Always Keep In Mind The EW Rules and Guidelines
Which pattern is more likely for the data shown on the chart below – A-BC
or 1-2-3-4-5? There is enough information from this data to put the odds
strongly in favor or one or the other pattern.
Note the pattern of the first section up from the May 14 low to the May
16 high. Does the first section appear to subdivide into a five or a three?
That will be the key to the larger degree pattern position.
The first section has three clearly defined swings of similar degree. If
this is the case, it is labeled an ABC. A Wave-A may subdivide into either
three or five waves. A Wave-1 should never subdivide into three waves.
The three-wave rally from the May 14 low to the May 16 high can only be
considered an A-wave.
If this is the case, the May 17 low should be the Wave-(B) and bonds
should be completing a Wave-(C) and the end of a corrective rally from
the May 14 low. Most traders would become very bullish with bonds
making a new high on a wide-range outside-day. But EW pattern traders
would be alert that the odds are bonds are in the very final stage of a
corrective rally from the May 14 low.
What could bonds do to confirm a W.(C) top is complete? A trade
below 101’00, the probable W.(A) high confirms the rally is a correction
and the W.(C) high should be complete. A trade below 101’00 confirms
May 16 could not be a W.1 high as the W.4 should not trade into the range
of a W.1.
Lessons Learned
Elliott wave traders often get hung up trying to label every zig and zag on
a chart. If the minor swings are not in an obvious structure, the tendency is
to force a wave count to fit the prejudice of the forecast. We have all seen
this over and over again. Trying to pretend that every bump on an intraday
chart always fits into an Elliott wave pattern structure may be very costly.
At the least, it is simply foolish. It just doesn’t work that way.
Begin a wave count by separating the obvious divisions of similar
degree. Place the probable count and the alternate if there is one on these
obvious divisions. Then identify what the market can do to confirm or
invalidate the most probable count.
Two key questions to consider once you have decided on the labels for
the obvious divisions –
Have the main swings basically sub-divided according to the EW rules
and guidelines for the labels I have given it?
What pattern structure should unfold from the last confirmed pivot if it
is the label I have given it?
By working in a relatively simple and logical manner, Elliott wave
pattern analysis can be the key to identify the main trend direction and
when trends are at or near their reversals.
Read next >>> Every zip and zag is not a perfect EW
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