The Secrets to Elliott wave Forecasting

Over the years, I have had a love-hate relationship with the Elliott wave, but lately, I have been in a honey moon with it. I think that most of you will benefit from what I have to share, even if you have just casually listened to elliotticians with wonder and skepticism over the years. I have said before that my first exposure to the Elliott wave theory came from the book “At the Crest of the Tidal wave” by R. Prechter. Ironically, Prechter was predicting a bear market by 1995, when I first read the book. Although I questioned some of its assumptions, I was very intrigued by the theory because it appealed to my scientific nature. For example, I questioned that he would go back to the 1400’s to begin counting the Elliott pattern in the “markets”. I think that if you are to trade the S&P500, you should start counting the waves in the index, when it begun to include the 500 components, back in the 1950’s. Ironically, however, the components have change significantly since then, so one would still have to question the validity of the counts. The Dow when it begun had only 15 components back in the 1890’s, and the index had grown at an exponential rate since then, so most elliotticians count waves in the log transformed charts, but I question the validity of this approach too. Now you can see why I have to be very skeptical about any long-term interpretation of wave counts, particularly if the analysis is included in some book that predict the end of the markets as we know them.

However, I have to credit my Elliott wave analysis from having saved my financial life both in 2000-2003 and 2008-2009. That alone is worth all my frustration over the years with the Elliott analysis. Thanks to my analysis of the S&P500 index, I expected the decline of 2008. Because of this, I have not owned any stock since 2000-2003, and was inclined to trade the volatility-sensitive PCCRC, which I credit with the greatest one-week profits of my trading career, precisely on the worst week in US market history. However, I have to admit that the profits did not come from forecasts in individual stocks or indices. In truth, I could have profited, albeit not so handsomely, if the markets would have ended higher in 2008. Now I am offering my secrets to Elliott wave analysis here.

Trading individual stocks by Elliott wave forecast is probably not wise. There are exceptions of course, but some conditions must be met. It is ironic that I used the Elliott wave analysis successfully early on between 1995 and 2000, but you could probably say that I was in the right place at the right time. While it may appear to make sense to buy calls in individual stocks at the bottom of a wave 2, you’d have to keep a watch list of stocks and examine them on a daily basis, for you to enter your trade at just the right time. With the explosion of software for charting, search and trading, today it seems unpractical to keep counts on a watch list of stocks. More significantly is the lack of accuracy of wave counts of stocks that you do not follow routinely. Some softwares claiming to search for Elliott patterns have fallen short of my expectations over the years, and even my own counts are erratic, at best, in many individual stocks. I think that the main reason for that is the significant gaps that occur between days. This is particularly true for stocks that trade with relatively low volume. Even though one could restrict the forecasting and trading to highly liquid stocks, the truth is that after hours trading is not recorded in most charts. I believe that this is a major fault in Elliott analysis because wave patterns are determined by highs and lows, and some of these may occur outside normal trading hours. If one where to restrict the trading to clearly identifiable patterns, the you could rely on Elliott wave counting. The truth is that such unambiguous patterns are the exception, rather than the rule. Making this approach unpractical for those who want to swing trade options for a living, like I do. You may find such patterns in hourly charts, particularly in currency pairs, but to me the time spent in day trading, along with the stress, do not fit my personality.
S&P500 futures are the best! I have been observing the /ES and trading it here and there, for a little over 1 1/2 years, since I joined the DTI group. Since then I have found that day trading is not for me, but I have discovered that the /ES is probably the best instrument for forecasting using the Elliott wave. My Tuesday and Wednesday webinar participants are witnesses to the almost uncanny forecasts I have been given lately. I am convinced that this is mostly because the /ES trades all day and all night, with the exception of 15 min and Friday to Sunday, which are actually of little significance in Elliott forecasting. There are very few gaps, and one can easily count waves with little ambiguity. That is not to say that there are not periods of uncertainty. By its very nature, there are sequences with low predictability. However, the advantages of having a forecast on the S&P500 are obvious, since most stocks follow the indices most of the time. The validity of the Elliott wave forecast on the S&P500 futures may derive, at least in part for the high liquidity of the instrument.
Believe your eyes. In 1995, I used the methodology described in R. Beckman’s book “Elliott wave Explained”, this is the channeling methodology. In fact, this is derived from Ralph N. Elliott’s own methodology. Somewhere along the way I was disappointed by my own counts, as I noticed that some patterns did not conform to the channeling rules. I then went on seeking further advice. One book that interested me was Glenn Neely’s “Mastering Elliott wave”. However, the complexity of his approach made it almost impossible to use for trading. Over the years, I have learned that there are basic rules, basic patterns, and that there are also rare patterns that almost never occur, and if they do, we just need to recognize them. I have also used the Advanced Get and the Refined Elliott Trader, each with its own advantages. In the end, I have returned to my first love, the channeling methodology, having adapted it based on my additional learning over the years. I believe that when all is said and done, it is the human eye that is best adapted to pattern recognition. I should have understood this since the beginning, after all I am a Pathologist, and we learn to recognize lesions at the microscopic level, something computers are unable to do (so far).
Long-term charts are the best. Go back a decade in a weekly or monthly chart, and the noise will disappear, making your analysis clear. You could make larger decisions in your life, such as understanding that the 2000’s was a bad time for investing, for example. If I had told you that the March 2009 low as a major low according to my own Elliott wave forecast, would you have believed me? Better yet, would you have believed yourself if you could identify the 2000-2009 move as a FLAT that reversed just as expected by Elliott analysis? This will be complicated by the forecast of other well recognized elliotticians such as Prechter and Greenblatt who were calling for a continuation of the decline as recently as August 2009. They were wrong. Yet the FLAT pattern from 2000-2009 calls for a strong reversal after completion. That is what we are getting. My group-participants will tell you that I have been saying this since December, 2008. I don’t want to boast because invariably I will get it wrong some time too. However, it is nice to know that I have a frame of reference which the long-term Elliott wave forecast of the S&P500.

Please join my group, attend my webinars on Tuesdays which involve the basic of options and technical analysis. Some of my recorded webinars deal with the Elliott wave and my approach to forecasting. The tools are available in the free charting software that come in the Think or Swim platform.