SPX Daily
No matter how I look at this chart, I just couldn't count that death drop fall as wave 5 without having to break some sacred Elliot Wave rules (e.g. wave 4 not supposed to overlap wave 1, wave 1 must not be longer than wave 3, etc etc).
BUT I DO SO WANT THAT PLUNGE TO BE WAVE 5!!
So, what do I do?
I decided that the shaded area will be wave 1; that dreadful plunge, wave 3.
All EW rules observed.
Phew!
So what becomes of wave 5?
EW practitioners call it a "truncated fifth" (Given that wave 3 is visibly over-extended, what I'm looking at is a totally valid truncated fifth).
And what follows a bear market truncation is .... happy news: A RALLY!! (If you notice that HAMMER from yesterday, that's one reason to believe that bulls will be happy at least for today...and maybe for this entire week....)
I'm not even going to be bothered about confirming that there are 5 subwaves in that wave 5.
I'm just going to say that IT IS WAVE 5.
I mean, why can't I, when a pessimistic EW expert can always claim that that triangle where I've labeled wavee 3,4 and 5 is in fact a wave 4 made up of diagonal triangle, and that what follows is usually a continuation of the previous trend (ie. DOWN!!!)??
And THAT is exactly what they're calling that triangle at the base of a similar plunge on the daily EUR/USD chart!
The beauty of EW, in my opinion, is that you can interpret it in anyway you want and no one can really say that you're wrong, unless you break those ridiculous rules. It's arbitrary, and yet complicated enough so when you make an attempt to explain your reading to a layman, you stand a good chance of sounding REALLY SMART.
Ok, so I USED TO BE fascinated by Elliot Waves.
Truth be told, anything that baffles me has my attention until I can say for sure that the only reason that it had baffled me is that it's pure nonsense to begin with.
It was only recently that I realize that the one and only thing I BUY about the EW principle is this: that you can't use physics to explain the market, and that everything that happens within the market has NIL correlation with things happening beyond it. WE move the market. Events don't.
So out of the many tenets underpinning the Elliot Wave Principle, I find myself agreeing whole-heartedly with just one.
Just so that I can bore myself to sleep when I revisit my postings in the distant future, I'm just going to talk a little about the 2 EW tenets below, one of which is the one I buy, and the other ...well...not entirely...
Tenet 1) Social moods determines the development of events, not the other way round. A much used example is that of the Enron Scandal.
While most of us, out of sheer forgetfulness, would attribute a bearish market to the unfolding of a string of events closely resembling and following the Enron saga, practitioners of EW principle will tell you that it is the
bearish sentiment around the time that the news first broke that precipitated those scandals.
A detailed writeup on how they arrived at that conclusion is available on the EWI website. Get a free membership and download their "Independent Investor eBook".
A more recent example (NOT taken from EWI - though I'm sure they would already have written something on it on their newsletter): the repeated rescue efforts US has taken to save companies deemed too big to fall had seen their major indices making lower lows and nearing the 2002 low.
An EW expert will tell you that it's the REACTION of the market towards these bailouts that has precipitated a market meltdown. THIS I totally agree with.
When sentiments have gotten this bad, it's damn if you do, and damn if you don't for policy makers. I don't want to be in their place.
Tenet 2) Investors that take the contrarian path, one which is almost always against the nature of man, win. The analogy used in one of the reports found in the Independent Investment ebook is that of someone NOT ducking when a stone is coming at him.
In the investment context, this is analogous to BUYING when everyone is looking to dump what they have.
This kind of activity is definitely not for the faint hearted - which
supposedly (according to statistics) represents 90% of investors/traders.
The special breed that dare make such moves are prepared to take the consequences.
The faint-hearted will simply end up losing when they are the ones who are the most afraid to lose.
I have big issue with tenet 2). I agree with it up to the point where it says that it takes remarkable emotional strength to stick to one's conviction (if that's what the writer is implying).
But I definitely think that to be able to go against the trend outright and make a killing - you need more than courage and foresight.
You need to have a very deep pocket to buy when people are selling, and then sit on your paper loss if your buying doesn't send the market back up immediately.
You either have to be already loaded, or the mettle to take an exceedingly high leverage or borrow from a loan shark to play the market this way. Should luck be on the side of the latter 2, wall street will have yet another rags-to-riches story to use to lure the ignorant into the market. For the one with deeper pockets than the average Joe to start with, if a major market meltdown doesn't kill him and the companies he buys, he's simply going to be an even richer man when the market rebounds.
If someone were to throw a stone at me, and it looks like there's a 70% chance it's going to hit me and a 100% chance that it'll kill me, I duck.
It doesn't take the Elliot Wave Principle to point out the obvious: that to make it in trading and investing, to be well-capitalized is a PRE-REQUISITE.
How and where you get the money is a separate issue altogether.
You MUST HAVE MONEY
Period
