Adapting to Systemic Dysfunction (part II)

By: Joseph Russo | Tue, Jun 8, 2010
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In part one of this series, we sought to align attributes of the trading and investment process with those of gambling and speculation. We further posited that trading amidst unpredictable and sudden market swings was no different now than it has been throughout any other period in market history.

In part II, we shall explore how we plot course in real time, and afterward, reveal precisely where we believe the Dow resides in Elliott Wave terms.

Charting a Course in Real Time
Manic swings permeate all periods of market history, and as such, should be fully anticipated and quickly reconciled by any chartist worth his or her weight.

The charts herein intend to illustrate exactly how we plot course in real time amid the never-ending succession of swings from optimism to pessimism.

We have extracted the following array of charts and associated commentary from recent publication archives.

Before we proceed, the first essential concept one must grasp is to recognize that nothing and no one can predict with any level of bankable certainty, precisely when, where, or how a market will form its regular succession of key pivotal tops and bottoms.

What one can demand and expect from charting and forecasting analytics is a rather accurate directional roadmap providing an extremely reliable compass from which to ascertain what specific stage of advance or decline any given market may be currently operating under.

CompassIn addition to charts containing legible analysis and notations providing effective visual guides, the evolving plotted course should also contain the following:

An accurate conveyance of information relative to the magnitude and forward looking implication of current market conditions, potential timing of pending terminals of import, along with one or two alternate contingencies in order to account for unknown variables.

Such analytics may also include the continual formation of dynamic price targets, plausible timing of imminent peaks and troughs, the degree of trend governing the market, long-term secular and cyclical analysis, and prospective price paths, which serve to provide advance warning and forward vision as to potential directional shifts of varying magnitude.

Ready, Set, GO
In our first chart, we look at a 60-minute intraday chart of the Dow published after the close on April 26, 2010. The chart below recalls our real time Level-III analysis following the very session in which the Dow printed its most recent pivot high just north of 11,258.

Dow Jones Industrial Average Elliott Wave Count

Bear in mind that beyond its print high of 11,258.01 moving just 12.06-pts beyond 11,245.95, which identified the specific Fibonacci 61.8% retracement level of the entire preceding primary bear market decline, there was no level of certainty that this particular day would definitively mark a pivotal top of import for the industrials.

Having said that, we draw your attention to our preferred and alternate wave counts noted for 26-April. The standing comment box (text highlighted) back on March 24, stated that we were allowing for a 4th wave pullback in the late March/early April period, which would be followed by another push to fresh highs. Just one month later, that is exactly what transpired.

At the time, we had our preferred 4th wave in orange labeled in early April. Note that at this precise terminal location we also had made alternate provisions for this preferred -e- of -4- wave terminal to identify instead, that of a 2nd wave down within a 5-wave impulsive advance. If this alternate contingency proved to be in force, it may well have been the last in ending the entire bull market advance from the March low. We labeled these alternate guides in tan numerals with question marks.

Our alternate tan wave labels had placed the larger 4-wave as occurring a bit earlier as noted on the chart, bottoming precisely at the tail end of March/beginning of April - just as our initial guidance from March 24 had suggested.

At the time, our real time preferred view gave slightly greater weight to the prevailing bullish conditions, in retrospect however; it was our tan alternate contingency count that indeed captured the critical 5th wave terminal high, which occurred on April 26, 2010.

Dow Jones Industrial Average Elliott Wave Count

In addition to conveying urgent foreknowledge of an imminent terminal of import, and identifying two interpretations of its precise progress, one of which nailed it perfectly, the standing comments furnished back on March 24th stated explicitly that although powerful and exciting, sustained vertical moves tend to implode like controlled demolitions when the music inevitably stops.

So, not only had we fully prepared our readership for the timing of a key pivotal high, buy we also set forth the follow-up scenario of a "controlled demolition" that was likely to occur after the market had topped.

Enter the Flash Crash
The now infamous "flash crash" which occurred just eight sessions later on May 6, 2010 proved our visionary statement from March 24 as a most prescient forewarning well in advance of that mind-numbing event.

To sum up this rather small slice of interpretive analytics, we trust there is little doubt remaining as to the proficiency of directional navigation and adequate preparedness derived from high level charting.

Russo on ElliottELLIOTT TERMS: Where are we in the Grand Scheme of things?
As we alluded to in our January 10, 2009 article entitled "Welcome to Supercycle Wave-IV", we maintain that the Dow Jones Industrial Average has entered into an enormous 4th wave decline of Supercycle dimension.

