Projectile Bottoming

05/12/05 08:02:47 AM

by David Penn

Elliott wave projections came within 0.50 of noting the bottom in the March-April declines.

Security: $SPX
Position: N/A

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
31 x 1.618 = 50.16
Starting point of wave 1: 1198 - 50 = 1148

Amplitude of wave three: 64 points
64 x 0.618 = 39.56
Starting point of wave 3: 1165 - 40 = 1125

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
2273 / 2 = 1136.50

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.

David Penn

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

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ELLIOTT WAVE

Projectile Bottoming

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