Monday, February 8, 2010

SPX Elliot wave targets

Eric wanted me to explain my crazy thought process on Elliot waves.

There were two potential Elliot Wave scenarios until recently; now the only valid one is the white lines and numbers below. I'll keep the green lines and numbers in only for argument sake and I'll explain why this isn't operable anymore after the chart.

The white lines show Wave 1 from Jan high to Jan 29 low of 1071.59 (that was a key level to remember, hence the red line.) We swung up for Wave 2 and then rolled over into Wave 3.

Wave 4 could be no higher than the 1071.59 level from Jan 29 or that would have violated the Elliot Wave mechanics. I know this sounds weird, but it works nearly every time: Wave 4 cannot swing higher than the lowest point of Wave 1. This is why I was stalking this level so closely today looking for a short entry... and it happened at around noon when it began to roll over.

For a while I was thinking that the green numbers were operable, but this was violated on Feb 2 when Wave 4 creeped above the low of Wave 1, so that told me that Wave 1 extended down to were (3) is and we were actually still in Wave 2.

The Wave 5 target for the white Elliot waves is between 1011 and 1030. Wave 3 cannot be the shortest wave, so Wave 5 cannot go below 1011; a more likely target is 68% of Wave 3, which would put us at 1030... game theory.

Even if this were an ABC (green lines), the most conservative target is a test of the low at 1045... game theory was a target of 1050 for today. We didn't make it, but I had to close out my day trade (TWM long) since I'm away from the computer tomorrow. I set my target for the day on TWM at 27.95 with an entry at 27.42. The 27.95 corresponded to the 2-d vwap on IWM, whcih Brian Shannon had tweeted this afternoon. I thought this would be a good exit since buyers might come in on the 2-d vwap.

I'm still net short with swing positions is RSX (short), FXP (long), TAO (short) among others. Small long positions in XLV, XBI, SYK are my hedges.

1 comment: