I had real problems with the complexity of Elliot Wave (EW) corrections, where there are never ending corrections, with some EW analysts having multi decade corrections, where higher tops are valid under EW theory. This presents serious investment difficulties, because you never know where you are in any wave. Here I will present MAP waves, my modified wave counting based on analysis with examples and statistics so that probabilities can be established for risk management on a weekly and daily pivot scale. I only look at indices, because individual stocks can be too easily manipulated, including by governments as is done in the US.
The principles of MAP Waves are based on EW. However it is pretty evident when looking at the facts that the 5 wave theory offers a much better investment tool than EW. MAP waves using the following simple 5 wave rules, for up waves pivot 1 must be >= pivot 0 / pivot 2 <= pivot 1 and >= pivot 0 / pivot 3 >= pivot 1 / pivot 4 >= pivot 2 / pivot 5 >=pivot 3 (the opposite for down waves), we can assign probabilities on various timescales to make sensible risk reward investment decisions which is not possible under EW.
We will start with monthly pivots.
Looking at the red dashed 14SMA we can clearly see 2 tops and 2 bottoms, with the 2007 top being the highest, and most likely it will stand as the peak as the 2009 was lower than the 2002 low. Many EW theorists call the 2000 high the top. However just following the basic EW theory, which is the basis of MAP waves, of 5 waves 2007 is the most likely top.
Using a shorter SMA, the bold black line we can see that the 2000 to 2002 decline has a clear 5 wave structure, where as the 2007 to 2009 decline shows a 3 wave – described by EW as an ABC correction.
The current rise from the 2009 bottom shows a clear 5 wave structure which even if the recent high is the final top then it is valid under EW. The rise from 2002 to 2007 however does not show such an obvious wave count, and I suggest that that is the result of sub waves, or extensions to those familiar with EW, which all show a valid EW 5 wave count.
Below I have added daily pivots, so that you can see the subwaves.
So following the basic principles of MAP waves in the S&P we have the following showing a clear 5 wave pattern;
Weekly pivots – 3 of 4
Daily pivots – 10 of 10.
If we change to a weekly scale it is obvious that the 2007 to 2009 drop also has a clear 5 wave structure as shown below.
So on a weekly and daily pivot scale on the S&P the 5 wave structure has a 100% record however from a small sample of only 14!
Applying the same methodology to the Russel it would appear that the 2011 top is pivot 5 off the 1987 bottom, but is not clear yet from the long SMA.
Ignoring that as we will not know for a while yet, and anyway I don’t believe there are many investors that are looking at 25 year returns, the weekly 5 pivot count is 5 of 5 and without changing scale 11 of 11 daily 5 wave counts are clearly visible. (I have only shown bottom of pairs but check for yourself! So 100% and sample size is now 30 5 wave counts.
Applying the same methodology to the DJIA it would appear that the 2007 top is pivot 5 off the 1987 bottom, but is not clear yet from the long SMA.
The weekly 5 pivot count is 5 of 5 and without changing scale 7 of 7 daily 5 wave counts are clearly visible. (I have only shown bottom of pairs but check for yourself! So 100% and sample size is now 42 5 wave counts.
The other main US index, the Nasdaq however on the monthly scale poses an interesting decision. How to count the bubble top of 2000? I offer 2 options for the monthly wave counts as shown below, but because of the investment scale it is largely irrelevant!
Irrespective of the above mentioned conundrum, where monthly pivots have not been included into the previous counts anyway, we have 5 of 5 weekly 5 waves, and 9 of 9 daily 5 waves that are clear on this scale, making our totals 56 5 wave counts – 100%.
So to see if this works on other indices below is the DAX.
The DAX shows the same 5 wave pattern adding 5 of 5 to the weekly pivot scale and 11 of 11 to the daily pivot scale, maintaining the 100% bringing the sample size upto 72! It is interesting that the bold red SMA has turned down and this has only occurred at major trend changes!
I have not previously looked at the FTSE but would assume a similar pattern will emerge and is shown below.
Again the waves are clear, however on the monthly pivot scale which have not been counted for the probabilities, we have a break of the rules or indicating that the 2003 low may be a larger scale correction than a monthly pivot! We will not know for a long time and either need a new high above the 2007 high or a new low below the 2003 low to confirm. Either way it does not really matter as the investment term using those scale pivots is not sensible! A second alternative is that there is a subwave where the 2009 low is pivot -1 and we are completing pivot -2. However looking at the other indices presented I would favour that this is a break of the rules! Again it is clear that there has been a downturn in the bold red SMA, suggesting that we are unlikely to see a new high which MAP waves suggest! Time will tell. As we will see when we go into smaller pivot scales that the rate of failure is higher than for larger scale pivots, and that these failures tend to occur close to trend changes!
