STRATEGY, WAVE COUNTS, AND DIRECTIONAL BIAS

Reprinted from our Weekly E-Briefing

Through 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 puzzle

Above 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 BIAS

Briefly, 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 TRADE

Weekending 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-Triggers

Total Dow trigger-points CAPTURED – 451-pts PROFIT

Total S&P trigger-points CAPTURED – 67-pts PROFIT

Total 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 PROFIT

Total S&P Level-V points CAPTURED – 27-Feb. 65-pts PROFIT

Total 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 Russo

Publisher & Chief Market Analyst

ELLIOTT WAVE TECHNOLOGY

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STRATEGIC THEORY

REPRINTED FROM THE 20-FEB. WEEKLY BRIEF 

Through a series of quick snapshot visual representations, this issue intends to graphically convey what each of our strategies strive accomplish in practice. 

 

LEVELS-I & IIFrom its historic 2007 highs, we observe Level-I and Level-II strategies in this daily chart of the Dow. The bright purple arrowed lines represent our largest core speculative stance at Level-I.
Note how Level-I core positions maintained long exposure throughout the first leg of declines from the October 2007 top. It is not until early 2008 that core bias shifts to the downside. 

Circled in bright purple, are general periods of drawdown or non-performance relative to Level-I positions. 

On the same chart, we illustrate operations at Level-II with dark purple arrowed lines. Note how Level-II short positions established in July of 2007; preserves the last portion of profits relative to Level-I maintaining its long side exposure. In kind, the dark purple circles illustrate general periods of drawdown or non-performance relative to positions taken at Level-II.

 

LEVEL-IIIIn the above 60-minute chart of the Dow, the blue arrowed lines represent the general types of swings intended for capture at Level-III. Despite attempting to capture shorter-term swings that Level-II hedging operations simply ignore, the areas circled in orange represent typical periods of drawdown or non-performance relative to positions taken at Level-III. Though this is a purely speculative strategy, in some sense, one may consider Level-III a hedging operation against positions taken at Level-II.

 

LEVEL-IVThe chart above illustrates the visual landscape of bullish and bearish trade-trigger set-ups considered for capture at Level-IV. Varied in point-value, size, success, and failure, this purely speculative strategy is somewhat impartial to trends, and instead focuses on chart patterns that present a continual menu of measured speculative opportunities. As illustrated, one can see that price followed direction (free of drawdowns) in more than half of all the arrowed triggers. It is important to note however, that even though they may have provided substantial open profits at one point, at least three of these triggers failed to reach their measured targets.

 

LEVEL-V (IPV)
The chart above illustrates the (IPV) portion of our extremely short-term LEVEL-V counter-trend strategy. When the market cooperates with this strategy’s mechanical protocol, it intends to capture one to three day trends from counter-trend reversal pivots.
Note that this “always in the market” mechanical approach will be heavily taxed with controlled losses amid sustained stretches of overbought/oversold extremes, general sideways short-term price action, and/or during extreme episodes of pronounced and sudden whipsaw reversals. We illustrate such tax in the two failed reversal signals circled. 

LEVEL-V (MV)
The chart above illustrates the (MV) portion of the LEVEL-V counter-trend strategy. As illustrated, this strategy is much faster moving, and makes every attempt to capture as many meaningful pivots as possible. When the market cooperates with this strategy’s mechanical protocol, it intends to capture intraday trends from extremely short-term reversal pivots.
Note that this always in the market” mechanical approach will also be heavily taxed with controlled losses amid sustained stretches of overbought/oversold extremes, general sideways short-term price action, and/or during extreme episodes of pronounced and sudden whipsaw reversals. We illustrate such tax in the five failed reversal signals enmeshed amid the areas circled.

ANCILLARY STRATEGY REVIEW
Weekending 20-Feb. 2009 

LEVEL-III Medium-Term Swing Trade (NTST)
Dow trades – UP 10.7%
S&P trades – UP 10.9%
NDX trades – UP 8% 

LEVEL-IV Trade-Triggers
Total Dow trigger-points CAPTURED – 680-pts PROFIT
Total S&P trigger-points CAPTURED – 666-pts PROFIT
Total NDX trigger-points CAPTURED – 92-pts PROFIT 

LEVEL-V Short-Term Counter-Trend (MV) (IPV)
Total Dow Level-V points CAPTURED – 17-Feb. 242-pts PROFIT
Total S&P Level-V points CAPTURED – 17-Feb. 32-pts PROFIT
Total NDX Level-V points CAPTURED – 0-pts Captured 

Following respectable sell side Profits Booked at the start of the week, subsequently sustained oversold conditions failing to incite a rally lasting more than 90-minutes, has since taxed the Level-V counter-trend strategy with a succession of controlled losses in search of a tradable bottom. 

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 Analyst
ELLIOTT WAVE TECHNOLOGY

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RISK OF RUIN

the Silver Bullet Band
Groping in the dark for the golden gun with silver bullets, should they get their hands on it- the Fed, Treasury, and the political bodies at large, may soon discover they have been on their knee’s pleading to engage in a willfully ignorant round of Russian roulette with a fully loaded revolver.

