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Question for people using Elliot Wave

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September 28, 2012 – Comments (13)

Recently I met a trader who is trying to train me to help manage his portfolio, but he wants me to learn elliot wave.

 

I have made a blog like this before, and I have asked many people before, and I never seem to understand the answer.

 I just read this line in the book, and it confuses me to no end, and has forever.

 

"The market decline in the middle box shows everyone is on the same side of the market".

 

How is that possible?  If everybody was on the sme side the market, no trades would take place.  Every sell needs a buy to match it, otherwise the price would not appear on the tape.  My trader friend said "price does not represent buyers and sellers, it represents the progression of the price towards supply equaling demand".

 

This also makes no sense.  If at $55, there was 1 million sell orders, and no buy orders, then the price would keep going down until there was 1 million buyers at a certain price level, where the trade would take place.

 

So how could everybody be on the same side of the market?  It is hurting my brain 

13 Comments – Post Your Own

#1) On September 28, 2012 at 6:06 PM, valuemoney (99.99) wrote:

Maybe they mean the market has more sellers than buyers that is why the market is going down. The side everyone is on is the selling side that is why the price is going down. If only one buyer steps in you still have a trade. That is why at the bottom you will always see high volume. It isnt EVERYBODY is on the same side of the trade it is MOST.

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#2) On September 28, 2012 at 6:20 PM, valuemoney (99.99) wrote:

 My trader friend said "price does not represent buyers and sellers, it represents the progression of the price towards supply equaling demand".

I would say price DOES represent buyers and sellers. This part your thinking is correct. If a trade does take place you are right there has to be a buyer and a seller plus an agreed on price REPRESENTING each which turns out to be the trade and the quote on the tape at that monent in time. Price is the ONLY thing that represents both at the same time.

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#3) On September 28, 2012 at 6:42 PM, Mega (99.96) wrote:

I'd suggest getting really high before looking at the chart. That should help put you in the Elliot Wave frame of mind.

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#4) On September 28, 2012 at 7:04 PM, valuemoney (99.99) wrote:

Hah, I don't even know what Elliot Wave is and never have even heard of it! I was just commenting on the general statements made. Getting really high before looking at anything always helps! :)

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#5) On September 28, 2012 at 7:05 PM, valuemoney (99.99) wrote:

Hah, I don't even know what Elliot Wave is and never have even heard of it! I was just commenting on the general statements made. Getting really high before looking at anything always helps! :)

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#6) On September 28, 2012 at 7:39 PM, TMFBlacknGold (98.64) wrote:

I'm pretty sure that just has to do with market sentiment (in context of the Elliot Wave Principle). So, the beginning of a head and shoulders pattern for example.

Everyone has their ways of doing things, but to me technical analysis is just fitting a model to the data and making the mistake that the model can be used to predict the market. However, once an unknown variable comes along - or one that is deemed "impossible/unlikely" (read: 2008-2009) and outside of the tolerance of the equation - the model is garbage. Yet without fail, people just scoop up the data from these events and throw them into a new set of equations until one fits. Can we forget so quickly?

Seems silly to me. 

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#7) On September 28, 2012 at 10:27 PM, Valyooo (99.40) wrote:

Megashort,

 

Are you serious?  Cuz I was actually thinking that... 

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#8) On September 28, 2012 at 10:28 PM, Valyooo (99.40) wrote:

Elliot wave predicted the housing market collapse, it is not a game of probabilities.  It is not an equation either.

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#9) On September 29, 2012 at 10:19 AM, TSIF (99.96) wrote:

Elliot Wave predicted the housing market crash?????  Seriously...is that why many of the Elliot Wave proponents disappeared???  They're rich now???

BlacknGold is quite correct.  Elliot Wave is a sentiment meter.   In most cases it is self fulfilling, when it does appear to work. Anyone predicting a downward Market using Elliot Wave is mostly playing "trends" and wishful thinking.

We are in a period of high Beta with Catalysts on the horizon. Techinical Analsyis currently is a valuable tool, (in relationship with Fundamentals), because much of the market is "trading" and not looking for long positions.  Computer Trading, Day Trading, shorts, short covering, volitility, all play together and if may people are using techinicals then they too will become a self fulfilling prophecy.

Your client is a "trader", not a long investor. If he wants you to learn Elliot then either he believes in it as a tool, or believes that enough others believe in it that it has value.  I think it does have some value when used in short ranges on a broader market. I think it has minimal usefulness when applied against a particular stock.  As BlacknGold indicated, their are too many catalysts that can upset the "market mood".

Sentiment, itself can be a powerful tool, Elliot is one way to measure it, but there are other ways that might not need you to be stoned to bring some lines into a piece of artwork!!!

 

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#10) On September 29, 2012 at 10:32 AM, TSIF (99.96) wrote:

Everyone is on the same side of the trade, does mean in general.  There was a question on my ZLC pitch from a short wondering if he should cover. I pointed him out the volume trail to him and it's a good example of what you are asking.

