|I've written frequently about Robert Fischer's methods for locating a likely range for the end point of a fifth wave in a five-wave Elliott pattern. Fischer's method--clearly articulated in his book Fibonacci Applications And Strategies For Traders--produces less a specific point and more a likely range of values. But sometimes, averaging the extremes of that range can produce interesting results, as I discovered.|
Recall that a few days ago, I published a Traders.com Advantage article suggesting that the sideways to higher trading in late April and into May resembled a fourth-wave correction ("Feels Like A Fourth," May 4, 2005). The caveat to that interpretation, as I wrote in a caption at the time, was this:
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) ...
When the S&P 500 in fact moved and closed above that downtrend line, the previous count was proved invalid and a new count deemed necessary. Going back to the drawing board of the trendline (or, more important, the trend channel) that was broken, I found myself recasting the wave count into, perhaps, a better picture of where the Standard & Poor's 500 is right now (Figure 1).
|Figure 1: Violation of the major downtrend line from the March highs was a clear sign that the two-month bear swing was likely over and a countertrend movement of some sort likely to follow.|
|Graphic provided by: Prophet Financial, Inc.|
|First, the good stuff. It appears as if the market did indeed bottom in mid-April. While a clearer positive stochastic divergence between the March lows and the April lows would have provided a far more compelling case for the bottom, the fact that some indexes--such as the Dow 30 and the Dow emini (but, interestingly, not the DIA)--did in fact show such a positive stochastic divergence is noteworthy.|
And further confirmation comes from the Fischer projection. Here, we take the amplitude of the presumed waves 1 and 3, multiply them by 1.618 and 0.618, respectively, and then subtract those numbers from the values at the wave 1 and wave 3 lows. This produces a wave 1 projection of the wave 5 low and a wave 3 projection of the wave 5 low.
Amplitude of wave 1: 31 points
I've rounded off all numbers here for simplicity's sake.
From this point, Fischer suggests taking an average of the two values. I like to keep the entire range in mind, in the event that the projections are not what I would expect. But it is interesting to see what we get when we follow Fischer's advice.
1148 + 1125 = 2273
Where did the market bottom in April? The closing low was 1137.50. The actual price low? 1136.15.
|From here, I'm relying on some Elliott wave guesswork. If in fact the market did put in a five-wave low in mid-April, then it is likely that the market will embark upon a three-wave correction/countertrend move to the upside. So far, the first leg of this advance appears to have taken the S&P 500 from the 1130s to nearly 1180. |
If this first leg is the (a) of an (a)-(b)-(c) countertrend move that is designed to retrace some fraction of the March/April decline, then traders should expect some sort of pullback from the 1180 level before the market makes another push higher. The history of second waves (again, with the March/April decline representing a wave 1 decline) is such that they often retrace as much as 80% of the previous wave 1 decline.
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