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Some Stormy Waves Today

The market showed quite a bit of volatility today. After opening early to the upside, it traded rather flat in anticipation of the Consumer Sentiment Report which was released at 9:55, The report sold the market off rapidly to below the previous low of Wedneday, but immediately reversed with Ben Bernakes speech  which began at 10:00 and ended up on the day by 165 pts.  Dow 10,000 saved for another day.

We have labled the DJI wave (ii) as an expanded flat to this point.  Our primary label is that it counts out as being finished, however, in counting the wave c, an alternate count would allow for it to extend further as you can see on the chart.

Elliott describes the structure as an expanded flat in instances where the B wave of a correction extends beyond the end of a Wave 1. In looking at the e-mini Dow futures, the b wave did not enter beyond the end of (i) so  it is considered a running flat,   it retraced at least 90% of wave (i)  but did not go beyond the end of (i) and it has exceeded the length of wave a.

 These are difficult waves to trade. Once price extends beyond the end of wave 1 we normally think that the correction is over. At this point in the correction, there is already a nice a-b-c correction of wave a which can appear as completed. The next waves down can appear as a 1-2 impulse wave down with the wave 3 in progress. Once price goes beyond then end of the previous wave 1, you think, “home free” more lows to come. Then it suddenly reverses as it did today.

 Suddenly you can be left holding a bag full of losses. Unfortunately, the c wave isn’t confirmed until it enters  into the  price of what you may have labeledthe end of  wave 1 and in some instances beyond what you have labeled the end of the wave 2. In this instance you may be taking into consideration a  larger degree leading diagonal which can appear only in a first wave.  The lesson here is,  keep your stops in place and move them down to proper levels to protect your entry. Perhaps you haven’t had time to count the waves because of the volatility like it was today and you haven’t had time to start your count. Our experience is that these waves turn quickly. If you look at one of our previous longer term charts you will see that this same strucure appeared in the wave [ii] correction at the July 2nd lows.

The saving grace of an expanded flat is that you usually know pretty quickly once price enters the low of your wave 1 or beyond the end of your previously labeled wave 2 that the correction isn’t over yet and you can begin to look for a target to the end of wave c. 

Following the rules  (P89 EWP) of an expanded flat you know that it takes the form of a 3-3-5 correction. That simply means that wave a is 3 waves, wave b is 3 waves and wave c is five waves. Once we recognize an expanded flat we start looking for  5 impulse  waves or a diagonal that will become proportional to what we now know are a and b. One of the first things we do is to use the Fib Extension tool and start at the end of wave (i), use the end of wave  a as the midpoint and the end of wave b as the end point. This tool extends fib lines up back up the chart.  You can see these red lines on our chart.   Prior to this we have also used the fib retracement tool measuring from the end of the previous wave [ii] to the end of wave (i) and are seeing where the important fib retracement lines are.

We use the fib extension tool as a guide to give us some proportional relationships between a-b-c.  Quite often, we look at targets where a c wave equals a and where c equals 127% of a or sometimes c will equal 161.8%  of a. It makes an even stronger target where one of these extensions is in an area of a fib retracement level. Making an even stronger probability now that we have fib grid we also put a lot of weight where there is a cluster of these fib relationships close together.

Since this is  wave 2 we know that a minimum retracement is 38%.  However, we usually find a wave 2 is  more often a deeper retracement than that. Quite often 50 to 61.8% are the norm, but as you see on our chart a 40% retracement is also a fib retracement level.  We mention this because the Dow closed today right at the 40% retracement level with what appears to be a five wave count after spiking through right to a mogul on the fib grid.

In summary, using the excellent tools provided  from a study of Elliott Wave Principles and using those rules and  guidlines outlined above we have  a high degree of confidence that wave (ii) is complete or nearly complete,  as we have allowed for a bit higher target that could extend into Monday.

Wishing you all a great weekend.

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