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Riding the Elliott Wave


A primer on the natural rhythms of the market.

Editor's Note: MVHQ is proud to introduce Minyanville's newest professor, David Waggoner. David is a private trader and investor. He is obsessed with the Elliott wave principle. He is an affiliate of the Market Technician's Association working toward his CMT. Before he was a trader he was a technology executive. He worked at America Online, KPMG, and The National Academy of Sciences. Before that he was a Marine officer. Please join us in welcoming David into our community.

Eliminate all other factors, and the one which remains must be the truth.
– Sherlock Holmes, The Sign of the Four

I am an Elliottician. I believe there's a deterministic natural rhythm to the markets that's called the Elliott wave principle (Ewp). I believe it to be truth. Unlike many other technical indicators, it works all the time and it's only the analyst's interpretation of it that fails. The pattern is always there and it's always correct. Everything else is periphery; fundamentals, all other forms of technical analysis, even social evolution itself. Everything that's rooted in behavior follows the natural rhythm of the Elliott wave principle. It's a law like gravity and electricity. And like gravity and electricity, we don't have to fully understand it in order to use it.

I call myself TheMarketDetective. I spend each day, every day, tracking and interpreting the truth. I report my sleuthing in my analysis. I will attempt to explain my analysis for those who want to learn my methodologies, but I will also present actionable opportunities based on clues I uncover in the market that anyone can use.

Forecasting the future with the Elliott wave principle is scientific in its approach; there are 13 simple patterns to the Elliott wave principle that connect and combine in a limited number of possibilities. By identifying Ewp patterns in charts, we can use logic and Fibonacci mathematics to deduce which other Ewp patterns most likely will follow suit. Often, there are several alternatives, but sometimes we can fine tune it to only one possible outcome.

There are two types of wave combinations that occur, impulsive and corrective. Impulsive combinations are found in the direction of the larger trend in force, and corrective patterns are primarily in the direction opposite that trend. Therefore, the manner in which the patterns come together can provide important clues regarding the primary direction of trend.

In order to get to the scientific part you must first correctly interpret the wave patterns - not always an easy thing to do. In fact, this part may be more art than science. For me, being right more often than being wrong came only after thousands of hours of practice. Perhaps I can shorten the learning curve for you. If you want to learn more about the Elliott wave principle, the best place to start is the biblical text; Frost and Prechter's: Elliott Wave Principle.

The wave principle spans the whole of social evolution. I'm only going to focus on the part we can trade. In the three charts that follow, I will provide my perspective of current cycle, primary, and intra-day Ewp patterns.

I'll start with the cycle trend. I call this chart, Prechter's revenge. Robert Prechter Jr. believes that 2000 was the top of the Super Cycle: a 5 count impulse wave up that started in 1932. When the market rallied back from the 2002 low and made a new high, most market watchers quickly dismissed his thesis (and with it the Elliott wave principle). More recently he suggested that 2000 was in fact the top and we are in the midst of a corrective flat. In a classic case of crying wolf syndrome, no one believes him. I do.

I have never seen anyone else attempt to provide a detailed wave count to substantiate his flat theory, but I have done so here. I have also added a probable path of decline based on common Fibonacci wave relationships (in price only: not time).

Prechter's Revenge

Click to enlarge

It's tempting to go all in short and wait it out isn't it? There are other possibilities however, so it's probably best to focus the lens on multiple timeframes in order to maintain a total perspective, and trade the cycle trend one wave at a time.

Change always starts at the smallest degree and ripples out to the larger degrees. Let's look at the chart below labeled primary trend for more clues.

At the level of primary trend, based on the evidence of Elliott wave rules, guidelines, and Fibonacci ratio analysis, we have probably completed five waves down and three waves up. The question now is have we resumed the down trend, or are we in a downward correction of the counter-trend correction (which is up), which I will call a correction of the correction.

Primary Trend

Click to enlarge

The wave patterns are often difficult to interpret short-term at this degree, so I will focus the lens one degree lower to see if the evidence is clearer. Elliott wave patterns are believed to be fractals. Different time frames fit together like Russian nesting dolls. By examining the smaller time frames we can gain detailed insight into the probable direction of the larger ones. Conversely, we sometimes rely on the larger ones to see the forest through the trees when the shorter time frames become too complex. It is a constant balance of interpretation.
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No positions in stocks mentioned.

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