ANSWER:

This is an extremely important question sent in by an anonymous, European client. Nearly everyone who studies wave theory is tempted to start from the smallest time frame and work their way up, as if they were constructing a building. Unfortunately, as is usually the case with markets, whatever feels right is usually wrong. 

Until a larger structure is nearing completion, structure on smaller time frames can be ambiguous, presenting multiple scenarios or leaving the analyst with no logical options. Once a larger pattern approaches conclusion, then smaller structure will begin to make sense, but only in the context of the larger scenario. When a larger pattern appears to be concluding, you can bet the smaller time frame will find ways to stretch out its conclusion in ways never imagined. That is why it always takes a market longer to top or bottom than anyone expects.

So, to answer the question, it is never appropriate to build wave counts from the bottom up, but should always be started from the longest time frame possible first. For example, as structure on a monthly time frame begins to clear and there is only one viable option, drop down to the weekly time frame, using monthly structure as a guide to constructing your weekly wave count. Once weekly structure begins to clear, drop down to a daily time frame. As daily structure approaches the conclusion of an identifiable pattern, drop down to 1/5 the size of the daily time frame (for 24-hour markets, use a 288 minute chart; for U.S. stocks, use a 78 minute chart [i.e., 6.5 hours divided 5]). Make sure your daily structure guides the design of your intra-day chart. 

ANSWER:

This week I decided to address a question on trading tactics, which was sent in by long-term customer Dennis Lithgow of Arizona. It is an important question for those interested in trading futures markets. In my book, Mastering Elliott Wave, I warned of the dangers of plotting cash prices 24-hours-a-day. The reasoning then (1989), based on observation and fact, was that each country had their own version of a particular market. For example, a Gold futures contract in the U.S. was not the same as a Gold Futures contract in London. In addition, when something new happened say in a U.S. market, you would frequently witness that same behavior when Japan opened and again when London opened (this still happens among the stock exchanges of the world). As a result, plotting cash prices around the clock created choppy looking wave structure that was difficult to decipher and did not appear to obey the rules. 

Now, 16+ years later, with the advent of single-contract markets (such as the E-Mini S&P), which are traded nearly 24-hours-a-day, plus the advent of personal, real-time trading platforms (that allow anyone to trade, any time day or night), 24-hour-plots no longer experience the repetitive behavior of the past and therefore produce valid wave structure. Therefore, when possible (unless you are trading a market that only trades during a particular time zone), I recommend using electronic, 24-hour contracts for all wave counts, stop placement and price targets.

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.