Trade In Review - SPX

This week I want to review a trade on the SPX (S&P 500) that has some properties common to many strong Elliott Wave 4 Buy trades. The set-up in question was triggered on January 3rd this year after the SPX had retraced during December to form a Wave 4 leg.

Marked on the charts below are various elements that add to the strength of this trade set-up. The first point marked in the price chart (point 1) is a Wave 4 retracement that hits the lower Bollinger Band. The angle of the Bollinger Band is also quite flat, implying that a reversal, rather than a downward break-out, will occur.

The second item marked (point 2) is Wave 4 pulling up before the TAPP (Time and Price Projection) target in both time and price.

Next, by drawing some basic angles on the chart, we can see that time and price is balanced during the retracement (point 3). By this I mean that the angles between the up move of 0-3 and the down move 3-4 are close to being perfectly equal. This can be checked by using the trendline drawing tool in ProfitSource.

In the oscillator chart [plotted beneath the price chart (point 4)] notice how the 5/35 Oscillator ‘kisses’ the zero level - in other words, a 100% Oscillator retracement.

Chart 1 – S&P 500 Daily Bar Chart

This Oscillator pattern is significant, however it requires other corroborating evidence like the retracement to the lower Bollinger Bands (at point 1 in Chart 1 above) and the subsequent zigzag retracements (identified at point 5 in Chart 2 below) to confirm that the Wave 4 move is in fact over. Skipping these steps will increase the risk of false breaks.

The fifth element of strength in this trade (point 5) is a zigzag pattern in the Wave 4 retracement. When analysing such ABC style zigzags, Fibonacci and Gann retracement/extension levels tend to work the best. In this case, ‘C’ is 138.2% of ‘A’ supporting a potential end to the downward move.

And ‘last but not least’, as they say, we have the Commodity Index Channel indicator displayed beneath the price chart in Chart 2 (see point 6).

During recent analyses of winning versus losing Wave 4 Buy trades, I have observed that set-ups with a CCI of less than 50 on the entry day tend to perform better than those with a CCI over 50.

Chart 2 – S&P 500 Daily Bar Chart

Following the trade forward, we can see the various exit styles that can be employed.

The TAPP ‘limit’ style exit shown at point 1 on Chart 3 is the most profitable in this case.

The next most profitable exit style would be to employ the Wave 5 EBOT exit (see point 2 on Chart 3).

Lastly, the least profitable would be an exit using the Trailing Stop (see point 3).

Chart 3 – S&P 500 Daily Bar Chart

Of course, the levels of profitability for each of these exit styles will vary from trade-to-trade, which then begs the question, “Which one is best used for all trades?”

The answer is somewhat of a trick one in that all these stops can be used in conjunction with each other. Depending on how aggressive you are, you may wish to raise the level of the TAPP stop to the middle of the TAPP. On the other hand, you may simply want to tighten your trailing stop once the TAPP is hit. In my experience, if you are using a trailing stop, you can even get away with aiming at the top of the TAPP. This allows the big winners to run further, with the trailing stop or EBOT picking up the others.

I hope this article has given Elliott Wave technicians a few new ways to analyse markets and manage retracement based trades. Stay tuned for further tips and tricks in my future Trading Tutors articles.

Happy Trading

Jordan Craw