Temporary Triangle Trouble In The Hourly S&P 500

03/09/04 09:04:43 AM

by David Penn

A symmetrical triangle in the hourly S&P 500 suggests higher volatility in the near-term. But is direction a complete unknown?

Security: $SPX
Position: N/A

In a recent article for our sister publication, Working-Money.com, I proposed an updated Elliott wave count for the S&P 500 since March 2003 in general and since the August 2003 lows in specific ("The Count Right Now," March 3, 2004). Breaking the waves down to the minute level and lower (minuette and subminuette), I suggested among other things that the S&P 500 -- which was correcting at the time -- would not fall any lower than the low of the previous "a" wave low at about 1122 or so. This was fulfilled in spades as the S&P 500, in its "c" wave correction, halted its decline at 1135 and began moving steadily upward.

Since that minute "iv"/minuette "c" low was established on February 25, the S&P 500 has traced a five wave advance at the subminuette level. So far, it appears as if this wave count -- leading up to a wave "1" minuette top -- is as follows:

Subminuette "1"
February 24 to 25
S&P 500: 1134 to 1145
11 points

Subminuette "2"
February 25 to 26
S&P 500: 1145 to 1139
6 points

Subminuette "3"
February 26 to March 1
S&P 500: 1139 to 1157
18 points

Subminuette "4"
March 1 to 3
S&P 500: 1157 to 1144
13 points

Subminuette "5"
March 3 to 5
S&P 500: 1144 to 1163
19 points

All S&P 500 numbers rounded off to the nearest whole number.

I should underscore this: This wave count has a technical flaw. There is an overlap between subminuette "4" and subminuette "1" by about one point. As most Elliott wave practitioners know, this is not proper counting, unless the five-wave structure is part of a triangle, which I don't believe this structure is. So while I find this count compelling, I have to be on guard for alternative counts that might better fit classic Elliott wave guidelines.

At the same time, the Fischer method (Robert Fischer's book is Fibonacci Applications and Strategies for Traders) suggests an upside range between 1163 and 1174, which would put the current subminuette "5" top at the lowest possible end of that range. So there is some support for this wave count -- even with the problem between the first and fourth waves mentioned above.

Subminuette "1" projection of Subminuette 5 top
11 points x 1.618 = 17.8
1145 + 17.8 = 1162.8

Subminuette "3" projection of Subminuette 5 top
28 points x 0.618 = 17.3
1157 + 17.3 = 1174.3

Thus, the Fischer projection range is 1162.8 to 1174.3.

With regard to an alternative count, the most basic rule of thumb for constructing alternative Elliott wave counts might be: make it longer. I've suggested repeatedly that "short waves" are perhaps the biggest shortcoming of most Elliott wave analysis, the reluctance to believe that a wave might actually be longer than it first appears. Thus, whenever I come across a situation in which an alternative count might be helpful, my thinking is to extend the current count and see if a probable alternative count emerges.

A prospective wave count for minuette "1" that began at the end of February.

Graphic provided by: eSignal.

In the present case, a reasonable alternative count might put the subminuette "3" not at the top of the rally that ended on March 1, but at the top of the rally that ended on March 5. This would certainly clear up the problem between the first and fourth subminuette waves and, of course, it would also make the still-to-come subminuette "5"/minuette "1" top even higher (the top side of a Fischer projection range in this situation would be closer to 1181).

But what I am more interested in at this juncture is the symmetrical triangle that developed on March 5 and into March 8. Symmetrical triangles are fundamentally patterns of decreasing volatility. In effect, they are like slowly coiling springs from which a burst of energy is likely to emerge. The problem of symmetrical triangles, of course, is that they tend not to be directional. In other words, it is difficult to tell whether or not prices will break out to the upside or break down simply by looking at the pattern itself.

Here is where an Elliott wave analysis might come in handy. Whether or not the March 5 peak represents a subminuette "5" peak or a subminuette "3" peak, the next direction of prices should be downward -- into either an a-b-c minuette "2" correction or an a-b-c subminuette "4" correction. When we examine the downside of this symmetrical triangle -- approximately 11.50 points from a breakout level of about 1156 -- we note that a downside objective could be established at 1144.88, precisely one point away from the subminuette wave "4" low. If the correction is of minuette degree (i.e., minuette "2") then it would be expected that the correction would find support at or near the level of the previous fourth wave low OF ONE LESSER DEGREE. This suggests that the current correction in the S&P 500 would likely fall no further than 1144. Of course, an upside resolution to the symmetrical triangle would invalidate this outlook, and further suggest that a minuette "1" top has still not occurred. Given the Fischer projection range of 1162.8 to 1174.3 for a subminuette "5"/minuette "1" top, this possibility shouldn't be ruled out entirely.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Temporary Triangle Trouble In The Hourly S&P 500

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