliott first come up with the theory?
GLENN: He was sick for an extended period of time in the late 1920s
and early 1930s. He had lost lots of money in the stock market crash
of 1929 and wanted to understand why. While bedridden, this desire
caused him to study stock market data for years. From that process,
he began to notice repeating patterns, not on a sine-wave basis and
not based on specific time cycles, but based on structural price
patterns. He noticed repeating behavior in various up-and-down moves
that we now call pattern recognition. He started quantifying and
classifying all these price patterns into what we now call Elliott
Wave theory.
DAVE: Interesting. What was the next step in the discovery?
GLENN: Eventually, he discovered that these patterns had a relation
to the Fibonacci number series. All Elliott Wave patterns contain a
number of segments that total a Fibonacci number. He then started to
notice that the patterns also contained Fibonacci relationships -
what we now call the Golden Mean or Golden Ratio, which is .618.
DAVE: Ah, the Fibonacci sequence. Wasn't this number sequence the
result of a question given the mathematician Leonardo Fibonacci by a
King who wanted to know how to figure out how many rabbits there
would be after a certain number of mating periods?
GLENN: I don't know all the details, but that was supposedly how he
came up with this formula to figure out the answer, which created the
Fibonacci number sequence.
DAVE: I know the Fibonacci sequence is observable in many facets of
nature.
GLENN: Correct. The Fibonacci number series starts off with 0 and 1,
then each two adjacent numbers is added together to get the third.
So, you get a series that goes like this: 0, 1, 1, 2, 3, 5, 8, 13,
21, 34, 55, 89, 144, etc. In nature, you find that most plants have
either three or five leaves. A sunflower has 144 seeds, which is a
Fibonacci number. The spirals in a seashell are "created" based on
the Golden ratio: .618, which is the relationship between each
adjacent number in the Fibonacci number sequence.
DAVE: You mentioned the term sine wave initially. Can you go a little
bit deeper to what you mean when you say Elliott Waves are not sine
waves?
GLENN: By that, I meant Elliott Wave patterns are not tied to
specific time periodicities. In other words, market tops and bottoms
don't occur every five days, or five weeks or five years. Elliott is
not based on specific time requirements. It's based on the design of
price action. For example, let's say we are dealing with a three
legged formation called an ABC correction. In that situation wave A
may take 5 days, wave B may take 13 days, and wave C may take 8 days.
Each period which is a Fibonacci number and they relate to each other
by a Fibonacci relationship, but no wave takes the same amount of
time. So, you don't have reliable, consistent highs and lows at a
specified time, but once the pattern is over, it will possess
Fibonacci relationships that can be used to confirm the end of one
pattern and the start of the next.
DAVE: OK, let's move into more specifics about Elliott Wave. I know
the Wave is composed of two major types of waves: the impulse wave,
and the corrective wave. Tell me about the impulse wave. How is it
defined?
GLENN: Impulsive patterns occur primarily when you have extensive
public involvement in a market. When a market is in corrective
formations, they tend to go sideways and form in three segments. When
you are in an impulsive pattern it's because you have an extra
element that is coming into the picture. Usually, it's the public
coming into the market as opposed to professionals trading amongst
themselves. When the public gets involved in a market (CBOE:^SPX -
News) it creates an extra leg in the sequence. Let's say a market is
beginning an uptrend. The first advance is called Wave One; after
that, it is followed by a reaction for Wave Two that must not retrace
more than 100% of leg one. Next comes Wave Three. The media and the
public generally become interested and involved in a market near the
top of Wave Three. As the public is jumping in, professionals and
more sophisticated traders begin to get out of the market. In the
entire five-legged, impulsive sequence, whichever leg the public gets
most involved in will be the longest wave of the sequence - that
could be Wave One, Wave Three or Wave Five. Generally, public
participation is heaviest in the third wave of a sequence.
DAVE: I see. The public coming into the market would naturally make
this wave the longest.
