ANSWER:

This is an issue I have grappled with for 23 years, over which time I have come to realize the answer depends on the market sector. It also depends on whether your goal is a market forecast or a profitable, low-risk trade.

The oldest futures markets (those in the agricultural sector) pose the most serious “translation” problem for the futures trader. The cash market may bare little resemblance to the futures contract, making wave analysis of cash structure nearly useless for forecasting futures prices. Additionally, if you have a position and don`t liquidate your contract soon enough, you may have to take delivery of a pile of pork bellies. The new kid on the block (Forex) is very popular because of its simplicity – no expiration date, no translation issue (the contract you trade is cash based), plus it settles in cash (nothing to deliver).

If your goal is to forecast an agricultural market, I would use the nearest futures contract on all time frames. If your goal is to profitably trade an agricultural market, I would limit the time frame followed to Weekly (or smaller) and analyze the actual contract you are trading.

If your goal is to forecast metals (Gold, Silver, Copper, etc.), natural resources (Crude Oil, Gas), stock indexes (S&P, Nasdaq, etc.) or futures based currency markets, I would use the cash market on all time frames. For real-time trading and stop placement I would use the actual futures contract on Weekly (and smaller) charts and the nearest futures on a Monthly (or larger) time frame.

ANSWER:

This question, asked by Ahmad Pesnani, is important for those trading (and applying wave theory to) equities. No matter which of the above three events occurs, it is known well in advance, giving investors plenty of time to contemplate, calculate and plan for their impact. Lacking the unexpected impact and surprise of an event such as hurricane Katrina, dividends and interest payments simply become part of the psychological fabric of a stock and should have no impact on wave structure.

Regarding stock splits, because exchanges retroactively adjust and connect historical prices for a stock to the new price level, stock splits also have no impact on wave structure. Therefore, when applying wave theory to equities, I would ignore news regarding dividends, interest payments and stock splits and simply apply all NEoWave rules as you would to any other market. 

ANSWER:

A common mistake made by wave practitioners is that of starting wave counts from the lowest low or highest high of a market advance or decline (respectively). Probably due to the fact price lows and highs are easy to identify, most simply assume wave counts begin there. Even though the greatest financial reward or damage does occur at price extremes, Wave theory is the quantification and structuralization of mass psychology. Unfortunately, periods of pessimism and euphoria rarely conveniently peak at price tops and bottoms.

To make sure you are beginning your counts at the correct starting points, it is important you observe the behavior of price action near highs and lows. If the initial rally (off a major low) or decline (off a major high) is retraced more than 61.8%, it is nearly certain the new opposing trend will begin after that major low or high. In starting a new trend, it is nearly always required (except following an Expanding Triangle) that the new trend move further and faster than any previous correction of the previous trend. For example, if the S&P is topping and the first decline off the high is retraced 80%, you know the conclusion of the advancing wave structure is not over. As long as a new high is not made, the last label of the advance (probably wave-5 or maybe wave-c) will be placed to the right of the highest high. When the psychology has run its course and the uptrend is over, a decline larger and faster than any corrective decline during the advance must occur to start the new downtrend.