Sunday, 27 May 2012

Rule of overlapping waves-Dow Jones

Things haven't changed much in Fridays session and nor bullish nor bearish scenarios got any stronger. This time we turn to DJI index and focus on the rule of overlapping waves of elliott wave theory. According to elliott wave theory, in an impulsive move, wave 4 should not overlap wave 1. Putting theory into action, we observe that DJI came very close. If the wave count depicted in the chart is the correct one, then we can assume that we won't see new lows, rather start a new upward move to new highs.
 Taking a closer look at the 60m chart, we observe that we can count 5 waves down from the highs within a channel and that the index has moved outside of the downward sloping channel. Bearish or bullish, whatever view you have, if you work with elliott waves you know that after 5 waves there comes a countermove. In this case, 5 waves down were part of a larger 3 wave correction and more specifically of wave C. If the next upward movement is in 3 waves, then the bearish scenario will strengthen. If we see 5 waves up we should expect 3 waves down and 5 more waves up. However this might prove to simplistic in real life and trading. Text book wave patterns do not happen very often and are not that clear in real life. However keeping things simple in counting waves is my major concern when trading with elliott waves.

Concluding we know what stop the bulls have after the recent 5 waves up (May 23rd low). Bear should wait 3 waves up before shorting again and cover positions until the low is broken.

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