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ELLIOTT WAVE OUTLOOK - S&P AND GOLDBy Peter Goodburn | Copyright © 2012 Use of Ratio & ProportionR.N. Elliott (1871-1948) developed his theories of repetitive pattern development of the stock market after the dramatic events of Wall Street during its collapse between 1929-1932 that led to the Great Depression. He was inspired by Robert Rhea’s book entitled Dow Theory and in the fourteen years that were to follow, completed a detailed, methodical analysis of price behaviour that was to eventually distil into a comprehensive and exact method of pattern recognition from which the seemingly chaotic activity of the markets could be viewed in an orderly manner. Elliott introduced the investing community with two underlying aspects of his methodology that were the driving forces of the Wave Principle – and these later, inadvertently created two branches of discipline that were to direct the course of its application by successive practitioners in the decades that followed. The first is derived from ‘human activities’ that develop from our social-economic processes commonly referred to as the mass-psychology of market behaviour. The second relates to the study of numerology and geometry, how its governing laws of measurement and form manifest in the creation of ‘waves’ and ‘patterns’ with regular occurrence. This raises the question of ‘cause’ and ‘effect’ – which discipline brings us closer to the underlying cause of price development? It seems the psychology/socionomic aspect has taken precedence since the theory has been popularised, particularly during the last twenty-five years or so. Despite this, Elliott’s original work revealed the ‘causation’ of price-development in his definitive work ‘Natures Law – the Secret of the Universe’ (1946) where he devoted many passages to numerology through the Fibonacci Summation Series and geometry through the philosophies of Pythagoras. After Elliott’s death in 1948, one of his successors, Hamilton Bolton stated that wave form takes precedence over ratio/proportion analysis and this has generally been echoed by others since, although it seems this is because very little research on its potential has been published during the last twenty or so years. The use of Fibonacci price ratios (fib-price-ratios) is nothing new to Elliott Wave practitioners, but it has mostly been applied in a very basic and rudimentary way. I rather consider ratio and proportion, pattern and form as the two sides of the same coin – one cannot exist without the other – neither is dependent nor independent but instead co-existing as interdependency. Without its use, it is possible to construct a wave count around whatever ‘whim’ or ‘fancy’ that fits the subjective personal desires of the analyst. But including it, this increases the probability of a concise and objective approach to successful forecasting. S&P and Gold ForecastsS&P 500 - When applying Fibonacci-Price-Ratios (fib-price-ratios) to any analysis of a market, we begin by constructing stringent measuring tests to the price data and across several differing degrees of trend – it’s generally a top-down approach, beginning with the long-term data first, then successively lower. Each pattern retains certain key fib-price-ratio measurements that recur over and over again. One aspect that is also important is to apply fib-price-ratio measurements to the data in log-scale through all degrees of trend. Over the last fifteen years, I have collected and archived several hundred examples of these and established a set of guideline measurements to work from. An example of this is shown in fig #1. The S&P 500 was expected to decline last year into a counter-trend pattern – this was empirically tested in the manner mentioned above, through various degrees of trend. Even before the decline began, our analysis expected a deep counter-trend corrective decline based on the measuring of the preceding advance – this was going to be a big one. As the price data began to unfold, it became clear that it would unfold into an expanding flat pattern, labelled (A)-(B)-(C) and subdividing into a 3-3-5 sequence. The starting point of measurement is always wave (A), in this case unfolding between 1344.07 to 1249.05 (Feb.-March ’10). In order to project the conclusion for wave (B), three most common fib-price-ratios would be used to extend wave (A) by either, 14.58%, 23.6% or 38.2% - these will encompass about 80% of all (B) waves is such patterns. A fib. 23.6% extension projected to 1367.53 with the actual high recorded to 1370.58. In common expanding flat patterns, wave (C) can be projected to its conclusion by using the same ratios – to determine which one would finalise the pattern, an overlay of Fibonacci retracement levels of the preceding upswing would be added to search for a convergence. In this particular example, we realised wave (C) would extend beyond the common measurements because of its location within this aggregate/larger pattern. This meant extending wave (B) by a fib. 161.8% ratio and this projected the low for wave (C) to 1074.82. As wave (C) began to unfold, we were able to add another fib-price-ratio to the developing five wave impulse pattern to test for convergence levels. In any five wave expanding-impulse (not a diagonal-impulse) pattern, one of the most common ratios used to determine the completion of the fifth wave is to measure this unfolding by a fib. 61.8% (correlative/correlation) ratio of the first-third waves, i.e. 1370.58-1101.54 x 61.8% - 1230.71. This measured the terminal 5th wave to 1075.24. A convergence of this kind is very powerful, and acts like a magnet, attracting the price to it. It is the ultimate in proportion, a natural law that states price action unfolds through the points of least resistance. The actual low was recorded on the 4th October 2011 at 1074.77.
