Value of Perfect Information

When I first started trying to apply Elliott Wave Analysis to my charts and trading I floundered all over the place. I tried to measure every wiggle as a wave taking it down to a 1 min chart all the way up. In the end, the market did whatever it was going to do, and I was left staring at the screen as the market continued to defy the waves I was applying to it. I felt like if I was ever going to be a successful Elliott Wave chartist, then I needed to come up with some objective ways to measure the market’s price action. Here is what I came up with:

• 8/34 Simple Moving Averages
• RSI Indicator
• Fibonacci Retracements
• Price Channels
• Time Frames

When it is all said and done, this where I begin with my charts. Certainly there are times where the market moves so quickly that it might be hard to catch a particular subdivision of a wave on a chart. This is how I apply the above tools.

8/34 Simple Moving Averages

I found as I watched the market that the price action tended to touch and go the 8/34 SMAs in a way that was very similar to the wave patterns I was looking for. You’ll notice that in the above chart I use a close below the 8 SMA to denote a wave. If price closes below the 8 and not the 34, then that generally denotes a subdivision to the wave. Sometimes it is not a perfect counting system, but it has benefited me greatly.

RSI(5)

I use the RSI Indicator to help me measure oversold and overbought areas in the market. Since a price wave should create an overbought/oversold condition, I use this to help confirm my wave counts with the moving averages. Often times the corrective waves don’t make it all the way to the oversold area (<30), so that is important to watch for. I added my price wave counts to the RSI Indicator, so you can see how I can count the waves with the RSI too.

Fibonacci Retracements / Extentions and Wave Parity

There are common relationships between waves that I use to start to identify potential price targets. The most common relationships I use (in order of importance) are:

• wave c = a
• wave c = a * .786
• wave c = a * .618
• wave c = a * .382
• wave c = a * .500
• and the same relationships between waves 1 & 5

I use the same Fibonacci ratios for key retracement (in order of importance) areas:

• .786
• .681
• .500
• .382
• .236

Fibonacci ratios cannot be used in a vacuum. I like to put them on the chart and then look at key support and resistance areas along with trend channels. Where more than one line up is where I put likely targets.

Time Frames

One thing that I have had to do as I’ve tried to chart the waves is realize that sometimes it is easier to take a top down approach instead of a bottom up approach. I like to use the 5/15/60 minute time frames to do my short-term charting. However, in the long run, I always will use a higher time frame chart over a shorter time frame chart. Sometimes the noise from the market can make the waves to hard to read at the shorter time frames.

Summary

Charting Elliott Waves is not an easy endeavor. It takes practice to apply the Elliott Wave rules and the guidelines that are outlined in Robert Prechter’s book Elliott Wave Principle. Using some objective price indicators allows me to focus on the patterns and not worry about measuring every wiggle. Practice with your own charts and see if you can’t find some ways to bring some objectivity to an otherwise subjective art!

[tags]Elliott Wave, Technical analysis, RSI Indicator, RSI, Robert Precther, Elliott Wave Principles, stock market, Moving Averages, Price Channels, charts, SPX 500, S&P 500, Fibonacci Retracement, Fibonacci[/tags]

Tags: Charts, Elliott Wave, Fibonacci, Fibonacci Retracement, Moving Averages, Price channels, Robert Precther, RSI, RSI Indicator, S&P 500, SPX 500, Stock market, Technical analysis

Categories: Charts ,Exclusive ,Markets

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