What Confirms A Trend Change? - Bonds
In this tutorial, we will look at the recent pattern of the S&P and bonds in
detail to see what trading opportunities may be at hand and what the
pattern may be revealing about the larger degree trend position.
Since both of these markets may be near significant reversals, we will
see what the market can do to confirm a reversal is complete.
Bonds
From the March 15 low to the May 1 high, there is only one logical way to
view the Elliott wave pattern which is as a five-wave impulse. May 1 may
or may not be the completion of a W.5 high.
What would be the initial signal W.5 is complete? A trade below the
W.4:5 low. This is a reliable and consistent pattern strategy that should be
used to make trading entry and protective stop decisions. A wave-5
typically sub-divides into five-waves. This is not always clearly evident but
when it is, a trade beyond the W.4 extreme is the signal the W.5 should be
complete.
Bonds have made five-distinct sections up since the March 15 low.
None of them overlapped (W.4 did not trade into the range of W.1) which
implies the five-waves are an impulse trend. What is the pattern signal a
W.5 high complete? A trade beyond the W.4:5 extreme. What should we
anticipate following the completion of a W.5? It depends on the how the
five-wave trend fits into the larger degree pattern position. The minimum
expectation is for a correction against the five-wave trend greater in time
and price than any correction within the five-wave trend. If the W.5 high
completed a corrective high of larger degree, a new impulsive trend may
begin instead of just a correction to the five-wave trend.
Which ever the case may be, the job of the trader is to identify the
completion of the five-wave trend and prepare for a trend reversal trade
for either a correction or new impulse trend in the opposite direction.
The smaller degree data may provide an earlier signal a W.5 high is
complete. It depends on how clearly defined is the pattern. Let’s take a
look at the 60-minute date from the April 18, W.4 low to see how it breaks
down.
When we move down to a lower time frame with short-term data, it is
usually only necessary to view the data from the last confirmed pivot. In
this case, from the probable W.4 low on April 18.
A five-wave rally from the April 18 low appears fairly distinct. If May 1 is
the W.5 high, we can assume May 2-3 completed the initial waves 1-2
down. If this is the case, what would be the signal that confirms W.5 is
complete? A trade below the W.1 low. Since the W.1 low is above the
W.4:5 low, a trade below the W.1 low would be an earlier signal the W.5 is
complete than a trade below the W.4 low.
What would be the maximum protective stop against a short position
taken one tick below the W.1 low? One tick above the W.2 high. It is that
simple and logical. We may be able to break down the data into smaller
degrees for even more timely information and potentially a trade strategy
with even less capital exposure.
The next chart is the bond five-minute data from the May 3 high.
Five-wave trends should be in the direction of the larger degree trend,
unless it is the last five-wave subdivision of the larger degree trend such
as the W.5 or W.C. Three wave trends should be corrections against the larger degree trend which should be followed by the resumption of the larger degree trend in the opposite direction to the correction.
Very short-term 5 and 3 wave patterns will often help to identify the
direction of the larger degree trend and how the market fits into the
immediate position. These very minor subdivisions will often help identify
trading strategies with less capital exposure.
In the 5-minute chart above, the market appears bearish since the fivewave
trends are down and the three wave trends are up. If this is the
case, a trade below the potential W.b:2 low signals the W.2 high is
complete.
Let’s take a look at another current example to see how pattern may
help us determine the position of a market.
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