GLENN: Correct.
DAVE: OK, I am starting to understand how the waves reflect market
psychology.
GLENN: Good. Let's move on a little. Most of the advance has already
occurred by the time the public gets in. If they waited until the
very end and get in on the fifth wave, then the fifth wave would be
the longest segment. The primary element that occurs depending on
whether the first, third, or fifth wave is the longest is based on
psychological perception. If there is a lot of anticipation of a
market advancing or declining, then the majority of the people will
enter on the first wave. If there is a just a general level of
interest, it will usually take until the end of Wave Three to get the
public's attention. If there is a lot of disinterest or disbelieve in
a market advance or decline, that will carry through almost to the
very end and they will not come in until the fifth wave is nearing an
end, which would make Wave Five the longest. What the market is doing
in that case is forcing the majority to get in at approximately the
worst price (i.e., when you have high demand for something, but
little supply). That is why the majority can never be in early in a
pattern; once the majority comes in it creates an over-demand and
limits the supply, which stretches that wave of the pattern, leaving
the remaining (if any) to be much smaller.
DAVE: This makes sense in a theoretical standpoint. In actual
practice, how does a trader know when or where to start the count?
GLENN: I am impressed with that question.You nailed the crucial part
of counting waves. If you miss this part, your analysis will never be
correct. This is not part of the orthodox Wave theory, but is part of
my NEoWave Theory. In NEoWave theory, the most important
characteristic that must be present to confirm the start of a new
trend is a counter-trend reaction that is "violent" in relation to
price action contained in the previous move (i.e., if the market is
starting a new downtrend, that trend must move further and faster
than any decline seen during the advancing phase).
DAVE: A move like the 1987 crash? Is this what you mean when you
say "violent, counter-active move?
GLENN: Yes, the crash of 1987 was a very distinct event. It was the
largest, fastest price decline since before 1982. Violence of that
magnitude is not required to end one pattern and start the next, but
the '87 decline clearly indicated the end of an old trend (pattern)
and the start of a new pattern (in this case, Wave Three ended at the
high and wave 4 began with the crash, but didn't end until January
1995).
DAVE: Can you provide any more current examples?
GLENN: Sure, take a look at a daily S&P chart from October of last
year to the present. From October's low until January's top, each
drop was mild and shallow; but, beginning January 3rd the market
collapsed (relative to prior action). In just a few days it dropped
more in price and time than any other since October's low. Based on
NEoWave behavior requirements, January's decline produced a
definitive change in behavior, signaling the conclusion of one
pattern and the start of another.
DAVE: Let's move on to your improvements of Elliott Wave? How did you
improve the basic theory?
GLENN: Orthodox Wave theory is very flexible, extremely subjective,
and allows for a vast array of opinions. If you ask most Elliott Wave
analysts what they think a market will do, the odds are they will all
have a different view. Not a great foundation for trading and making
money. On the other hand, those people who have taken the time to
learn my NEoWave approach (on their own or through my private NEoWave
Trading classes), will frequently come us with the conclusion as I
do - even if it has been years since we last spoke. That is almost
unheard of in the Elliott Wave arena. Even more important, wave
counts produced with NEoWave Theory are far less likely to be altered
later and far more likely to be accurate from start to finish of a
trend.
DAVE: You pretty much quantified Elliott Wave making it more a
science than an art?
GLENN: If you want market analysis to be a science instead of a
subjective form of analysis, there must be very specific rules that
must be followed. And there must be enough rules to all but eliminate
opinion from the process. Othodox Elliott Wave provides a lot of
leeway for interpretation. This is why most well-known Elliott Wave
analysts have lots of different opinions, and even worse, many of
them will have four or five opinions of their own. Maybe they'll have
variation number one, or scenario number two, or three or four. In my
weekly NEoWave Chart service, I almost never have more then one wave
count. Even better, my wave counts rarely change. For example in the
S&P 500, from 1988 to 2004, my long-term wave count did not change
for 15 years! No one in the world of Wave analysis can say that
except me. Recently, for the first time since 1988, I made a subtle
change to my long-term forecast, but my overall expectations have
remained the same.
