Elliott wave methods II

The Neely Method

As I described in my previous Blog, the channeling method has its limitations. If the upper channel is not exceeded at the top, we must question the validity of a wave-3 interpretation. To verify the count we could use the Neely method. I recommend that you stay away from this method for day-to-day counts because it is extremely time consuming. However, it is the most orthodox. In the current case, defining the true counts for the historic counts on the Nasdaq composite does have implications for the future of the index, and it may be worthwhile following the Neely approach.

The first step in the Neely method is to determine which are valid waves in the sequence of interest, as well as 1 or 2 of the waves preceding the count of interest. These valid waves are named Monowaves by Neely; they should be relatively proportional to one another; and they should be composed of smaller component waves themselves. You can use Quarterly, Monthly, Weekly, Daily or even Yearly or 60 minute charts to do these counts.

Wave sequences may be impulsive (labeled “:5”) or corrective (labeled “:3”). Monowaves are defined as impulse or corrective, based on the preceding or proceeding market action. Neely uses the relation of the monowave in question with the surrounding monowaves to determine its character. Using the Neely method, I have labeled the segment of interest according to their monowaves:




Once the monowaves are identified, we need to know their length and proportion to their neighboring waves. Their proportions determine a series of 7 rules with their sub-rules which determine the impulsive, corrective or ambiguous nature of each wave. I have created an Excel spreadsheet to deal with this complex method, and determine which rule applies to each monowave.




Believe it or not, this is only the start. I then label the end of each monowave with the rule number that applies. In Neely's book, there is a description of the rule that applies, and the conditions that define the Elliott wave designation. Here is the resulting chart labeled by the rule number that applies.



With the Neely book in hand (or a photocopy of the relevant pages), I go through each rule and try to characterize the monowave in question, one at a time. Here is the final result of my effort:



1) In grey are the rule numbers that apply in each case.
2) In cyan are the Neely wave designators as impulsive or corrective.
3) In red is my best interpretation of the sequence based on the Neely method.

The sequence is formed by 10 monowaves total, 6 of them are corrective and 4 are impulsive. My only conclusion possible is that we are dealing with a double zigzag (dz), and NOT an impulse series. Double zigzags are often confused with impulse waves. In my experience they occur more often than impulse waves, and frequently in their place.

The lesson to take from this exercise is that Elliott wave analysis is hardly a simple matter, and that considerable effort must be taken to eliminate ambiguities.

In case you wondered, I did do the Neely analysis of the historical data on the Nasdaq composite from its very beginning. If you’d like to see a complete analysis of the Nasdaq composite using the Neely method, write me at PaperProfit1@mac.com.