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Wave Count Test


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June 26 2012

Hello traders. A time ago I received an interesting count from a friend Goncalo Moreira. So I decided to share this with my readers as well. I received many different counts and ideas from readers, and below you will find my view and interpretation and how I would act if this situation would occur in a real-market.

Before I label the waves, I always try to focus on some obvious and simple things:
  • Lets count the structure from the “lowest point to highest point” just in numbers. You will come out with 13. Well, that’s subdivision of a correction/contra trend move like in a zig-zag pattern (5-3-5)
  • Then look at the next most obvious thing-, such as most complex choppy overlapping waves in tight ranges- That’s probably corrective wave then. I believe its wave B placed in the middle of the whole structure.
  • Then at the top of that chart you will see two overlapping waves, which means volume is decreasing, bullish momentum is losing strength, so we suspect market is topping. In fact, that move, at the end has a shape of an ending diagonal pattern. Well if you know EW then you know that an ending diagonal occurs when the preceding move has gone too far too fast. They are found at the termination points of larger patterns, indicating exhaustion of the larger movement. These are reversal patterns.

So if we now put all together, I believe this is a corrective rally called a zig-zag which appears complete, so bears should take control as shown on the picture below. But that is just analysis, well from trading perspective thats a different story! In trading we need to more open-minded (alternations) and be very, very, very patient before pulling a trigger. With this being said, I want that my bias and forecast is confirmed by price before I buy or sell the market. So that, I want to see two things: First impulsive fall from a top that will lock highs in, and second, overlap with wave A to invalidate any bullish wave count possibilities. Only then I would short this market against the top. If I wait on those evidences of confirmation then I may avoid a losing trade, just in case if I am wrong and if market goes straight up. If my analysis was correct, then I will probably miss some potential profit before I  jump into the market. But I have no problem with that. You cannot catch a tick high and a tick low in the market-that would be a gambling then. Have a good day! Grega

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