Technical Analysis―Elliott Wave Basics

Figure 1. Long-term Elliot Wave analysis posted in 2019 (courtesy: Elliott Wave Trader)

Elliott theorized that public sentiment and mass psychology move in 5 waves within a primary trend and 3 waves within a counter-trend:^[1] 

Once a 1-to-5 wave move in public sentiment has completed, then it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply the natural cycle within the human psyche, and not the operative effect of some form of "news."

 

Elliott Wave Analysis

In [1], Avi Gilburt describes Elliott Wave analysis succinctly in this way:

I have not found any other analysis methodology which provides an understanding of market context which exceeds that of Elliott Wave analysis. Moreover, Elliott Wave analysis does not provide any 100% guarantees. Rather, it provides us with probabilistic expectations based upon the market structure.

For its usefulness, Avi Gilburt further emphasize:

You see, the beauty of Elliott Wave analysis (as enhanced by our Fibonacci Pinball methodology) is not just the accuracy of identifying market turning points as well as precise targets. It is not just in its ability to outline where we are in the larger degree structures, and provide us with market context which is not available through any other methodology.

Finally, the goal of Elliott Wave analysis is to analyze sentiment, not participate in it!

Fibonacci Retracement Levels 

The Fibonacci ratios are derived from the Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on. Here, each number is equal to the sum of the two preceding numbers. Fibonacci ratios are informed by mathematical relationships found in this formula. As a result, they produce the following ratios 23.6%, 38.2%, 50% 61.8%, 78.6%, 100%, and 161.8%.  

The key takeaways of Fibonacci Retracement Levels can be summarized as:^[10]

• Fibonacci retracement levels connect any two points that the trader views as relevant, typically a high point and a low point.
• The percentage levels provided are areas where the price could stall or reverse.
• The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

These Fibonacci ratios and series have been controlling and limited the extent and duration of price trends, irrespective of wars, politics, production indices, the supply of money, general purchasing power, and other generally accepted methods of determining stock values.

Figure 2.  Labeling of self-similar fractal Elliott wave patterns (courtesy: [11])

Figure 3.  Elliott Wave—5 waves within a primary trend, and 3 waves within a corrective trend^[1]

Summary

If you watch video 1 (from 17:07 to 26:30), here are the gist of Elliott Wave analysis (as enhanced by Fibonacci Pinball methodology):

• There are 5 waves within a primary trend, and 3 waves within a corrective trend (see Figure 3)
• The 1st wave starts after a correction is completed
• 5 waves in an uptrend or downtrend looks exactly the same 
• 2nd and 4th waves take different shapes and sizes. Wave 2 pullback was fast and furious to the downside .  Wave 4 pullback will likely be meandering and take a long time.
• Rules of impulse waves^[12]
• Wave 2 may never move beyond the origin of wave 1 (i.e. retrace more than 100% of wave 1)
• Wave 4 may never enter the price territory of wave 1
• Wave 3 may never be the shortest wave
• Impulse waves always subdivide into 5 waves
• Waves 1, 3, and 5 are always 5 waves
• The percentage levels of Fibonacci ratios are areas where the price could stall (i.e., support level) or reverse (i.e., resistance level)
• But, Fibonacci retracement levels should not be relied on exclusively
• 3rd wave is the ideal wave to trade because it is the strongest and the most powerful of all waves
• Once we have waves i / ii in place, it makes trading the rest of waves iii / iv / v relatively easy to prognosticate in the impulse wave structure (referred to as Fibonacci Pinball by Avi)
• 3rd waves themselves have to be comprised of 5 sub-waves, which it helps us to determine how to trade this structure in relatively low risk manner
• Within wave iii (see Figure 3)
• Bottom → 1 normally reaches at 0.382 or 0.618 extension targets
• 1 → 2 normally pull back at 0.500 or 0.618 retracement levels
• 2 → 3 is the strongest move of all and usually reaches 1.000 or 1.236 extension targets 
• 3 → 4 is expected to pull back at 0.618 or 0.764 extension targets 
• If wave 3 reached 1.236 and the pullback broke below 0.764, this is an early indication that, about 70% of the time, the impulse wave up could ultimately fail.
• Ideal trading entry point is at label ii or label 2 within wave iii (see Figure 3)
• Ideal trading exit point is at label iii (e.g., 1.618 extension target)
• iii-iv wave pullback 
• After sub-wave 5 within wave iii reaches 1.382 or 1.618 extension targets, normally it would pullback to 1.000 level
• iv-v wave advance 
• Extension target would be either at 1.764 or 2.000 levels
• Self-similar fractal patterns
• In the direction of trend, waves i / iii / v are comprised of 5 sub-waves each and waves ii / iv are comprised  of 3 sub-waves each

