Third Of A Third?

06/23/04 04:26:09 PM

by David Penn

Updating my "The Alternative Wave Count Cometh" ... could a major Elliott wave event be right around the corner?

Security: $SPX
Position: N/A

If technical analysis is more art than science, then Elliott wave study might properly be considered part of the "abstract" school. Not because, as Elliott wave critics never tire of attesting, the rules and methods of Elliott wave analysis are so malleable as to be virtually nonexistent, but because the reality (or even necessity) of alternative counts, the role of probability, and the admittedly complex and shadowy origins of the method to tend to lend themselves more readily to the metaphor of throwing paint against a wall than they do to the obsessive precision of, say, the lithographer or pointillist.

That said, I feel the more competing wave counts the better. It seems to me that, for those still studying and learning Elliott waves, this is the most productive approach. Rather than seek out the one set of waves that seems to be most authentic, Elliott wave students tend to compile various counts and work backward, eliminating each flawed count until a most likely, a most probable, a "best-looking" wave count emerges.

It is in that spirit that I offer an update of my Traders.com Advantage article from early April ("The Alternative Wave Count Cometh," April 8, 2004). At present, I am most interested in the price action since the early June top.

With the completion of a wave 2 peak on June 8, a bearish third wave decline may just be beginning.

Graphic provided by: Prophet Financial Systems, Inc.

First, let's recap where I suspect the S&P 500 might be in terms of its intermediate wave count. My preferred count now suggests that the S&P 500 topped out in mid-February. There was a wave 1 of minute degree that began at that point and ended with the lows of March 2004. The rally from mid-March to mid-to-late April represents, as I see it, a wave 2 of that same degree (the lower of the two April peaks is the "top" of the wave 2 countertrend rally).

The decline into early to mid-May, then, looks to be another wave 1--though of a degree smaller than the February-to-March decline. For now, I am noting that as a "minuette" wave. As such, the rally from the early to mid-May lows appears to be a minuette 2 wave.

By my accounts, this minuette 2 wave looks to have ended on the afternoon of June 8, with an intraday high around 1142. It is important to note, for wave consistency, the peak of minute 2 was lower than the "top" in February, and the peak of minuette 2 was lower than the peak of minute 2. These are just a few guidelines that have helped sort out the price action in what many technical analysts have begun to suspect is topping behavior in the S&P 500.

I want to look even deeper because I think that if this wave count is accurate, then it is quite possible that a major Elliott wave event is looming in the S&P 500. This event is referred to by Elliotticians as a "third of a third" and is a way of describing the power and breadth of a third wave that is itself a third wave of another larger structure. Write authors Robert Prechter and A.J. Frost of "third of thirds": "It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence."

So where is our third of a third in the S&P 500 today? If the early June peak at 1142 represented a minuette second top, then what should follow is a minuette third--a minuette third that is part of a minute third (remember the minute second top in mid-April)? Thus, if the S&P 500 continues to move downward in late June, that bearish price action will represent a minuette third inside a minute third, a third of a third.

Actually, there is also a chance that a third of a third of a third is developing if we look beyond to the subminuette level. Like tracking subatomic particles, things can get pretty dicey when looking for waves at this level. Nevertheless, the fractal nature of the wave principle is such that, to borrow from the Indian proverb, it is turtles all the way down. Waves beget smaller waves which beget smaller waves and so on--down the smallest discrete pattern observable.

That said, let's look at the price action since the minuette second peak in early June. While it is still a tentative reading, I believe I have spotted an initial subminuette wave 1 from June 8 to June 14 (1142 to 1122) and a subminuette wave 2 from June 14 to June 18 (1122 to 1139).

Back in 1978, explaining his extremely bullish outlook for stocks, Bob Prechter noted that the stunning array of "fives" (meaning completed or near-completed fifth waves) in everything from gold to interest rates that helped tip him off that the big bull market in financial assets of the 1980s was right around the corner. Could an array of "twos" today suggest something similar--only in reverse?

David Penn

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

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ELLIOTT WAVE

Third Of A Third?

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