Every zip and zag is not a perfect EW
We always begin with the assumption that a market will unfold according
to the EW rules and guidelines. However, this is not always the case.
Rather than try to fit a convoluted wave count after-the-fact to make the
market conform to the rules and guidelines, move on. We are traders, not
EW academics. We are interested in making money, not in being right.
I can show you lots of examples of five wave corrections that fit all of
the rules and guidelines of an impulse wave structure. EW academics will
relabel them with all sorts of complex labels with Xs, Ws, Ys and more
when the reality is – it was a five wave correction.
Prepare for the most probable, but adapt to the improbable.
Trend or Counter-Trend?
From the first low on the left of the chart below, the S&P clearly made an
impulsive rally which is labeled a W.1. A sideways flat ABC followed with a
gap up to a new high signaling the correction should be over.
If we consider the gap up rally a W.1 of a new impulsive trend, what
could the market do to void that idea?
A trade below the W.C:2 low would signal a larger degree correction
was being made, not a new impulse trend, and the bear trend should then
decline to a new low.
If the market traded below the W.C:2 low, how would the pattern be
relabeled and what would we then anticipate?
We would then relabel the rally as an ABC and expect the market to
decline in an impulse trend to well below the extreme low on the chart.
Several bars later, the market declined below what was labeled the
W.c:2 low. Now we consider the rally an ABC as shown below and
anticipate the continuation of the bear trend to a new low.
We now know which side of the market to trade for some time – short.
A trading strategy would be to wait to identify a W.2 correction in order to
position short.
Read next >>> How Long To Be Short?
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