Video 1.  How To Find The Major Turning Points In The Market (YouTube link)

References

1. How To Find The Major Turning Points In The Market with Avi Gilburt
2. Sentiment Speaks: How I Know If I Am Wrong About The Equity Market
3. https://seekingalpha.com/article/4198736-analysis-will-change-way-invest-forever-part-1
4. https://seekingalpha.com/article/4200678-analysis-will-change-way-invest-forever-part-2
5. https://seekingalpha.com/article/4202240-analysis-will-change-way-invest-forever-part-3
6. https://seekingalpha.com/article/4203856-analysis-will-change-way-invest-forever-part-4
7. https://seekingalpha.com/article/4210288-analysis-will-change-way-invest-forever-part-5
8. https://seekingalpha.com/article/4230400-analysis-will-change-way-invest-forever-part-6
9. This is Water
10. Fibonacci Retracement Levels Definition
11. Determining Wave Degree
12. Rules and Guidelines Applicable to All Motive and Corrective Waves

Decoding the Fourth Turning: Why War, Debt, and Social Unrest Loom

Video 1.  The Fourth Turning: Why American 'Crisis' May Last Until 2030 (YouTube link)

Video 2.  The Fourth Turning with Neil Howe on The Macro Show (YouTube link)

Video 3.  Neil Howe: The Fourth Turning Has Arrived (YouTube link)

According to the authors—Strauss and Howe, the Fourth Turning (roughly from 2008 to 2030) is a Crisis. This is an era of destruction, often involving war or revolution, in which institutional life is destroyed and rebuilt in response to a perceived threat to the nation's survival.

09/20/2021 SPX Monthly (source: @InvestingAngles)

As Robert Prechter. noted in a study he published in 2012 on Socionomic theory, proposes that unconscious social mood regulates social actions (including our willingness to buy stocks).

Interestingly, it seems to match approximately the prediction of the Elliott Wave Theory (EWT) which foresees that, after stock market reaches a peak in the year around 2022, it then will go through the a-b-c correction phase.  This correction phase will last roughly from 2022 to 2037.

On 10/02/2022, Avi—an EWT analyst—had commented that:^[12]

One way or another, I am expecting a major bear market to begin and last at least 7-8 years, and potentially as long as 20.

Final Thoughts

Finally, if the authors Strauss and Howe are correct, "maybe" (note: not a prediction) the next debt will be burst by a civil unrest or another war in the future.

Updated (04/08/2020):

Analyst Dales Roberts has claimed that fighting Covid-19 is World War III in his article [2,3].

In a Foreign Policy piece, Nicholas Mulder highlights the way in which nations around the world have gone into wartime mindsets to fight the pandemic, both to control their populations and to mobilize resources and production. He connects the steps being taken today, such as enacting the Defense Production Act and instinctively using debt-financed federal spending to support the embattled citizenry, with those taken during the two world wars of the twentieth century. 

On a CNN report —U.S. Warships Enter Disputed Waters of South China Sea as Tensions With China Escalate, it states that:

• The move comes as a war of words between the United States and China over the coronavirus pandemic intensifies

Video 4.  Elliot Wave and the Kondratiev Wave Together (YouTube link)

References

1. If You Want Trump Out, You Need To Sell Your Stocks
2. Fighting COVID-19 is World War 3 – Weekend Reads.
3. The Reasons Why The Markets Will Go Much, Much Lower From Here
4. The Coronavirus War Economy Will Change the World
5. U.S. Warships Enter Disputed Waters of South China Sea as Tensions With China Escalate
• The move comes as a war of words between the United States and China over the coronavirus pandemic intensifies.
6. Kiril Sokoloff: ‘There will have to be massive debt relief’
• In an interview with Rana Foroohar, the famous Wall Street strategist Kiril Sokoloff mentioned this book "The Fourth Turning" which he described as a very prophetic book.  
7. "Losing The Bottom": Market Capitulates On The Idea That Normalization Is Ever Again Possible
• This is also the reason why we remain steadfastly in the corner of hard assets as a world in which the only backstop of economic, monetary, political and social stability is accelerating dilution of fiat, means that currency collapse is only a matter of time.
8. Why the US risks a new epidemic of violence (ft.com)
9. The Changing World Order - Where We Are by Ray Dalio
10. 10 "Big" Things For Stocks In The Coming Decade 
11. What Will Not Change
12. Sentiment Speaks: Market Approaching A Potentially Major Bottom (10/02/2022)