Posted on October 19th, 2009 at 1:35 PM

Whenever folks ask me about Elliott Wave theory, I wonder several things. First, how much do they already know? What is their experience level with Elliott? It's something I really have to establish before moving forward with them. Second is how far down the rabbit hole do they REALLY want to go? I feel like Morpheus in the Matrix asking Neo if he wants to take the Blue pill or the Red pill? The reason behind that subtle fear is that Elliott Wave theory can be a complete MIND TRAP! One can get so caught up in the details that the rest of the world becomes oblivious to them. I've seen Elliot Wave ANALists get so wrapped up in who has the EXACT right wave count that nothing constructive ever gets done. We have to be mindful of this as traders that the tools don't become mere "gadgets" to play and tinker with.

I say all this to preface where we are about to go with the current Elliot Wave counts in the major market indexes. We are going to venture down the rabbit hole a bit, but I don't want to loose anyone down there. We're just going to visit for awhile with the Oracle and see what she has to say, and then it's straight back home to put it into practice. :)

We all know the basics of Elliott Theory, seeing waves move in 3-wave patterns in a correcting market, and 5-wave patterns in a trending market. Slightly under the surface of the major wave counts (circled in red or blue) are the Minor counts within. You see them on your charts, and for the most part, you probably ignore them. There are some guidelines for which they are useful. Deeper Elliott Theory states that in evey EVEN numbered wave, we should see an A-B-C pattern therein. See the Daily chart of the Dow below:

Conversely, in ever ODD numbered wave, we should see a 5-wave sequence. These are pointed out in the next Daily chart of the Dow below:

What I find significant about the 5-wave pattern inside of the current 5 is that it had shown up a few weeks ago when we were at this same price level. However, at that point, we really did not have any resistance to speak of from a MOB level or significant FIB extension level. We were somewhat sitting out in no man's land, only having what we expect to see in the Elliott details, but nothing else to go with it. I was somewhat surprised when we started heading south at that pivot on 9/23/09. But we had a pretty significant move to the down-side the followed. However, our MOB level, that was once supposed to act as RESISTANCE, now came in to act as SUPPORT. (a very intriguing property of the MOB, by the way...don't ever erase your previous MOBs until they are off the chart...they may still come in handy). The same thing happened in the S&P as shown below.

We rallied off that MOB and made a new high this week. This gave us a RECOUNT of the waves within Wave 5, and this new recount is much more exciting to me, and seems to give us much more information. The reason being that we have a new MOB level to use! Taking a MOB off the previous high on 9/23, we get new resistance at our current highs. We now have a Major 5th wave with a completed 5-wave pattern inside, with some kind of resistance. Referencing Duane's blog from a few weeks back on DIVERGENCE we can see that, the 5,35 oscillator for Wave 5 seems to follow the pattern INSIDE of wave 5 better than the 5 itself, pulling back to zero during the small 4, and making a divergent lower high during the small 5.

This looks like, at least in the short term, a counter trending opportunity. I don't know that this is the major down streak beginning on the Weekly, but it is something to pay attention to, especially for those of you who are currently long. This would be an area at the very least to make sure profits are locked in, and stops are tightened up.

Be Prepared!

Nate McCartney

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