Inevitably, we envision this high-level failure of leadership bringing about an unprecedented opportunity for the US to raise the white flag on its irreparable financial system, and place disciplines from the Austrian school of economics to task in rebuilding its financial markets. In the interim, it is our hope (or fantasy) that the real (peoples) economy is somehow able to survive with vim and vigor while old school Wall Street deservedly crumbles.

Before a grand momentous occasion of this sort can save the nation, the financial sphere must first hit the very bottom of the barrel. Where IS the bottom of such an epic and calamitous event? History suggests clearly that 80% to 90% declines from peak values are the norm. The sooner we hit rock bottom the sooner we will be able to embark upon a prudent and sustainable growth path. It is scary, but that simple.

There IS no meaningful floor under the market – only the very bottom
Quite honestly, even we did not think the floor would fall out as quickly as it has. Below is an updated chart we presented nearly a year ago in a piece we titled V-for Vendetta.

Revisiting the Wilshire 5000
If one opens the “Vendetta” link and looks at the March 2008 version of the chart below it will become clear that we got it right, but failed to anticipate the gravity and speed in which the floor under the broadest representation of equity markets would collapse. As the updated chart graphically expresses, the “risk of ruin” is nearer than one might have conceived previously. Moreover, should it play out, we have now defined its target zones.

Below are a few of our prescient quotes from a segment within the above March 2008 article, which provided briefings on the state of various markets at the time:

On the S&P 500: from March 10, 2008
The S&P is struggling frantically to hang onto its five-year reflationary uptrend from 2003. Despite a potential breach (and apart from an all-out-crash) this beloved benchmark equity index is likely to get some sort of reprieve from its most recent five-months of bear whipping.

On the NASDAQ-100: from March 10, 2008
The NDX is one of the first widely followed equity indices threatening to post an ominous five-month closing low beneath its five-year uptrend. The presidents “working group” must now do whatever necessary to insure a March close back above the mandated perpetuity of inflationary growth, or risk watching all of its fiat-managed equity indices stumble and fall.

On Gold: from March 10, 2008
Gold is frantically holding above its upper trend-channel eyeing the $1000 milestone, telegraphing to all of financial civilization the necessity to change its ways. So far, no one is paying serious attention.

Prescient Quote Outcomes:
On the S&P- After registering in an interim low of 1256.98 the week of 17-March, the S&P recovered more than 180-pts or 14.5% by mid-May. This was the rather generous and anticipated reprieve mentioned in our timely status briefing. The all-out-crash is still unfolding.

On the NDX- After registering in an interim low of 1668.57 the week of 17-March, the NDX recovered more than 380-pts or 23.2% by early-June. Whether or not this occurred with the aid of the presidents “working group” by September, all were watching in awe as fiat-managed equity indices stumbled and fell.

On Gold- From its 7-March 2008 close of 974.20, Gold went on to surpass the $1000 dollar milestone. In the week ending 17-March, Gold registered an interim high of $1033.90. Ironically, since the US Fed and Treasury still hold all the games poker chips gratis the reserve status of its fiat currency, Gold dipped 34% testing the 681 level in October 2008 as a combination of deleveraging and lemmings rushing to dollars reanimated signs of life in the otherwise dead US currency.

And still scratching our heads
We simply cannot comprehend the logic of leadership. In fostering an egregious 30-year span of hyper-like inflation, they suddenly stop the game, decree rule changes left and right, and then claim that we are facing a threat of a massive deflation, thereby mitigating any negative effects of their current radical plan, which is to embark on the largest inflationary effort ever attempted in the history of humankind. Four months after its initial pounding, Gold is knocking on the door of $950, up some 40% from its lows, and is again approaching the $1000 milestone, despite the continued surge in an otherwise worthless paper currency.



A reversion to the mean spells RUIN
The new normal, not yet defined, has potential to be truly incomprehensible. The old, so-called “normal” growth path that leadership is betting the ranch to salvage was an artificially created erroneous paradigm that is now just beginning to implode. By default, the US will take down the rest of the Globes financial markets in this extraordinary process of vile but necessary cleansing. The irreparable financial sphere is now poised to deliver itself a tsunami of forced-cleansing simply because of leadership’s failure to exercise the wisdom and discipline to allow the system to cleanse itself.

And they all fall down
Many if not all Global Equity Indices now sport trendline trajectories, which if breached, portend total collapse. From the false paradigm of what we now perceive to be this great kick-start quest in getting things back to the “old normal”, a simple reversion to the mean will equate to a serious breach for many of these “risk of ruin” trendline trajectories. It is indeed time for truly radical about-face change. Radical enhancements to what caused the problem in the first place constitute no change whatsoever.

Thus far, all seems eerily calm as the powers that be have yet to wrap their hands around the golden gun loaded with silver bullets. We should become more concerned after a convincing market rally, which gives off the appearance that their convoluted efforts are actually starting to work. Such a feat would indicate they finally found their golden gun, and have begun spinning its big shiny barrel frantically with hubris of old, awaiting their turn to pull the trigger in the fatal game of fully loaded Russian roulette.

Trade the Super-Cycle IV-Wave
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The express focus of Elliott Wave Technology’s Near Term Outlook is to help active traders anticipate price direction and amplitude of broad market indices over the short, intermediate, and long-term.


Until next time...

Trade Better / Invest Smarter…
Joseph Russo
Publisher & Chief Market Analyst
ELLIOTT WAVE TECHNOLOGY

Read More ->>