Saturday, December 20, 2008

Trading Elliott Waves

My friend Ilene has a series of posts up on Phil's Favorites comparing Elliott Wave analysis from three different perspectives, including my recent "Wave 5" post (you may have to scroll down a few articles to get there). All three of us come to about the same conclusion, but the uncertainty in details may make it hard to make trading decisions based just on the Elliott Wave analysis. Due to the nature of the Elliott principle, definite assignment of wave numbers and letters cannot be made until after the fact, AND, even then, there's no consensus. My analysis provides a specific trading guide for getting into the next leg down -- a practical application of theory, i.e. how does a trader turn theory into a real time, real money trade?

Enter Advanced GET. I have been using this software since 1995. Until very recently the program could only be run on Windows operating systems. With the advent of the new MacBook Pro, I can now run Windows programs on my Mac and the first Windows software I installed was Advanced GET. This program reduces Elliott Wave Theory to a couple of very tradable mechanical trading signals along with a host of supporting proprietary indicators like no others in any trading environment. Almost every one of these indicators is used to further refine Elliott Wave concepts into something that is actually tradable.

With this as an introduction, I want to walk through a few Advanced GET charts of the S&P 500 in different time frames and point out how theory can be distilled into something eminently tradable.

Weekly SPX


On the longer term Weekly chart the SPX is in the midst of a 3rd wave down. Two prominent markers stand out. First, that the S&P can climb as high as 1000-1100 and still be considered to be in a third wave down and second, that the software is citing the 700 level as initial support, but that by its wave count, the ultimate bottom of wave 5 is several hundred points lower. Interesting, but hardly the precise measurements we need to put on a trade.

Daily SPX


The daily chart is almost identical to one I posted on Thursday night. Unlike the weekly chart, the daily chart is providing some precise parameters for where the software believes Wave 5 will commence, the breaking of the auto-regression channels, or taking out the Wave 3 low, or in the bottom window, the cross-over of the GET stochastic. There are other indicators, such as the GET oscillator (window just above stochastic) going from way oversold all the way back to the zero line and an almost completed abc for Wave 4. As you can see, the probabilities are lining up for a trade to downside here and although no one indicator is in and of itself sufficient to base a trade upon, the culmination of so many all saying the same thing is something a trader can actually handicap into a successful trade.

False Bar Stochastic



Above is the Daily chart along with GET stochastic signals, also called the "False Bar Stochastic." This is one of the most powerful stochastic indicators I have ever come across. It filters out "false" stochastic signals (see horizontal black lines) leaving only the most highly probable stochastic cross-overs for trading. I've posted "Sell" signals on the chart where each of the recent False Bar Stochastic signals have been generated as well as over current prices where it appears that the third Sell signal is upon us. If so, one can easily conclude that an entry for an expected Wave 5 drop is imminent.

Short-term 10-minute SPX


Finally, above is a very short-term chart, a 10-minute chart of the SPX. The blue horizontal lines are where the software, in advance, alerted to where the index would reach at least a minor support level. The first horizontal blue line was generated by the first red price bar, 20 bars in advance of where the SPX found its support on Friday. But note that there is another horizontal blue line at the bottom of the price chart and running well into the future. That is where Advanced GET is suggesting the next level of support will be found, at about SPX 865, more then 20 points lower.

This is where theory and trading come together to provide excellent risk:reward parameters for real trades. The software applies basic Elliott concepts to it's own proprietary system providing rule-based signals with tight stops and huge rewards trades. Although it may be a departure from pure Elliott theology, it's result is a pragmatic application in a trading environment.

In earlier blogs I introduced Trade Triangles a simple mechanical system for trading stocks and indices. Recently I introduced Elliott Wave theory as applied by Robert Prechter and Glenn Neely as big picture analysis of where we are and where we are going. Advanced GET can be looked at as an approach to trading that combines the simplicity of mechancal, objective systems with the fascinating theory discovered by R.N. Elliott and widely practiced but seldom applied very effectively by analysts today. It is a very expensive program ($3,000) and is not for everyone. But it is for me, a Fibonacci 13 years and still going strong.

A

15 comments:

Anonymous said...

Allan, Once again,thanks for sharing. Have a Happy Hanukkah and a Merry Christmas, hopefully with your daughters.

Doug in ATL

shyamt said...

Thank you Allan for sharing. Happy Holidays to you and your family.

- Shyamt

Anonymous said...

The late Dominick Mazza one of the best elliott traders I have ever known used to always warn about the 5 wave that never happens. Robert Prechter has been calling the top for 8 years and I have watched Neely use 100-150 es points as stops.

Allan said...

His family announced his passing with a post on his web site, quite a shock for anyone who was following his work. Makes one stop to ponder the concept of mortality, and the randomness of life.

As for Prechter, I am tired trying to defend him and his work to naysayers, so if you don't like his analysis, don't read it and if you don't read it, don't comment on it.

Same for Neely, he's nailed some 200 S&P moves with the precision of a diamond cutter, something no one else has come close to doing.

Anonymous said...

Hi Alan,

Thanks for your posts. I just wonder in early August, the stochastic cross-over happened under 75, however, the market resumed its uptrend few days after and made a higher high. Since we are currently in the same level rebounce as that one, what do you think about that? Thanks.

Happy holidays,

YQ

Allan said...

YQ: In August there were two Sells, about 5 days apart, the first one resulted in marginal higher prices and then the second one resulted in several thousand DJIA points lower. I would welcome a similar outcome now, since I made a s__load of money in August through October.

In other words, if the first FBS signal fails, load up on the next one.

Anonymous said...

Thanks Allan. YQ

Harsh said...

Alan,

Enjoy reading your blog and a new Advanced Get subscriber myself. To put things upfront, I am not a good chart reader and mainly use charts to support my fundamental thesis.

The question I have is about double bottom. When you extend the SPX chart to multiple year time frame you see a clear double bottom at current levels. How do you interpret this? If these levels dont hold, we are going way low. But isnt holding these levels a bullish sign?

Allan said...

Harsh: Yes, if a double bottom holds, its bullish and if a double bottom fails, it's bearish. But what does that tell you? What it doesn't tell you is if the double bottom will hold or fail.

One of the points I hope my readers are getting is that there are many ways to view and trade markets and that it isn't as important which methodology you chose as it is that you have a method.

Wayne said...

Allan,

Any idea what happened to DXD today? It suffered a $15 drop today. I did find a dividend distribution notice (http://biz.yahoo.com/bw/081222/20081222005889.html?.v=1) but payout date I think is 12/30. So not sure what just happened, esp. considering the Dow actually is down 100 points as of this post.

Wayne

Allan said...

Has to do with record date, not payout date. Note that the short-term gain dividend is $16, about the same amount of initial drop in shares at the open. They sure did catch a lot of folks by surprise, though.

Anonymous said...

Allan

Do you think the drop in GFRE is exclusively market related?

Thanks for your continued sharing and Happy Holidays

Wayne said...

Thanks Allan. I guess the confusing part for me is that in my trading account, the drop in stock value did not come with a corresponding rise in cash. What I'm gathering is that this cash won't show up until later (perhaps 12/30?)

Wayne

joshua said...

I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


Deborah

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Anonymous said...

only wave 5 is predictable with stop at point 3 for a nice profit. wave 3 is for the insiders. that´s all folks.