ANSWER:

Many people believe Wave theory allows the skilled analyst to predict market action at any junction on any time frame, believing it is just a matter of spending the required time to determine current structure. Unfortunately, even the best wave analyst cannot specifically predict what a market will do all the time. There are times when wave structure is clear and times when it is not. 

Structural clarity is highest during the early and late stages of impulsive patterns (i.e., wave-1 or wave-5) and the early and late stages of most corrective patterns (i.e., wave-a, wave-c of a Flat or a Zigzag and wave-e of a Triangle). 

Structural clarity is lowest near the center of any wave pattern (i.e., wave-3 of an impulsion, wave-b of a Flat or Zigzag, wave-c of a Triangle, wave-d of a Diametric and wave-e of a Symmetrical).

To understand why, imagine you are driving a car from Los Angeles to New York City. The rules are you must stay within the boundaries of the United States, you cannot backtrack (i.e, you cannot go West), but at each juncture in the highway, you can take whatever route you choose. When first embarking, there would be a limited number of routes out of California, but the further you move out of the state, the more branches in the road you could take. By the time you reach the middle of America, you could be at almost any point in any number of states from the northern to southern end of the continent. As you pass the center of America, the number of available routes to reach your destination would begin to diminish. The closer you get to New York City, the fewer and fewer choices you have. 

Wave theory works much the same way, which is why market action can be predicted so specifically (using NEoWave concepts) during the early and late stages of pattern development. As a market moves away from its start, near its halfway point, the number of structural possibilities is at its greatest. As the market continues its journey and approaches the end of its development, the number of possibilities begins to diminish, eventually returning to one. 

As a result of the above realities of wave theory, during the beginning or end of patterns, forecasts can be very specific and accurate. Toward the center of any formation, the analyst must refrain from making specific forecasts and speak only in general terms (for example, “the trend is up”), but will not be able to predict specifically how it will get there.

ANSWER:

Most wave analysts do not appreciate the impact complexity (or the lack thereof) has on accurate wave analysis. About 20 years ago (at 26), I was in New York on my first PR tour, to make an appearance on CNN (the youngest guy ever to appear on their financial news show, I think). While in New York, I visited the office of a professional Elliott Wave analyst. On his wall I saw a 10-foot long, daily plot of the Dow Jones Industrial Average kept up-to-date by hand each day (that’s the way it was back then). The second I saw that chart I thought “this professional, highly-paid analyst doesn’t understand wave theory.” 

In nature, every living thing has a certain temperature range in which it can exist. If the temperature is too high or too low, the organism cannot function. When it comes to nutrients, too much or two little can be deadly – survival depends on a delicate balance. When it comes to proper NEoWave analysis, too much or too little complexity will seriously impact accurate analysis. 

To determine complexity, you don’t want to count bars, you want to count monowaves (see MEW, page 2-2). Too avoid the subjectivity possible when too many monowaves are present, and the difficulty of arriving at any decision when too few monowaves are visible, the ideal number of monowaves to produce the most accurate analysis is 55 (a Fibonacci number). The minimum of monowaves present should be 34 and the maximum 89. If the chart you are analyzing contains more than 89 monowaves, or less than 34, your personal beliefs and emotions can unconsciously impact your assessments. Therefore, no matter whether you are analyzing an hourly, daily, weekly or 5-minute chart, once the number of monowaves visible exceeds 89, move to the next higher time frame to gain perspective and reduce the number of monowaves being analyzed on the lower time frame.

ANSWER:

This is a great question sent in by Tseng Yung-Chih (location confidential). The construction of charts, for both wave analysis and trading, should follow a natural progression. For the most part, before 24-hour markets emerged, nearly all generally recognized time frames were approximately 1/5 or 5x’s the size of the next closest (i.e., an hourly chart was approximately 1/5 of a day, a day was 1/5 of a week, a week was approximately 1/5 of a month). For whatever reason, humans seem to like dividing time into 5th’s (a Fibonacci number). 

With the advent of 24-hour markets, an hour is no longer 1/5 of a day, creating a glitch in the “natural order” of things. So, what should one do? For any market that is active nearly 24-hours a day, I recommend dividing the total number of minutes in the trading day by 5. For markets like the E-Mini S&P, which is open 1440 minutes every 24 hours, that yields 288-minutes. 

If doing NEoWave analysis, I would construct a wave chart showing the high and low (plotted in the order they occurred) every 288 minutes; for trading, I would employ a 288-minute bar chart. Dropping down to the next, lower level, you could either maintain a strict 1/5 relationship by using a 58-minute chart, or use its closest, and most popular neighbor, the 60-minute time frame.