Elliott Expectations
Yesterday I said that we had reached a logical level for a pullback. Actually I was anticipating an A-B-C pullback from the closing level followed by another five wave rally. Correct on the pullback — wrong on the rest. The “rest” was based on an Elliott Wave concept.
I no longer trade Elliott Waves, although many of the setups I use are based on them. I watch the patterns form and take signals from Fibs and trendlines if they match the patterns, but I don’t pretend to actually trade the waves themselves.
For those that haven’t studied Elliott, a reversal that starts as a five wave pattern (marked in yellow numbers between the magenta “X” and “A”) will usually have a pullback A-B-C (from magenta “A” to “B”) and then continue to make new highs for the move.
When Elliott Waves work as advertised, they are amazingly accurate. But when they don’t fulfill their promise I find that they have given me a strong directional mindset, and I lose more money when I’m wrong than if I just trade Fibs, trendlines, and chart patterns.
So instead of the rally I was expecting we ended up with an inside day. Since we didn’t exceed the 162% level I marked at yesterday’s close, my rally bias is no longer in effect. But you’ll see from the chart that some good setups still appeared.
Much of my knowledge of Fibonacci came from studying Elliott, and I recommend that traders at least have a general idea of the structure of impulse waves. I’ve included a link below to the most understandable of the many books on Elliott Wave.
Robert Prechter’s Elliott Wave Principle