Start on August 3rd and work up when there were volume days that were 1/4th of normal. As volume starts to increase up to the Millon share a day or 2x norm, the price rises rapidly. Toss some 4x norm days in and in a few weeks the price is up 100%.  Did Zales value double in two weeks.  Well on paper it did.  An analyst upgrade, a smaller "loss", but did it double in potential or value. I'd say no, yet the trade was "buy".  It broke out of it's 50 day and attracted more traders. Where will it end?? I commented that if it breaks $7.05 then we have another upcycle possible, but overall, currently anyone who bought in the last year is on the winning side.  When selling starts profits will be protected.

This is a good example of volume dwindling to near nothing. Few sellers. (Some yes, but few), then the flip to buying. A trader would have been allover this, but there is a limit.  Smart traders get in somewhere in the lower middle when the trade gets defined.  They get out before the collapse. Sometimes they are wrong and get in and out several times. The entire float turned over the last few weeks yet institutional traders and insiders with over 50% of the shares probably traded little if any, meaning many shares traded hands many times.

AS a fundamentalist, or a long, I'd probably shoot this stock, but right now, fundamentals don't matter.  At some point this will likely flip. It may be slowly as it has rebased, or it may be rapidly if sell orders trip due to protective, profit protection, or an analyst trips it down, or a big holder sells into it. Elliot would try to tell you when to flip it. Personally, I'll be watching volume and price action.  Elliot takes too much time and I'd miss the action.

All the trades on the same side can also occur in a more "hidden" manner. Heavy short interest is one way.  Heavy short interest can signal a fall, but if there is a slight uptick in the equity price, short covering can actually cause the share price to spike to even higher levels.

March 9th, 2009 was an oversell. Elliot might help identify the levels it might reach. There were buyers, but predominantly sellers. Maybe that's the type of action Valyhoo means.

ValueMoney, I think you do a good job answering the questions without asking Elliot!!! ;)

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#11) On September 29, 2012 at 11:11 PM, mamothJin (< 20) wrote:

thousands people count wave,and there are thousands results.

Finally,a lucky man will jump out and say"oh,my god,the market matches my wave,i've got the point about Elliot!"

this is what i see in china,all you can do is smiling...

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#12) On October 13, 2012 at 11:57 PM, anchak (99.84) wrote:

Looks like TSIF already did a lengthy explanation.

 He's one of the few guys who I remember to be around the time - when in CAPS - GoodVibe fever was on - circa Feb-Mar 2009. He and I of course became friends - unfortunately lost him on the grid last year  -due to his extreme secrecy and then stopping emails etc. Probably one of the best Elliott Chartists I came across and he introduced me to it ---- well shall I say - to my own chagrin - in 20/20 hindsight.

I did a technical critique of Elliott -- back in Spring/Summer 2009  - possibly still there in my blog list --- if you are inclined read it.

 

But the simple gist of EWT is simple enough

(i) Its practically useless unless used in very short time frames --- but in ST frames - you are trading randomness anyway

But hopefully it wont do too much damage - and be as good or bad - as any other method you choose to adopt

(ii) Its a PERFECT 20/20 Hindsight model - and has rarely any UNIQUE solution ie

at any point in time -- there are usually at least 4 VALID wave counts for the market

(a) ST Bearish

(b) ST Bullish

(c) LT Uber Bullish

(d) and TSF --- ie our beloved friends contra notion - --- everything is going to hell

(e) Most of the time - -- sideways is also a very valid count.

I can't claim to be an expert - but I can hold my own - with any counterexample count --- you want - you name it EWT will support it.

 The only reason to use EWT - is pretty much the reason one of  TSIF and mine - old friend and CAPS beloved Tasty's links -- in terms of a technical study which tested most common TA based techniques to find a statistical signifcance to efficacy over randomness - the ONLY method which had slight above random success - was S&R ( Support and Resistance) -- because there's always -- enough critical mass in the markets trading it.

Blackngold and Mamothjin - comment put together surmise EWT very well.

 

As to your comment about everyone being on the same side - well I think your own and TSIFs ZLC example sums it up nicely.

In your case - for the market to be not 1-sided and balanced - there needs to be instantaneous and marginal demand to absorb the 1 million Sell order - else --- basically the market -- will continue move with that order like a freight train --- stopping only at points to shed pieces of it - as it finds buyers on the way - till it reaches equilibrium point - its not that the market is imbalanced --- its imbalanced during the path traversed till it reaches balanced --- and there's a lot of dark tape and white spaces ( ie gaps) in between - so it would "feel" its only 1 sided.

 

Same in TSIFs example -- in a marginal sense -- very little volume to a simple jump -- which is unidirectional -- can eat up void in no time - because there are no Seller or Sell-orders "in the path" -- while short HAVE TO cover ---- the path to equilibrium is FAST and UP!

 

Hope all of this made sense!

 

 

 

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#13) On October 18, 2012 at 11:02 AM, Momentum21 (87.88) wrote:

I read Prechter's book and found it very interesting but there is a reason you haven't heard from EW folks lately...they all were crushed trying to predict the next "wave" down.

As with any trading theory, while there might be some merit in using it as a strategy, it mostly arms its followers with an unhealthy level of confidence in an outcome occuring. And the end of the road typically happens when all the investment capital is gone.

 

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