Friday, September 4, 2009

An Almost Pefect 5 Waves

I just had to post this pattern from today's SPX count. This is what I find so intriguing about EW.

This pattern is a pretty clean 5 wave structure that one cannot deny. The waves behaved according to EW rules and guidelines almost perfectly.

Notice waves 2 and 4 (blue). They both show alternation. Wave 2 is a little sharper in it's correction and wave 4 played out it's typical triangle (sideways move) while alternating (sharp vs sideways) it's pattern with wave 2.

Look at the perfect little sub-waves for wave 3 (blue) in red. Again, waves ii and iv show alternation.

The triangle pattern played out as well with a thrust lower (in true fashion) to create wave 5 (blue).

Wave 3 blue is definitely not the shortest wave (and it doesn't have to be the longest wave, just not the shortest of the 3 actionary waves) and it is usually the longest, which in this case it is. This makes it easy to spot wave 3s.

Once this structure has been identified, can we make a trade with it? Certainly. An example of how one would work this:

Given the 5 wave count, one would expect a correction at the end of this structure. A position may be taken on a play for the corrective action up.

A stop may be set below the 5th wave. Targets for the corrective action would be assisted with the Fibonacci retracement percentages along with the proper wave count.

One other thing I will add. This structure may also be counted as an abc correction. Replace wave 3 (blue) with 'a', wave 4 with 'b', and wave 5 with 'c'. This,however, does not change the fact that a turn would be expected at the conclusion of this structure.

In fact, one must keep this in mind because if the corrective action following this structure continued much higher than the typical Fibonacci percentages, it may be a clue that this structure was corrective after all. One then must assume that the prior trend will continue higher.


  1. Jose,

    just curious. how would you have traded (no not traded) based on the first chart using your own trading strategy?