So on the FTSE we have 6 of 6 weekly waves and 10 of 10 daily waves visible on this scale, maintaining the 100% record with a sample size of 88.
All in all I think MAP waves offer a far better insight as to what is happening in the markets than EW. Not only that, but has predictive probability that EW does not allowing more informed investment decisions to be made and on a weekly and daily pivot scale. Even if it is 1 error if we include the monthly FTSE anomoly it is over 90% accurate, all be it with a small sample. I am sure this is statistically significant.
I am sure had Ralph Nelson Elliot had the power of computing that I have he would have come to this same conclusion when he developed his theory all those years ago!
On the Weekly and Daily pivot scales it is clear that a 5 wave count up and down has a good risk to reward ratio! The problem however is identifying the pivots in advance as even on a daily scale it is way behind the curve by the time you have reasonable confirmation using wave counting in isolation.
I will be presenting the same indices, but restricting it from 2011 highs to the recent April 2012 highs using pivots which can be identified on daily bar charts. Whilst looking at the charts also note how the lines, including some from over 10 years ago form resistance and support highlighting the importance of good pivot selection rather than random lines just drawn!
Starting with the S&P.
The 5 wave counts are as follows – 4H 8 with 2 failed 3’s (abbreviated F3) with trend, H 15 with 1 abc wave 1 (abbreviated W1 W2 W3 W4 W5), 15 minute 3.
Subwaves present as follows: W1 4, W2 1, W3 6, W4 1 and W5 4.
For the Russel.
The 5 wave counts are as follows – 4H 8 with 2 F3’s with the trend, H 12 with 6 abc’s 3 W1’s, W2, W3 and W5, 15 minute 6.
Subwaves present as follows: W1 4, W2 1, W3 6, W4 1 and W5 4
For the DJIA.
The 5 wave counts are as follows – 4H 8 with 2 F3 with the trend, H 23 with 1 F3 with the trend & 5 abc’s W1, W2, two W3 and W4, 15 minute 7 with 1 F3 with the trend.
Subwaves present as follows: W1 5, W2 3 , W3 7, W4 0 and W5 5.
For the Nasdaq.
The 5 wave counts are as follows – 4H 8 with 1 F3 with the trend, H 19 with 1 abc W4, 15 minute 4.
Subwaves present as follows: W1 4, W2 5, W3 8, W4 0 and W5 5.
For the DAX
The 5 wave counts are as follows – 4H 8 with 1 F3 and 1 abc W1, H 15 with 4 abc’s, W1 W2, W3 and W4, 15 minute 7 with 3 abc, W1, W2 and W5.
Subwaves present as follows: W1 1, W2 2, W3 8, W4 0 and W5 5.
Finally the FTSE. My initial look at the daily scale is interesting and this really needs much more time to sort out as it is possible as suggested in part 1 that as the 14M SMA has rolled over and its wave structure of last years low shows a likely completion of its high which may not be seen again for many years! It has one anomaly prior to its high last year which may mean we now have completed 2 sub waves off the 2000 high, one on the monthly pivot scale, one on the weekly pivot scale and this years high on the 4H would explain the anomaly pointed out in part 1! But that for another day!
So in summary our probabilities for MAP waves following the simple rules of pivot 1 must be >= pivot 0 / pivot 2 <= pivot 1 and >= pivot 0 / pivot 3 >= pivot 1 / pivot 4 >= pivot 2 / pivot 5 >=pivot 3 are as follows;
|MAP WAVES||PIVOT SCALE|
|Gold||Red||Purple||D Blue||Lime||Sky Blue|
|Monthly||Weekly||Daily||4 Hour||Hourly||15 Minute|
|5 wave probabilities||Chart Scale – for abc corrections go one chart scale down to see 5 MAP Waves|
|Percent 5 Waves||88%||97%||100%||78%||79%||85%|
It is clear from the table above that most abc waves form on Hourly waves. The distribution of in which wave they form is W1=6, W2=4, W3=4, W4=3, W5=3, so totally unexpected and contrary to EW where abc corrections should occur in waves 2 and 4 through simple observation – testable by yourself!
Finally below you find the table of where would you expect sub wave formation.