DAVE: OK, let's get even more specific about the actual application
of wave theory to trading. The specific point where to begin the
count. How do you quantify if a particular move qualifies for your
definition of a violent counter-active move? Seems sort of nebulous
without hindsight.
the Wave is composed of two major types of waves: the impulse wave,
and the corrective wave. Tell me about the impulse wave. How is it
defined?
GLENN: Impulsive patterns occur primarily when you have extensive
public involvement in a market. When a market is in corrective
formations, they tend to go sideways and form in three segments. When
you are in an impulsive pattern it's because you have an extra
element that is coming into the picture. Usually, it's the public
coming into the market as opposed to professionals trading amongst
themselves. When the public gets involved in a market (CBOE:^SPX -
News) it creates an extra leg in the sequence. Let's say a market is
beginning an uptrend. The first advance is called Wave One; after
that, it is followed by a reaction for Wave Two that must not retrace
more than 100% of leg one. Next comes Wave Three. The media and the
public generally become interested and involved in a market near the
top of Wave Three. As the public is jumping in, professionals and
more sophisticated traders begin to get out of the market. In the
entire five-legged, impulsive sequence, whichever leg the public gets
most involved in will be the longest wave of the sequence - that
could be Wave One, Wave Three or Wave Five. Generally, public
participation is heaviest in the third wave of a sequence.
DAVE: I see. The public coming into the market would naturally make
this wave the longest.
GLENN: Correct.
DAVE: OK, I am starting to understand how the waves reflect market
psychology.
GLENN: Good. Let's move on a little. Most of the advance has already
occurred by the time the public gets in. If they waited until the
very end and get in on the fifth wave, then the fifth wave would be
the longest segment. The primary element that occurs depending on
whether the first, third, or fifth wave is the longest is based on
psychological perception. If there is a lot of anticipation of a
market advancing or declining, then the majority of the people will
enter on the first wave. If there is a just a general level of
interest, it will usually take until the end of Wave Three to get the
public's attention. If there is a lot of disinterest or disbelieve in
a market advance or decline, that will carry through almost to the
very end and they will not come in until the fifth wave is nearing an
end, which would make Wave Five the longest. What the market is doing
in that case is forcing the majority to get in at approximately the
worst price (i.e., when you have high demand for something, but
little supply). That is why the majority can never be in early in a
pattern; once the majority comes in it creates an over-demand and
limits the supply, which stretches that wave of the pattern, leaving
the remaining (if any) to be much smaller.
DAVE: This makes sense in a theoretical standpoint. In actual
practice, how does a trader know when or where to start the count?
GLENN: I am impressed with that question.You nailed the crucial part
of counting waves. If you miss this part, your analysis will never be
correct. This is not part of the orthodox Wave theory, but is part of
my NEoWave Theory. In NEoWave theory, the most important
characteristic that must be present to confirm the start of a new
trend is a counter-trend reaction that is "violent" in relation to
price action contained in the previous move (i.e., if the market is
starting a new downtrend, that trend must move further and faster
than any decline seen during the advancing phase).
DAVE: A move like the 1987 crash? Is this what you mean when you
say "violent, counter-active move?
GLENN: Yes, the crash of 1987 was a very distinct event. It was the
largest, fastest price decline since before 1982. Violence of that
magnitude is not required to end one pattern and start the next, but
the '87 decline clearly indicated the end of an old trend (pattern)
and the start of a new pattern (in this case, Wave Three ended at the
high and wave 4 began with the crash, but didn't end until January
1995).
DAVE: Can you provide any more current examples?
