|
Most of us who have researched or applied Elliott Wave Theory will be familiar with the concept of ‘Waves within Waves’ or ‘Cycles within Cycles’. Keeping this in mind, we can often get a clearer picture of future potential price action by looking for counts over multiple time-frames.
Products like ProfitSource are generally set to a default time-frame to look for Elliott Wave counts. This is important initially to give consistency to analysis. However, as the old saying goes, once you know the rules you can learn how to break them.
ProfitSource as a standard uses a 300 bar period to establish the beginning of Wave Counts. There is, however, nothing wrong with also using shorter time frame settings to find counts that have started more recently or that are forming on a smaller scale.
Chart 1 below shows a 50-bar count. This shorter time setting picks up a smaller than “average” Elliott pattern that started in November of this year.
Chart 1 – AAI-SpotV Daily Bar Chart
click chart for more detail
This count has formed with a close correlation to the typical Wave count mapped out by the Wave 4 and 5 Time and Price Projections (TAPPs). ‘Typical’ behavior like this gives the impression that the SPI is likely to continue to trade within Elliott Wave relationships.
Aside from the Wave 5 TAPP being reached, the Upper Bollinger Bands have now been tagged a number of times, giving an indication that the current price is relatively high. RSI divergence also warns that momentum is decreasing as prices get higher.
These three indicators point towards a potential retracement in the near future. So where is such a retracement likely to go?
Chart 2 below shows three progressively lower target levels for the SPI in February. The first target is the 20 day moving average or mid-line of the Bollinger Bands applied to the chart. Once Bollinger Bands have been breached for some time on the upper or lower side, it is typical for the market in question to return at least to the mid-line.
Chart 2 – AAI-SpotV Daily Bar Chart
click chart for more detail
The second target is the lower line of the trend channel created on the chart using parallel trend lines, while the third target is the bottom of the gap up in price that occurred in early January. Moves beyond this and below the Wave 4 low in Chart 1 are possible, but less likely.
It should also be noted that there is still room for some higher prices before such moves occur. Looking at the upper trend line in Chart 2, it is quite possible this may be tagged again before a retracement. The best signal of a retracement starting will most likely be the breaking of support at the Wave 3 high.
Finding set-ups and counts like this is to a degree a matter of massaging the number of bars used to fit the current market activity. It does take a little practice as well as some trial and error. However, the extra effort can be worthwhile if it gives you a clearer view of current price action.
Happy Trading
Jordan Craw
|