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ELLIOTT WAVE

Feels Like A Fourth

05/04/05 02:23:47 PM
by David Penn

The tilt-a-whirl action in the S&P 500 over the second half of April is reminiscent of a fourth-wave type of complex correction. ...

Security:   $SPX
Position:   N/A

... Which means that a bottom is closer rather than farther, but there's still some downside to go.

At their most elemental, Elliott waves are simply patterns. And like any other pattern in technical analysis, they are not just patterns of lines, bars, or candlesticks painted--constellation-like--on a chart. Rather, they are patterns of human behavior, patterns of fear, greed, and uncertainty that have been distilled into the symbols we see, analyze, and anticipate in charts of price action.

As such, whether or not a person considers him- or herself an "Elliottician," there is much to be gained by understanding how certain analytic "schools" see and interpret certain patterns. In other words, you don't have to believe the magic to appreciate the myth.

Figure 1: S&P 500. The argument against a fourth-wave double three requires the S&P 500 to both rise and remain above the downtrend line (which extends from the market peak in early March). Note also the possibility of a negative stochastic divergence at the top of the prospective "Y"/(iv) wave if prices make a new high and the stochastic does not.
Graphic provided by: Prophet Financial, Inc.
 
The myth here is the notion of consolidations in trends. Generally speaking, consolidations in trends--whether those consolidations are diamonds, triangles, rectangles, cup with handle formations, wedges, flags, or pennants--tend to lead to more action in the direction of the previous trend.

So encountering the consolidation in the Standard & Poor's 500 over the second half of April, there was a great deal of talk about the possibility of a bottom being formed. While this may turn out to be the case, it is worth recalling again that consolidations in trends tend to lead to "more trend."


To an Elliottician, however, the late April consolidation--coming as it did after a strongly trending decline--suggested a fourth-wave type of correction, one that would be necessarily more complex than the short, sharp, and "simple" correction (a second wave correction) on April 12.

I've labeled the fourth-wave correction as a double three--two sets of three waves connected by an intermediary "x" wave. Here is what AJ Frost and Robert Prechter had to say of double-three corrections in their essential text, The Elliott Wave Principle:

In all of these cases the market is hesitating and acts as if one three weren't enough, as if more time were needed to straighten out whatever "reasons" the market had for pausing in the first place. Sometimes stock prices seem to be waiting for economic fundamentals to begin to catch up with the market's expectations.


These formations frequently give rise to strong subsequent action.



This also lends credence to the notion that the double three in the second half of April is a fourth wave, the penultimate wave in an impulse series.


David Penn

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

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Date: 05/04/05Rank: 3Comment: 
Date: 05/05/05Rank: 3Comment: 
Date: 05/07/05Rank: Comment: Clearly the market requires the fundamentals to catch up with the optimism of our future. Contrarians aside, even Mr. Penn cannot deny the many positive formulations which are occurring in these trying times. Oh, if only life could be a dream and we could all humm with Bill and Hill..... would the bubble never have burst and business plans be outmoded....oh, if only if .
Date: 05/07/05Rank: 5Comment: Clearly the market requires the fundamentals to catch up with the optimism of our future. Contrarians aside, even Mr. Penn cannot deny the many positive formulations which are occurring in these trying times. Oh, if only life could be a dream and we could all humm with Bill and Hill..... would the bubble never have burst and business plans be outmoded....oh, if only if .
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