GLENN: Sure, take a look at a daily S&P chart from October of last
year to the present. From October's low until January's top, each
drop was mild and shallow; but, beginning January 3rd the market
collapsed (relative to prior action). In just a few days it dropped
more in price and time than any other since October's low. Based on
NEoWave behavior requirements, January's decline produced a
definitive change in behavior, signaling the conclusion of one
pattern and the start of another.
DAVE: Let's move on to your improvements of Elliott Wave? How did you
improve the basic theory?
GLENN: Orthodox Wave theory is very flexible, extremely subjective,
and allows for a vast array of opinions. If you ask most Elliott Wave
analysts what they think a market will do, the odds are they will all
have a different view. Not a great foundation for trading and making
money. On the other hand, those people who have taken the time to
learn my NEoWave approach (on their own or through my private NEoWave
Trading classes), will frequently come us with the conclusion as I
do - even if it has been years since we last spoke. That is almost
unheard of in the Elliott Wave arena. Even more important, wave
counts produced with NEoWave Theory are far less likely to be altered
later and far more likely to be accurate from start to finish of a
trend.
DAVE: You pretty much quantified Elliott Wave making it more a
science than an art?
GLENN: If you want market analysis to be a science instead of a
subjective form of analysis, there must be very specific rules that
must be followed. And there must be enough rules to all but eliminate
opinion from the process. Othodox Elliott Wave provides a lot of
leeway for interpretation. This is why most well-known Elliott Wave
analysts have lots of different opinions, and even worse, many of
them will have four or five opinions of their own. Maybe they'll have
variation number one, or scenario number two, or three or four. In my
weekly NEoWave Chart service, I almost never have more then one wave
count. Even better, my wave counts rarely change. For example in the
S&P 500, from 1988 to 2004, my long-term wave count did not change
for 15 years! No one in the world of Wave analysis can say that
except me. Recently, for the first time since 1988, I made a subtle
change to my long-term forecast, but my overall expectations have
remained the same.
DAVE: OK, let's get even more specific about the actual application
of wave theory to trading. The specific point where to begin the
count. How do you quantify if a particular move qualifies for your
definition of a violent counter-active move? Seems sort of nebulous
without hindsight.
GLENN: Not at all, it's very specific. Let's say the S&P is at 1200
and it drops to 1100 over a period of time. During that decline, the
market probably rallied a few times. Measure the time and price
consumed by each rally during the decline. To confirm the decline is
over, you must see an advance around the 1100 low that is larger and
faster than any other rally since the 1200 top. In other words, you
are looking for a move that is quicker and larger than every previous
rally during the decline. That will signal a new pattern has started
and an old pattern has ended.
DAVE: That will signal that the decline is over?
GLENN: That will be the point where the previous pattern is
concluded, even if it's higher than the low. In other words, you may
have a low, a bounce off the low that's really slow, and then a
conclusion that's at a higher low, and then the market has a violent
rally. It is at the higher low - where the violent rally began - that
the old trend ended. Most wave analysts don't understand the
importance of this concept or don't take the time to apply it. They
usually start their wave counts from the very bottom and they finish
them at the very top. That is why most wave analysts' counts are
usually wrong, and constantly need revision - they assume wave
patterns start at the bottom and end at the top of a trend. Remember,
wave theory isn't about price, it is about mass psychology. Mass
psychology doesn't always conveniently peak out at the top or bottom
of a trend. Psychology may make its shift after the high or after the
low. It is where psychology changes that a new pattern begins and an
old pattern ends.
DAVE: What other aspects of Elliott's theory did you improve upon?