At the low of 1074.77 last October, this decline was labelled as ending one of two ongoing counts – the first as primary wave 2 of a larger five wave expanding-impulse pattern in progress as cycle wave C that began from 1010.91 (June ’10) – very bullish. The second as primary wave A of a larger complex corrective pattern labelled cycle wave B and acting as the counter-trend to the preceding advance from the March ’09 low. As the progress of the Oct.11 upswing unfolded, an interim high formed later that month to 1292.66. From this, another set of fib-price-ratio measurements were taken – see fig #2. We wanted to test this upswing as part of primary wave B of a complex expanding flat corrective pattern. The first measurement was to extend the 1074.77-1292.66 advance by a fib. 61.8% ratio and this projected a potential high for wave C to 1448.87. The second extended the entirety of primary wave A’s preceding decline between 1370.58-1074.77 to the upside by a the common three ratios – the 14.58% level to 1420.04 and 23.6% to 1451.52. The latter formed a convergence and so for the last several months, we have been expecting a test to this price area and have waited to see its reaction – whether it would accelerate higher to confirm a larger 3rd wave in progress, very bullish, or alternatively stage price-rejection and a subsequent reversal signature that isolates the entire advance from 1074.77 as a zig zag pattern – very bearish. Earlier this month, prices tested the minimum 14.58% extension level at 1422.38 and have subsequently triggered a reversal signature basis prices breaking below the preceding reaction lows of early March ’12. This provides an early warning of reversal. Isolating a zig zag advance from the Oct.’11 low labels this upswing as ending primary wave B of a much larger expanding flat pattern with wave C downside projections until Oct.’12 towards 979.45 (40.68 month cycle). This is measured by extending primary wave A by a fib. 38.2% ratio and this converges with the fib. 50% retracement support of cycle wave A’s advance that began from the March ’09 low (666.79-1422.38 – log scale!). Gold - There has been a lot of forecasts published on gold in recent weeks, perhaps more bears emerging as analysts downgrade their expectations perhaps due to the fact that prices have remained below last year’s peak of 1921.50 (LBMA – spot bullion). Despite this, the Elliott Wave Principle (EWP) combined with Ratio & Proportion studies determine the longer-term uptrend as intact. The decline from the Sep.’11 high of 1921.50 is identified as a counter-trend pattern that ended intermediate wave (4) at the late Dec.’11 low of 1522.48 – see fig #3. Since then, prices rose rapidly to the late Feb.’12 high of 1791.16 whilst unfolding into a five wave expanding-impulse pattern. Evidence of a five wave impulse is usually enough to confirm the larger uptrend has resumed, but this could also become the final sequence of a horizontal (running) flat pattern with bearish implications for the next several months. How can these two scenarios be separated? The subsequent decline revealed its true intensions – the initial decline to 1688.56 was extended by a fib. 61.8% ratio to test as a counter-trend zig zag pattern. This projected wave ‘C’ of the zig zag to 1628.11 – the actual low recorded to 1628.16! Furthermore, wave ‘C’ of this zig zag unfolded into an ending-diagonal pattern, a wedge-shaped formation that confirms this as the completion of the zig zag without any bearish alternative. Prices have since advanced into three waves, then declined into three waves to 1612.26 that together confirms a counter-trend pattern is set to extend the original single zig zag decline from 1791.16 to 1628.16 into a double pattern with price projections to 1551.86 sometime during the next few months. The secondary zig zag decline is measured so that it unfolds by a fib. 100% equality ratio of the first whilst more critically, ending above the Dec.’11 low. Fibonacci ratio and proportion studies remain an important aspect of Elliott Wave and remains an effect tool in the process of ‘proofing’ and ‘determining’ a successful forecast. Sincerely, Peter Goodburn Peter Goodburn is the senior Elliott Wave analyst at WaveTrack International and is the author of the monthly institutional Elliott Wave-Navigator report and the bi-weekly private client Elliott Wave-Compass report. Details at www.wavetrack.com END | FIN | ENDE |
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