Monday, April 4, 2016

SPX, INDU Updates: A Bit of Elliott Wave Edumacashun

Last update covered the near-term key bearish overlaps in considerable detail -- but on Friday, neither SPX nor INDU overlapped their key levels, which kept the uptrend intact for the time being.  After re-reading Friday's update, I was a little bugged with myself for not explaining WHY I had those levels as key overlaps (and thus why I had the alternate count as a b-wave into the high) because it probably would have been helpful to readers who are not well-versed in Elliott Wave.

I sometimes forget to explain information that I take for granted -- and odds are good that I'll do that again at some point -- so I'm going to provide a few educational paragraphs now so that readers have the benefit of this knowledge for the NEXT time I forget to detail a 1-4 overlap.

Let's go back to Friday's INDU chart for educational purposes (first chart, directly below).  On this chart, we can see that, leading into the recent highs, I have red 1 and red 2 labeled... but no red 3, 4, and 5.  We can also see the black "alt: b" at the peak.  There are no red 3, 4, and 5 because I didn't see those subdivisions present in the wave structure -- so I presumed that one of the following must be true:

1.  I had missed red 4, and it was hidden in the wave structure;
2.  Or we only had 3-waves into the high -- no 4th or 5th wave would indicate a b-wave high (b-waves are 3 wave moves), hence the "alt: b."
3.  Or red 4 was still unfolding, with red 5 to come.

Options 2 and 3 were the reason I focused on the key overlaps as the "first step for bears" and suggested readers watch those levels closely:  A key overlap at the red 1 peak would have eliminated option 3 above and thus left only options 1 and 2 in play.  This is such a basic tenet of Elliott Wave (wave 4 cannot overlap the price territory of wave 1) that I often fail to even mention it, but I should probably have discussed option 3 in more detail, because knowledge of that rule provided a low-risk long entry for anyone who was willing to treat the opening decline as part of a fourth wave.

(Incidentally, the above options detail part of the value of Elliott Wave: It allows you to build logic-driven market models -- by identifying the key levels that act as lines of demarcation between bull and bear waves, you can develop "if/then" statements for a move.)

Now let's take a look at the updated chart:

In my opinion, bears should probably be glad that the wave made a new high, because if Friday HAD overlapped the key levels, then we'd have been faced with the specter of a b-wave into the high (b-wave highs/lows are never the final wave in a move, and indicate that said high/low will be broken in the future).

SPX also held its key overlap:

Interestingly, NYA did NOT hold its key overlap, but it also did not make a new high.  There are thus several options on the table for NYA, including the possibility of an ending diagonal -- but it also leaves open the potential for a bunch of garbage moves over the coming sessions, so I'm going to give it another session or two to allow me to eliminate some of the many options there.

In conclusion, SPX and INDU both held their key overlaps, so bears are still in limbo.  It now appears there are finally enough waves in place for a complete rally, but there's nothing yet to rule out options such as a fifth wave extension, etc., so "enough waves" does not necessarily guarantee an immediate end to a move.  From a near-term perspective, we still have no impulsive declines, or anything indicating a concrete turn.  Trade safe.

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