With a knowledge of the
tools in Lessons 1 through 15, any dedicated student can perform
expert Elliott Wave analysis. People who neglect to study the
subject thoroughly or to apply the tools rigorously have given up
before really trying. The best learning procedure is to keep an
hourly chart and try to fit all the wiggles into Elliott Wave
patterns, while keeping an open mind for all the possibilities.
Slowly the scales should drop from your eyes, and you will
continually be amazed at what you see.
It is important to remember that while
investment tactics always must go with the most valid wave count,
knowledge of alternative possibilities can be extremely helpful in
adjusting to unexpected events, putting them immediately into
perspective, and adapting to the changing market framework. While
the rigidities of the rules of wave formation are of great value in
choosing entry and exit points, the flexibilities in the admissible
patterns eliminate cries that whatever the market is doing now is
"impossible."
"When you have eliminated the
impossible, whatever remains, however improbable, must be the
truth." Thus eloquently spoke Sherlock Holmes to his constant
companion, Dr. Watson, in Arthur Conan Doyle's The Sign of
Four. This one sentence is a capsule summary of what one needs
to know to be successful with Elliott. The best approach is
deductive reasoning. By knowing what Elliott rules will not allow,
one can deduce that whatever remains must be the most likely course
for the market. Applying all the rules of extensions, alternation,
overlapping, channeling, volume and the rest, the analyst has a much
more formidable arsenal than one might imagine at first glance.
Unfortunately for many, the approach requires thought and work and
rarely provides a mechanical signal. However, this kind of thinking,
basically an elimination process, squeezes the best out of what
Elliott has to offer and besides, it's fun!
As an example of such deductive
reasoning, take another look at Figure 1-14, reproduced below:
![](images/FIG1-14.gif)
Figure 1-14
Cover up the price action from
November 17, 1976 forward. Without the wave labels and boundary
lines, the market would appear as formless. But with the Wave
Principle as a guide, the meaning of the structures becomes clear.
Now ask yourself, how would you go about predicting the next
movement? Here is Robert Prechter's analysis from that date, from a
personal letter to A.J. Frost, summarizing a report he issued for
Merrill Lynch the previous day:
Enclosed you will find my current
opinion outlined on a recent Trendline chart, although I use only
hourly point charts to arrive at these conclusions. My argument is
that the third Primary wave, begun in October of 1975, has not
completed its course as yet, and that the fifth Intermediate
wave of that Primary is now underway. First and most important, I am
convinced that October 1975 to March 1976 was so far a three-wave
affair, not a five, and that only the possibility of a failure on
May 11th could complete that wave as a five. However, the
construction following that possible "failure" does not
satisfy me as correct, since the first downleg to 956.45 would be of
five waves and the entire ensuing construction is obviously a flat.
Therefore, I think that we have been in a fourth corrective wave
since March 24th. This corrective wave satisfies completely
the requirements for an expanding triangle formation, which of
course can only be a fourth wave. The trendlines concerned are
uncannily accurate, as is the downside objective, obtained by
multiplying the first important length of decline (March 24th to
June 7th, 55.51 points) by 1.618 to obtain 89.82 points. 89.82
points from the orthodox high of the third Intermediate wave at
1011.96 gives a downside target of 922, which was hit last week
(actual hourly low 920.62) on November 11th. This would suggest now
a fifth Intermediate back to new highs, completing the third Primary
wave. The only problem I can see with this interpretation is that
Elliott suggests that fourth wave declines usually hold above the
previous fourth wave decline of lesser degree, in this case 950.57
on February 17th, which of course has been broken on the downside. I
have found, however, that this rule is not steadfast. The reverse
symmetrical triangle formation should be followed by a rally only
approximating the width of the widest part of the triangle. Such a
rally would suggest 1020-1030 and fall far short of the trendline
target of 1090-1100. Also, within third waves, the first and
fifth subwaves tend toward equality in time and magnitude. Since the
first wave (Oct. 75-Dec.75) was a 10% move in two months, this fifth
should cover about 100 points (1020-1030) and peak in January 1977,
again short of the trendline mark.
Now uncover the rest of the chart to
see how all these guidelines helped in assessing the market's likely
path.
Christopher Morley once said,
"Dancing is a wonderful training for girls. It is the first way they
learn to guess what a man is going to do before he does it." In the
same way, the Wave Principle trains the analyst to discern what the
market is likely to do before it does it.
After you have acquired an Elliott
"touch," it will be forever with you, just as a child who learns to
ride a bicycle never forgets. At that point, catching a turn becomes
a fairly common experience and not really too difficult. Most
important, in giving you a feeling of confidence as to where you are
in the progress of the market, a knowledge of Elliott can prepare
you psychologically for the inevitable fluctuating nature of price
movement and free you from sharing the widely practiced analytical
error of forever projecting today's trends linearly into the future.
|