We provided the chart below on June 7, 2007. This was an update to the original, which we had presented back in 2005, which called for a significant market top in 2007 (8)? Need we say again that this is exactly what transpired?

Where do we go from here?
Firstly, a Supercycle decline at such dimension shall contain at least two major bear markets of Cycle dimension with one intervening Cycle degree bull market.

Dow Jones 1896-2040

Unless the recent 2009 low marked all of the first Cycle degree bear phase, we shall continue to assume that the Dow is still in process of forming the first of two Cycle-degree bear market lows.

Secondly, within the context of the smaller Cycle-degree bear, there shall be at least two yet smaller primary degree bear markets accompanied by one intervening primary bull phase.

It is our present view that the first of these two smaller primary bear phases has past at the lows of 2009, with another to follow upon completion of the current primary degree bull market.

Kick it up a notch!In terms of Elliott's nine-degrees of trend, our current wave count projections (shown in the chart below) for the Dow illustrate two central themes.

First and preferred until forthcoming price action dictates otherwise, is that amid the intervening primary bull market in force from the 2009 low, the 26-April pivot high has likely terminated an intermediate (a) wave rally within the context of its larger Primary "B" wave advance.

Secondly and of immediate bearish concern, our first alternate count considers the 26-April high as plausibly terminating all of the intervening Primary bull market phase which spawned from the March 2009 low.

Providing dynamic visual guides to our long-term forecasts
On March 11, 2010, we updated the dynamic chart below for reader presentation as the Dow traded near the 10600 level. It is a weekly line chart of closes, which removes some of the intraweek extremes, and in our view, provides better clarity of developing wave structure.

Bear in mind that in the interest of paid subscribers, we have removed our forward-looking guidance, and have provided only those portions that have already transpired.

Dow weekly line chart

Most notable on our 11-March chart are the highlighted remarks furnished to readership on February 26, 2010.

Following the sudden decline in January of this year, we had been monitoring the plausibility of market cycle low occurring into the April period. Because of the markets rapid recovery and persistent one-way bubble like market conditions, on 26-February 2010, we alerted readers as to the likelihood that the April period might well mark a high pivot rather than a low. As it turned out, that is precisely what took place.

Compass 2More than two months later, the very same chart from above (shown below) illustrates the Dow following our dynamic projected path with phenomenal precision.

For ancillary benefit, we provide readers with frequent updates to a wide range of charts covering varying timeframes. We do so impartially, predicated exclusively upon the evolving price action.

With the exception of a note added on April 6, the updated standing comments posted in our March 12 issue remained fixed through the rendition below, which we published on May 25.

Dow weekly line chart

On March 12, and with notable absence of bias, we stated that given the fresh impulsive highs recently posted by the S&P and NDX, that we had shifted our timing preference envisaging a continued grind higher in the Dow through the April turn period.

The April 6 addendum suggesting that bullish momentum could carry the move up to May proved to be of value considering that the actual print high occurred just four sessions prior to April's close.


The May 25 chart update above shows the Dow plummeting at the precise angle of descent and amplitude envisaged by the March 11 chart preceding it, which accurately projected the timeframe for the April peak, and the pursuant nature of the decline likely to follow.

We trust this exposition illustrating how we chart course in real time has provided readers with a newfound appreciation for charting, technical analysis, and Elliott Wave Theory.

To expect anything beyond the above from a chartist is sheer fantasy. Despite this reality, many of our followers do demand more. For many, plotting a daily course in real time with the level of accuracy depicted herein is simply not enough.

Common demands resonate with questions surrounding specific levels of timing entry and exit orders, when one should buy, when does one sell, how does one trade such charts to their benefit.

Obviously, there are no broad answers to any of these narrow demand based questions. Whether one is aware of it or not, each individual possess a unique set of parameters that drives his or her desire to engage in trade. As such, attempting to arrive at a one-size fits all answer if futile.

Though our in-depth charting protocols provide a complete foundation from which users can easily develop numerous successful trading strategies, many simply lack the wherewithal to define their objectives, develop suitable trading strategies to meet them, and adhere to the disciplines required to execute that strategy.

Driven by such demands, this chartist moves outside the box to deliver the goods. We shall explore this aspect of charting/advisory in part-III of this series.

In part-III, we will explore the chartists (optional) role in providing contextual guidance relative to specific trading and investment objectives commonly held by those trading from the information contained in such charts.

Until then,

Trade Better/Invest Smarter



Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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