If this thesis is correct, and we bounce, one of two things will happen. We either resume the counter-trend rally up toward our next Fibonacci target (Read about Fibonacci ratio targets here), or get a significant 3-wave bounce, similar in degree to the bounce on April 10th, and then turn back down. If we bounce and turn back down, it will be the last wave of a correction of the correction. The Ewp rule states that corrective waves can only extend to 3 corrective combinations. We've either completed or are a fraction away from completing two of the three allowed in this wave set. Another turn down after a bounce would also most likely end at 1322 or 1307.

It's important to always look for alternatives with Elliott wave analysis. When I have options to choose from, then I’m confident that good detective work will guide me to the correct one. If and when my preferred option fails, however, I usually have an alternate count/thesis to fall back on. Unfortunately, this happens more often than I would like.

There is a technically feasible impulse wave count combination down from the April 7th high on an intra-day basis (see the chart below: Ugly Duckling). It's undesirable in its symmetry and it contains minor rule breaches. It's clearest on a chart of the E-minis. On the other hand, the Fibonacci ratios are acceptable, and the daily time frame is starting to look like it could turn into an impulse swan.

This is our alternate wave count. It increases in probability if we're unable to get the expected bounce before turning down again. If the slide continues without a significant bounce, and we don’t bounce until 1307 -- and we will bounce at 1307 if we go there on this trip down -- then I give the ugly duckling a higher probability. The reason is simply that a 1:1.618 Fibonacci ratio is more common for an impulse wave3 than a corrective wave. It can still be a corrective wave, but the odds will have shifted in favor of our possible swan.

If it comes to this, then the bounce from 1307 will be the next critical test. If we can bounce above 1352, then a correction of the correction thesis returns to front and center. If we can’t, then the ugly duckling will remain our primary thesis and we prepare to head lower. The reason is another rule: wave 4 never moves beyond the end of wave 1.

An impulse wave count down from here would also slightly diminish the cycle trend 2nd wave count thesis. If we are in the 2nd wave at cycle degree, a .382 retracement of wave1 is the least common Fibonacci ratio target.

Ugly Duckling


Click to enlarge

I've covered a lot of material. If you do not have prior exposure to Ewp, and you are still reading this, you might think that there is Kool-aid in my water supply. No doubt about it, this is extreme technical analysis. Predominant thinking cannot even clear the first hurdle of considering that the markets are deterministic, let alone that the pattern can be interpreted by a lone trader with a data feed and a PC rather than the world’s fastest super computers and a room full of quantitative analysts.

All I ask is that you keep an open mind. I'm confident that I will present you with some accurate market calls that cannot be derived from any another type of analysis.

I've already condensed the unlimited possibilities of a random walk down to just a few probabilities.