Elliott Waves & The New Post Corona Reality.
Updated
The start of the Covid-19 pandemic kicked of a volatile time in the stock market with a 34% market decline in 24 days. This marked a clear new leg in the market and allowed one to start an Elliott Wave mapping.
In this chart, I begin with the classic A-B-C correction wave as the market declines and follow it up with the 1-2-3-4-5 impulse wave of the new Bull market that emerged from the ashes of the crash.
The market then experienced another corrective A-B-C wave from September to November 2020. Still, it emerged again with the promise of massive government stimulus into a new 1-2-3-4-5 impulse wave supporting the major Bull market move.
In the chart above, you can see that it really helps with plotting Elliott waves to use supporting indicators; I have used Cumulative Money Flow and Relative Strength Index to confirm the moves.
In technical analysis, it is always a good practice to use a price-based indicator (RSI) with a price/volume indicator (OBV or CMF) to give you two different perspectives on the same chart.
By mapping a 9-day moving average (MA) on the RSI and CMF indicators we can see that when the indicators cross down or up through the MA we have a strong confirmation. This helps with recognizing a new wave pattern sooner, rather than retrospectively.
What's Next
I expect in the next few weeks we will see a corrective wave emerge, which will be signaled by a MA crossover of RSI & CMF. But until stocks have any competition from Bonds/Treasuries, the market will continue to move up. The only caveat is a macroeconomic disaster, for example, the pending crypto market collapses, which will send shock waves through the financial markets, but again, stocks will eventually emerge victoriously.
In this chart, I begin with the classic A-B-C correction wave as the market declines and follow it up with the 1-2-3-4-5 impulse wave of the new Bull market that emerged from the ashes of the crash.
The market then experienced another corrective A-B-C wave from September to November 2020. Still, it emerged again with the promise of massive government stimulus into a new 1-2-3-4-5 impulse wave supporting the major Bull market move.
In the chart above, you can see that it really helps with plotting Elliott waves to use supporting indicators; I have used Cumulative Money Flow and Relative Strength Index to confirm the moves.
In technical analysis, it is always a good practice to use a price-based indicator (RSI) with a price/volume indicator (OBV or CMF) to give you two different perspectives on the same chart.
By mapping a 9-day moving average (MA) on the RSI and CMF indicators we can see that when the indicators cross down or up through the MA we have a strong confirmation. This helps with recognizing a new wave pattern sooner, rather than retrospectively.
What's Next
I expect in the next few weeks we will see a corrective wave emerge, which will be signaled by a MA crossover of RSI & CMF. But until stocks have any competition from Bonds/Treasuries, the market will continue to move up. The only caveat is a macroeconomic disaster, for example, the pending crypto market collapses, which will send shock waves through the financial markets, but again, stocks will eventually emerge victoriously.
Note
Hi everyone, the application of Elliott wave is extremely subjective, but I believe can be used as a rough guide in longer-term timeframes. Everyone who tries to map Elliott waves will get a different view and have a different opinion.Please note these quotes from famous technical analysts.
Benoit Mandelbrot has questioned whether Elliott waves can predict financial markets:
But Wave prediction is a very uncertain business. It is an art to which the subjective judgement of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed.
Technical analyst David Aronson wrote:[24]
The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.
Note
Wave 3 DiscussionThere are numerous comments on the length of wave 3 which I can fully understand. My take on this application of Elliott Wave in a short-term timeframe in times of volatility and market panic, is that it is not the length of the wave in time, it is the length of the wave in % gains per day of the wave.
Impulse 1 % Gain # days daily % gain
Wave 1 32 24 1.33
Wave 3 18 15 1.20
Wave 5 19 48 0.40
Impulse 2 % Gain # days daily % gain
Wave 1 22 73 0.30
Wave 3 13.7 45 0.31
Wave 5 11 95 0.12
In both of these impulse waves (by daily percent gain), wave 5 is the shortest and wave 3 is the longest or close.
During this time when the psychology of the market was influenced more by Monetary policy and government, and not by the natural market cycle of commodity prices, corporate earnings, and negative bond yields, I believe this is a new approach.
Let's have a constructive discussion.
Barry D. Moore CFTe Financial Technician
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