Three Alternative Elliott Wave Counts For The S&P 500 Index

07/06/12 10:39:03 AM

by Koos van der Merwe

Analyzing a chart using Elliott waves is not always easy.

Security: SPX
Position: Accumulate

The first rule in Elliott wave analysis is, "the chart must look correct." In other words, don't look for a complicated Elliott wave count; look for the simplest count there is. When I read newsletters by other Elliott wave analysts calling for a further downside to this market, with an ABC-ABC-ABC correction downward, no matter how hard I try, I simply cannot see it. Either I am blind (which at my age is a very real possibility!), or we are not looking at the same chart.

In the early 1980s, Robert Prechter, coauthor of Elliott Wave Principle, was my tutor. Whenever I queried his counts, he would scribble his reply on a chart and mail it to me. (Remember, in those days, there was no Internet.) One particular answer he gave to a question of mine has always stuck in my head: "The Elliott wave theory is simply a signpost in the wilderness," he wrote, "and it can change direction at the next signpost."

Another lesson he taught me is underscored in the count shown in Figure 1:

FIGURE 1: One possible Elliott wave count.

Graphic provided by: AdvancedGET.

Figure 1 is a weekly chart of the S&P 500 index with a count that suggests the index is rising into a wave 5 of a Wave III of a WAVE III, with a target of 1488.19. The chart certainly "looks correct," and with the MACD indicator turning into a possible buy in the week ahead, the trader can reasonably accept the account as true. However, there is a second count that is possible, which I show in Figure 2:

FIGURE 2: An Elliott wave count where Wave 3 is shorter than Wave 1.

Graphic provided by: AdvancedGET.

Figure 2 helps demonstrate the second important lesson Robert Prechter taught me. "Can a Wave 3 be smaller than a Wave 1?" I once asked him.

"Yes," he replied, "but then Wave 5 will be smaller than Wave 3." The chart in Figure 2 shows this quite clearly. WAVE III is less than WAVE I, and therefore WAVE V must be less than WAVE III, which it is. This chart is also a great deal simpler than the chart in Figure 1, another plus in its favor. The only part of this count that does cause me some worry, however, is the five-wave count in WAVE V. The ABC correction could also be in doubt. Thus, I show an alternative count in Figure 3:

FIGURE 3: An alternative count for Wave V.

Graphic provided by: AdvancedGET.

With my alternative count in Figure 3, I am suggesting there is still a wave 5 of WAVE V to come, with a possible target of 1458.34. This target is identical to the target in Figure 1, even though the major counts are different. WAVE V will still be less than WAVE III, so the count still meets Prechter's rule of a shorter WAVE V if WAVE III is less than WAVE 1. One error that is obvious, however, is that the low of Wave 4 is less than the high of Wave 1, and strictly speaking, that is a no-no; remember, "the chart must look correct."

Whichever count is correct, the charts are telling us that we can expect a rise for the future, with a small correction in the cards once WAVE V (as suggested by Figures 1 and 3) or a Wave 1 of a new bull trend (suggested in Figure 2) is complete.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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ELLIOTT WAVE

Three Alternative Elliott Wave Counts For The S&P 500 Index

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