GLENN: Quite a few actually. The orthodox Elliott Wave theory was
based on Fibonacci numbers, pattern recognition, and Fibonacci
relationships - that's pretty much it. NEoWave theory--my
contribution to the field--integrates and substantially adds to that
concept processes of logical induction and deduction, structural
limits, time limits, special plotting procedures, self confirmation
requirements (which describe how a market has to behave in the future
to prove the pattern just finished was properly analyzed) an
and it drops to 1100 over a period of time. During that decline, the
market probably rallied a few times. Measure the time and price
consumed by each rally during the decline. To confirm the decline is
over, you must see an advance around the 1100 low that is larger and
faster than any other rally since the 1200 top. In other words, you
are looking for a move that is quicker and larger than every previous
rally during the decline. That will signal a new pattern has started
and an old pattern has ended.
DAVE: That will signal that the decline is over?
GLENN: That will be the point where the previous pattern is
concluded, even if it's higher than the low. In other words, you may
have a low, a bounce off the low that's really slow, and then a
conclusion that's at a higher low, and then the market has a violent
rally. It is at the higher low - where the violent rally began - that
the old trend ended. Most wave analysts don't understand the
importance of this concept or don't take the time to apply it. They
usually start their wave counts from the very bottom and they finish
them at the very top. That is why most wave analysts' counts are
usually wrong, and constantly need revision - they assume wave
patterns start at the bottom and end at the top of a trend. Remember,
wave theory isn't about price, it is about mass psychology. Mass
psychology doesn't always conveniently peak out at the top or bottom
of a trend. Psychology may make its shift after the high or after the
low. It is where psychology changes that a new pattern begins and an
old pattern ends.
DAVE: What other aspects of Elliott's theory did you improve upon?
GLENN: Quite a few actually. The orthodox Elliott Wave theory was
based on Fibonacci numbers, pattern recognition, and Fibonacci
relationships - that's pretty much it. NEoWave theory--my
contribution to the field--integrates and substantially adds to that
concept processes of logical induction and deduction, structural
limits, time limits, special plotting procedures, self confirmation
requirements (which describe how a market has to behave in the future
to prove the pattern just finished was properly analyzed) an
Here is my trade setup... I have labeled the decline from the Oct. 11 high as wave 1 and today's high as wave 2 completing an A-B-C correction of wave 1. My trade would be to short 2 March e-mini S & P contracts at 1514. A decline below 1514(end of wave 4 of wave C) would be my confirmation that a top is in and that the Stock indices have begun a new leg down. If filled my my initial stop would be at 1533(1 pt. above todays high) for a risk of $1900.00. My target is 1350 which if reached would represent a profit of $16,400 and a reward vs. risk of 8.63 to 1. If the trade is initiated I would move my stop to breakeven when the contracts trade at 1441. Today I would place my sell stop order prior to todays Fed announcement. If the stock indices rally on the Fed news I will work my sell stop until the market trades above the Oct. 11 high
Rob how about a short placed around the 1522*Dec cont/ 1532 March cont area.
It will give far more breathing space than the lesser degree wave 4 low.
If the market wants to go into some short of Extention wave, then a spike down to just below the Lesser wave 4 to take out everyones stops & limits making them run for cover on the way back up is a favorite play to set up a 1,2 i, ii,iii count.
If however the market up move is done ie, The A-B-C is complete your getting a far better entry up at the 1520's Dec /30's Mar
Your braver than me to front run the FED. I just wait untill the market shows her hand.
We normally get 3 spikes on the news on the lower time frames ie 5min. The first is the real direction, the second is the fade & the Third sets off back in the direction of the first.
* December prices.
It will give far more breathing space than the lesser degree wave 4 low.
If the market wants to go into some short of Extention wave, then a spike down to just below the Lesser wave 4 to take out everyones stops & limits making them run for cover on the way back up is a favorite play to set up a 1,2 i, ii,iii count.
If however the market up move is done ie, The A-B-C is complete your getting a far better entry up at the 1520's Dec /30's Mar
Your braver than me to front run the FED. I just wait untill the market shows her hand.
We normally get 3 spikes on the news on the lower time frames ie 5min. The first is the real direction, the second is the fade & the Third sets off back in the direction of the first.
* December prices.