Unorthodox Corrections & Weird Fractals & Sp500 Implications

Elliott Wave Corrections Presented here are two classic Elliott Wave patterns: the Contracting Horizontal Triangle and the “Double Flat.” The triangle is familiar to most. It’s a five legged pattern that should involve ‘contracting’ trend lines. The “Double” is a seven legged pattern that involves a small x-wave. An x-wave should be relatively short-lived and less complicated than the waves that precede it. An x-wave is a simple corrective pattern that separates two other corrective patterns. The first five legs of these patterns start out similarly. In the “double,” though, the first -c- wave should be a “five,” while the c-wave of a triangle will be a “correction.” Let’s just say that by the end of the dwave or x-wave, it can be difficult to know what’s transpiring. It may be more difficult than we realize….

Contracting Triangle

a

“Double Flat”

“b” e

c

w -c-

-a-

“b” y -c-

-a-

-bx

d b

-b-

“a”

“a” “c”

“c”

Unorthodox Correction: “Diametric” Glenn Neely, author of Mastering Elliott Wave, has claimed to have discovered a ‘new’ formation in the mid 1990’s. He was counting a market correction that he believed was a “Triangle.” However, the corrective e-wave became too large. The duration of the first three legs were too balanced to consider it a “double” as there there should be some alternation between a,b &c waves of a flat correction--the waves of a flat cannot each take the same amount of time. Therefore, he was left with the conclusion that it was a new formation that was named a “diametric.” His rationale for the new structure was that it was the market’s way of adapting to the popularity of Wave Theory. In addition the bow-tie shape idealized here, a “diametric” could also be a “diamond” shape. Which leads us to the following chart 

“Diametric” (Bowtie)

e “b” g

a c

d b

f

“a” The “Rules” around a diametric are that: a) Of the seven legs, only 1 or 2 will be a little longer or shorter, but that the rest of the legs will be equivalent in duration; b) The g-wave will be shorter than the e-wave if the c-wave is shorter than the a-wave, and vice versa.

“c”

“a”

(Y)

S&P 500: Unorthodox Corrections?

“g” “e” “c” “a” “f”

(W) “g”

“b”

(X)

“d”

“e”

“c” “a”

“f”

(X)

“d”

“b”

I’ve seen a lot of interpretations for the (W) wave here. Technicians have tried to twist it into a “five wave” impulse to support the idea that this is a “zig-zag.” Unfortunately for them, that (W) wave is NOT a “five.” At the time I counted the move as “double,” but that was never a truly satisfying count because the “abc” waves were all too similar in duration. Perhaps there was another answer? This may be one of those unorthodox corrections, a “diametric.” Because the diametric presented here is a “correction,” it can be followed by a shorter (X) wave. What should follow an (X) wave is another correction, and what follows here looks similar to what preceded it. The (Y) peaked very close to a 78.6% relationship with (W) and there are definitely similarities between these shapes. 

S&P 500 with Basic Legs Overlayed

I’ve highlighted the basic legs here as “straight” lines to get the “imprint” of what is transpiring.

S&P 500 with only the Basic Legs

S&P 500 Fractals? One of the concepts behind Wave Theory is that patterns, while NEVER exactly the same, are similar and can share similar characteristics. These are the two rallies that the S&P 500 has witnessed from the March lows. The pattern on the right was 80% of the size of the one on the left (close to 78.6%, or the sq. rt of 61.8%). I’ve expanded the pattern on the right for an easier comparison.

This is the S&P rally from 3/6/09 to 6/11/09. It was a 67 trading day move that, when completed, resulted in an exact 30% decline

This is the S&P rally from 7/8/09 to 10/21/09. It was a 72 trading day move that, when completed, resulted in an exact 31% decline

“c”

S&P 500: An Unorthodox “Triple”?

“a”

(Y) “g” “e”

“b”

“c” “a” “f”

(W) “g”

“b”

(X)

“d”

“e” “c” “f” “a”

“d”

“b”

(X)

The implications of this pattern is that we’re going to see prices rally to the high 1100’s or mid 1200’s. I cannot come up with any legitimate “orthodox” Elliott Wave counts that get me to 1200+.

S&P 500: An Orthodox Triple??

(Z) (Y)

“c”

“a”

“c” b “a”

(X)

(W) “g”

a

“b”

c “b”

“e” “c” “f” “a”

“d”

“b”

(X)

This is the basic count I’ve been highlighting for a few months--that this is a “Triple” of some kind. According to orthodox wave theory, there is nothing generally flawed with this model. I can certainly “twist” that (W) into some sort of “abc” pattern. The issue, according to Neely’s “logic,” lies in the “c” waves that come after the first (X) wave. They are all too short in duration. If an a&b-wave take up a similar amount of time, then the c-wave should be twice as long. If the b-wave is ‘long’ compared to the a-wave, then the c-wave should be (a+b)/2. Because I pay attention to both worlds of the Wave Theory, I’ve continued to stick to this model because it does make sense. However, this particular count should produce a dramatic reversal very soon. To be fair and honest, I thought this correction was “done” at (W) and then at (Y). So, I’ve been fooled before. Fortunately, the failure to “behave” properly afterward kept my trading out of much trouble.