The Elliott Wave is not a mystery, at least my version of it. Simply because, what I call Objective EW, has little subjectivity to it. Allow me to explain.
EW is best used for identifying long term trends, sorry not day trading. When a trend is established, one can anticipate what is to follow in terms of impulse and corrective waves, by applying some basic rules from the original theory; i.e. third waves can never be the shortest, and second/fourth waves must alternate in pattern, etc.
In my approach I use two basic TA concepts: trend reversal and momentum. You see trend reversals on bar charts often: a lower low in an uptrend, a higher high in a down trend. Momentum, conversely, is a simple rate of change: day 'y' compared to day 'x', on an ongoing basis.
In the early 1980's, I developed MMI (market momentum indicator) to verify the wave count as it unfolds. It has worked to perfection for over 25 years. As a bull or bear market unfolds, the MMI unfolds as well, in an almost identical pattern. When read properly, one can actually see the waves unfold in the oscillator. See chart below:
This is how it works. The MMI is a simple 40 day rate of change oscillator: a fibonacci 8 weeks. It simply compares todays close with the close of 40 trading days ago. Simple right? However, it also has a few rules to help interpret the momentum cycles: a complete cycle consists of 5 waves, it can subdivide just like waves, it is labeled just like waves, and the 4th wave is always lower than the second...always! This is how one can tell when a price wave is subdividing without the need of guess work (subjectivity).
In the chart below, I display the bull market thus far, and (as best I can) the MMI. Notice how waves (1 - 4) all line up with the indicator, and momentum (4) is lower than (2). Also, notice the subdivision within wave (3) and how 4 is lower than 2. This is Classic Objective EW, the Nasdaq is beautifully displaying a very clear bull market. Now, since the wave (4) momentum low, we've had four waves and four momentum waves. This is the key to this bull market!
The fourth momentum wave HAS NOT exceeded the second, thus as before in wave (3), wave (5) is extending. I've marked in RED on the chart what has already occurred, and in BLACK what has yet to occur (not to scale) in the MMI.
If you keep up with this thread, or visit my blog:
http://spaces.msn.com/members/caldaroEW/
you can watch the bull market unfold before your very eyes, just as I have for over two decades. And, it works perfectly in bear markets as well. Good trading!
Tony
