Elliott wave and intraday trading

There was some confusion over my use of Elliott Wave theory to examine GDX in a recent post. I'm certainly not an expert in Elliot Wave theory, but I know the basics and these can be a great help in trying to figure out market direction and finding the end of a correction. I do not trade based on Elliott Wave theory, but I do get ready to pull the trigger on a trade when I see the correct patterns developing. Here is a chart I used recently which shows five up waves:






 Here are the basics of Elliott Wave theory:
1) A move in the direction of the main trend consists of five waves (labeled 1 -5 on the chart above)
2) A move against the trend (a correction) consists of three waves, usually designated as A - B - C.
3) Wave three can not be the shortest wave of waves one, three, and five.
4) Wave four can not overlap wave one.
5) Wave two can not go lower than the start of wave one.
6) The waves are fractal, which means each wave can be subdivided into smaller waves and each of them can be divided again into still smaller waves.

On the chart above, wave one is from the bottom up to the number 1 and ends at the number 1, wave two starts at the number 1 and ends at the number 2 and so forth.

Note that the congested area inside the green ellipse can not be designated as waves three and four for two reasons. First, the lower part of the congestion overlaps wave one and violates rule four above. Second, using the top of the congested area as wave three makes wave three too short, violating rule three.

Note how all of the rules are met by the count I have shown and a decline immediately ensued.
Here is a chart of what has happened since the original chart:



 The red number 5 is in the same place as the number 5 on the first chart. Prices declined from the 5 in an A wave, went back up in a B wave and then started down for the C wave.
Remember how I said the waves are fractal? The C wave is shown here divided into five waves with blue numbers.
So why, you ask, did it go up in a sixth wave and down again in a seventh to where the "C?" is?
Once again, the waves are fractal so wave number five is itself dividing into five waves which, combined with the first four waves will look like nine waves down on the chart.
Confusing? Sometimes.
Helpful? Sometimes.
That's why I watch it, but don't trade by it.
Happy trading.

GDX update

After yesterday's big decline GDX has regained about 50% of the loss at today's high, but it appears to lack any real push to the upside. It is normal after a big one day drop to see some consolidation before the market decides which way it will go. It would also be normal to see yesterday's bottom tested with a flag. Declining volume this afternoon is consistent with flag formation, but it will need to go down some more to do it right.
If it forms a small symmetrical triangle, or pennant, this afternoon and breaks up, I would still expect a test of the bottom tomorrow or soon thereafter.




 

Elliott wave theory says that markets move five waves in the direction of the trend, and then three waves opposite the trend for a correction.
Yesterday morning's high was slightly higher than it went four days before and qualifies as the top of a fifth wave in the latest up move. A five wave move suggests that there will be another move to the upside after a three wave decline. Whether or not there has already been an A-B-C, or three wave decline is subject to interpretation.




 

The chart above shows how a three wave down move could have already completed.
There was a quick five wave decline to form the A wave. This was followed by a triangle to form the B wave. A quick move below the low of the triangle could have formed the C wave.
If  this is the case, I would expect a flag to form soon without a new low. If my interpretation is wrong, and that is quite possible, then a new low, below yesterday's low, would complete the three wave down requirement. After that new low there should be a flag forming to start the next move up.
Happy trading.