Thursday, 16 August 2012

S&P 500 is a low risk short right now for Elliott Wave counters

The S&P 500 is a low risk short right now for Elliott Wave counters. Low risk does not mean high probability, but low points, against either the mid-week all sessions high or the late April all sessions high depending on your chosen time frame / degree of trend.

The set up comes from examining the charts at two degrees of trend. Both charts in this post include all sessions trade. Under the Elliott Wave model, the daily chart shows that the trend is down, and an upwards correction may have ended. The 15 minutes chart supports a near term bearish stance, showing that a new down trend has begun at small degree of trend, thereby indicating that a larger degree turn lower is in its early stages.

The Elliott Wave model lends no more certainty to set ups than any other form of analysis (coin toss at best for all of 'em), but here it shows some of its strengths, namely identifying where big moves might begin, and allowing risk to be defined. I don't know if this set up will work, but I know where it will fail (a handful of points higher) and where the market should go if it works (150 points lower and likely much more). That's the type of set up I like.

First the daily chart, which illustrates a clear five waves down 1-2-3-4-5 from the late April peak, defining the trend as down. Subsequent to that, there is a wedge shape three wave correction A-B-C that so far has peaked two days ago at 1412. If wave C has made its final peak, the market is now in the early stages of a large new five wave decline to below the June low. If wave C has not yet peaked, the five wave move lower from the late April high defines the trend as down so long as the market remains below that high, and so warns to be watchful for turns lower at smaller degrees of trend.

Next, zooming in to the action since the mid-week peak at 1412, the 15 minute chart shows a clear five waves down 1-2-3-4-5, defining the trend at this small degree as down, followed by a completed A-B-C correction, and subsequently wave 1 of the next small degree five wave move. The A-B-C correction which I have labelled as complete could morph in to a more complex corrective pattern, but so long as the market remains below the mid-week peak, the five wave move lower defines this degree of trend as down, and suggests that a new decline at higher degrees of trend is beginning.

Added confidence to the smaller degree bearish case would come from an identifiable five wave move down on the hourly chart, then the four hour, then the daily chart, if (IF) such patterns develop. The trade off for added confidence is increased points risk, and a less favourable risk/reward ratio. Different approaches suit different traders.