Morning Update: Relief Rally Dissected

6 окт. 2022 г.

The worst thing an Elliott Wave analyst can do is convince himself of a wave count to suit his positions or overall analysis, in fear of being wrong. Ray Dalio billionaire investor was recently quoted as saying. “You won’t be successful if you can’t tolerate being wrong”. Let’s first discuss what should happen if my EW count is wrong.

Wrong Thesis

Whether I’m right or wrong is to be determined. In either scenario it appears to complete this move off the recent Monday low we MAY need one slighter poke higher. That would be a cleaner 5-wave structure. A corrective retrace of some magnitude in the form of an “abc” and then an impulsive move through the high we’re to strike today (if not completed already). That would be a sign to me to re-examine my count for possible biases because price is acting like it put in a bottom on October 3. I must consider that a strong possibly then. That’s why if we do get a poke higher today and retreat from there, any move past that high is my stop out. I do not need a clearer sign than that to re-examine my analysis. I’m not going to be hard headed. But there’s still a lot work to do to prove my count wrong that is why I still am in my short position of October 3950 EOM calls. So those are the clear parameters to adopt the wrong thesis. One side-note to add, I sold these options when the SP futures were at 3709 and suffice to say the trade has gone against me. The trade-drawdown is now is as follows:

Buying Power Required to place trade: -5 contracts = $56,000

Premium Gained = $4673

Total = $60,673

Price to buy back today = $10,202 /$60,673 = 16.81% Trade Drawdown

Even though price is still far below my strike my drawdown has not exploded from Monday afternoon due to time deterioration. This is why I like to be a seller versus a buyer. I’ve mentioned that before. But enough inside baseball.



Correct Thesis

Elliott’s principles are based on rules. His research stated that a markets' price moves in repeating patterns he referred to as waves. He also concluded that when you dissect each of the larger degree patterns, the minute patterns should also repeat. These repeating patterns of varying degrees are mathematical fractals. Meaning they are repeating patterns or shapes.

The above chart is a 15 minute chart of the price action in the SP Futures since September 28. It is this series of patterns that have been giving me the most trouble. Indulge me for a moment.

The main controversy that surrounds Elliott’s work is that the labeling of waves is really an interpretation of the analyst. Therefore, it’s common for Elliottitons of varying experience to mislabel charts in an attempt to understand what pattern it is they’re analyzing. Maybe they are on the wrong side of the market and they’ve allowed their biases to enter the analytical picture. I will admit I am not immune to this, nor do I believe any Elliotition is. That is why it is a form of probabilistic analysis (Hence Elliott Wave Theory) and not an academic law.

Nonetheless, when I’m stumped. I look at the smaller degree fractals for potential answers. The above chart is the only way I can interpret what is going on within these latest series of price actions in the SP Futures. The rally off the 9/28 low of 3613 appears to be a 5-wave structure (labeled in BLUE). After that price moves below the 3613 area is what appears to be a 3-wave decline which ended October 3. This can be explained by being a B wave or the beginning of a diagonal. However, the current pattern we have is shaping out to be a 5-wave structure. This can be explained by either being a C wave or an impulsive start to a new trend of varying timeframes. Now some Elliotitions may read this and say a B wave should not exceed the A waves high or low. My answer is, in the real world, this has been happening far more and becoming more common than when Elliott first conceived his principles. (The Covid-19 low of 2020 was such a pattern) Without looking at a pattern, if you ask any Elliotitiion was is a (5,3,5)? Their answer will be an “ABC zig zag”. I prefer the simple over the complicated as my followers know, so this is the most rational logical explanation I can provide for the price action of the last week. So how does price prove my thesis correct. If my work shared with you today is correct, then I anticipate (maybe after OMH labeled in blue) price would start to descend lower and that pattern will be impulsive and take out 3572. The key word here is impulsive. This would be a 5-wave structure (not a 3-wave structure) and would trade below the October 3rd low of 3572. Our first clue would be a trade below 3758 and then immediately below yesterday’s low of 3733 that we will not get OMH. From there we track a 5-wave pattern that should conclude at new lows.

One last thing before I conclude todays Morning Update. The Tier-1 Crypto currency patterns have clearly been in a wait and see mode for unusually long period of time. I have been calling for new lows for but their relentless consolidations near local lows have undoubtedly been frustrating. The above chart, if proven correct, could be the catalyst to get Tier-1 Crypto falling in the manner I have been waiting for. That just a speculation on my part. Let's see what today brings us.

Best to all,

Chris