Reprinted from our Weekly E-BriefingThrough another series of quick snapshot visual representations, this issue intends to follow up on the last. The charts will graphically convey how level – I, II, and III speculative strategies integrate with the dynamism of Elliott wave counts. To wrap up this week’s dispatch, we will also briefly touch on strategic directional bias relative to all ancillary trading strategies.
In this week’s charts, the bright green lines represent periods of long exposure, while red lines illustrate periods of short exposure. As intended, Level – I engages the market predominantly in effort to capture the lion’s share of Elliott’s Primary Degree of trend. We label the Primary degree wave terminals in red. The blue labels (1) through (5), and (a) through (c) represent our Intermediate degree terminals at one smaller degree of trend. It is important to point out that Level-One does NOT intend to capture turns at the absolute bottom or top of price extremes.
Note how Level-One protocol prudently shifted bias to the short side well after the primary -3- wave crest in 2000. The 2000 price peak registered what we now recognize as primary -3- however, that crest may well have marked the end of -5- at the time. As such, our Level-One posture prudently shifted bias to the short side. When the market turned back up sufficiently and held, Level-One then reversed back to long side exposure well past the 2002 low, and remained there until returning to a bearish stance about three months following the October 2007 Primary degree top.
Before proceeding further, let us us first take a quick look at Elliott’s Nine Degrees of Trend.
Parts of the Elliott Wave puzzleAbove is a compilation of every possible terminal within Elliott’s Nine Degrees of Trend. In total, there are 126 possible wave terminals spanning from sub-minuette to Grand Supercycle degree. Each degree is identical, and fractionally comprised of five impulse waves 1 through 5, and 9 plausible corrective waves.
Corrective wave labels consist of the typical –a- -b- -c- pattern or “three wave” correction, the corrective five-wave –a- -b- -c- -d- -e- pattern, and various complex corrective combinations thereof, which incorporate the –x- -y- and –z- wave labels to connect an elongated a series of smaller corrective sequences into one larger degree correction.
With that quick review of trend degree out of the way, we proceed to illustrating Level 2’s strategy objectives as they relate to unfolding Elliott Waves and directional bias.
The chart above observes Level 2 operations from the base of Primary -4- in 2002. Note how Level 2 stays mostly in sync with the core primary trend, becoming defensive only following extremes that may put the larger trend in jeopardy.
With Level Two’s primary purpose being that of a hedge and enhancement operation relative the larger core positions held at Level One, a mostly one-way rally from the 2002 low served to keep Level Two operations positioned primarily long, enhancing profits, and in general sync with Level One core long posture.
With the exception of the very last redline short-trade put on in 2007; all previous short-hedges were short-lived, whipsawed often, and generally resulted in losses prior to rejoining the long side and providing major profit enhancements to core positions. All said, Level 2 performed exactly as designed and intended which in this case, served to enhance long side profits while remaining on guard to protect larger long side exposure in core accounts.
The chart above observes Level 3 operations from the peak of Primary -5- in 2007. Note how Level 3 attempts to capture the lion’s share of moves at the Intermediate and Minor degrees of trend.
With Level 3’s primary purpose, being that of a hedge and enhancement operation relative the positions held at Level 2, the mostly one-way decline of primary -A- down (still in progress) from the 2007 high, served to keep Level 3 operations positioned primarily short. Level 3 operations enhanced profits of Level 1 core short positions while serving to hedge any episodes of Level 2 long positions.
DISCRETIONARY DIRECTIONAL BIASBriefly, we thought it prudent to revisit a discretionary strategy tactic covered in our NTO essentials files. This tactic has particular relevance to much shorter duration strategies, but is applicable to all. It essentially limits its practitioner to take action only upon those signals that suggest a continuation of price movement in the same direction of the trend currently in progress at one larger degree.
For example, once the prospects of a longer-term downtrend clearly established itself in early 2008, Levels 3, 4, and 5 speculative traders employing a “directional bias” tactic would have ignored all long signals, and have taken short signals only. To employ this tactic successfully, one must best determine the degree of trend in which they are trading, and then objectively determine the direction of trend at one degree higher.
In exercising this tactic, one must expect that upon reaching a proportionate reversing terminal that this directional bias strategy will underperform until the practitioner reverses his or her applicable trading bias to align with that of the markets.
One way to accomplish identifying the directional status of trends is to use a combination of preferred and alternate wave count interpretations together with monitoring a simple moving average barometer. Closing prices above a moving average suggest an uptrend relative to the timeframe or degree of trend under observation, while closes below reflect a bearish bias.While price is subject to vacillate above and below such moving averages, preferred and alternate Elliott Wave counts assist further in identifying the plausible duration, patterns, and degree of trends currently reflected amid bifurcations that prompt price to dance in sideways fashion about its dynamic moving average.
THE WEEK IN TRADEWeekending 27-Feb. 2009
LEVEL-III Medium-Term Swing Trade (NTST)Dow trades – UP 14.43%S&P trades – UP 15.12%NDX trades – Exit Stop with 8% PROFIT
LEVEL-IV Trade-TriggersTotal Dow trigger-points CAPTURED – 451-pts PROFITTotal S&P trigger-points CAPTURED – 67-pts PROFITTotal NDX trigger-points CAPTURED – 165-pts PROFIT
LEVEL-V Short-Term Counter-Trend (MV) (IPV)Total Dow Level-V points CAPTURED – 27-Feb. 531-pts PROFITTotal S&P Level-V points CAPTURED – 27-Feb. 65-pts PROFITTotal NDX Level-V points CAPTURED – 27-Feb. 41-pts PROFIT
We hope that you have enjoyed this Weekly Brief, and have gained some insight into strategy application and current market conditions.
Until next time…
Trade Better / Invest Smarter…Joseph RussoPublisher & Chief Market AnalystELLIOTT WAVE TECHNOLOGY