The chart above is our main compass, a Weekly S&P 500 chart that is in the midst of a five wave sequence down from the 2007 highs. There are three clearly designated completed waves and by implication, a Wave 4 that has been sliding and slinking its way sideways to up against the major downtrend. A previously drawn wedge is placed earmarking this 4th Wave with the hope of isolating either an extended Wave 4 by a break upwards out of the wedge, or a completed Wave 4 by a breakdown below the wedge. As is obvious, neither an up or down breakout has yet occurred. By zeroing in on a couple shorter time frames, maybe we can glean some clues as to which way prices are headed.
Above is a Daily chart with a broader view of the 4th Wave. I've drawn in a channel that encompasses all price action since the November 21, 2008 low. Superimposed on that price action is a simple ABC sequence culminating with a Wave 4 top as of the close on Tuesday, January 6, 2009. What isn't clear on this chart is whether or not Friday's decline broke the bottom of that upward rising channel. For some clarity, let's look at the 60 minute chart below.
Whoa, Nellie (not an orthodox Elliott observation), this chart shows a break of that lower trend line clear as a bell.
The smaller time frame provides a snapshot of all the price action for the first six trading days of the new year. A top of some significance is shown being made on Tuesday, January 6th. Beginning Wednesday and carrying into the close on Friday, prices moved down in what is being shown as a five wave sequence.
The phrase means simply "very clear." A bell is used as a model of clarity because the sound of a bell ringing is a clear tone. In the realm of sound, the opposite of clear is dull.
From: The Phrase Finder
This is where my analysis deviates from more traditional Elliott Wave analysts. You will read elsewhere how this Wave 4 is tracing out a triangle or a flat or a double flat or a zig-zag or any number of traditional Elliott Wave corrective patterns. These are all well and good and I admire those who can figure that stuff out. But just as I avoid getting clogged up in the minutia of life, I also abhor getting involved with all the subtle, yet ambiguous minutia of the Elliott Wave Principle. If I can't trade it, what good is it? The analysis above is one I can trade.
I know that the elusive Wave 5 to new lows will start with a break of that trendline in all of the above charts. That doesn't mean all breaks of that trendline must result in a Wave 5, only that a break below support will provide the first tangible indication that Wave 4 is over and Wave 5 has begun. If prices correct back above the trendline, my analysis is probably wrong and I am exiting with a small loss. If prices continue lower, I clean up with my short positions.
In fact, if I short every break of that trendline I am certain to enter Wave 5 early enough to profit handsomely, including those small losses incurred, if any, upon those false breaks. Like it or not this is how I trade EW. Keep it simple, with an emphasis on clarity, while being true to the major tenants of the Elliott Wave Principle. It may not be perfect textbook Elliott, but it is profitable. I'll take profits over perfection, every time.