Saturday, July 14, 2012

Pushing the Envelope on EW - the Neo-way...

The popularity of Elliott Wave seems to keep growing all the time. Like cycles, it is possibly the promise of predicting an entire structure of market in advance that lures people like me towards it. Once we sight some success in market following a given label, the confidence to label the on-going and the expected activity increases and we get hooked.

Usually once hooked, you are in. Doesn't matter if any forecasts have gone wrong (pretty badly in some cases; for instance, as is well-known, a leading practitioner that people associate closely with EW has been predicting doomsday for US equities and Gold & Silver for last several years). 

After getting enamoured with some of those bombastic forecasts for quite a while, I chanced on neo-wave. The MEW took a while to complete, even with the dreadful 3rd chapter by and large ignored. This and some exposure to neowave literature, has introduced few ideas where I thought that the traditional interpretation may be improved on. These are based on my understanding and may or may not be considered by pure neo-wave (if there is such a construct) followers.

Firstly, the logic that human progress happens in waves of advance and decline is an appealing one. Within this, how do you decide which phase we are in? The neowave answer is that the primary trend is on the side of fastest and largest price action in the given time frame. So for instance if market goes up by say 100 points in two days and falls 120 points in next three days, the trend is up and not down! Ofcourse this needs to be looked at different degrees of time frame. As an extension, a trend can said to be changed if the price action reverses with a move larger and faster than any similar direction (as the reversal) move in the previous phase of the trend. E.g. In the Nifty bear market since 2011, the largest rally was say between 4695-5630 in 1.5 months; The trend change confirmation should come with a larger upmove than this in a shorter time frame.

Second: Continuing with the same logic, an impulse wave should be faster than a corrective one. So if you see a label with 2nd or "B" that takes lesser time than 1 or "A" then probably the labelling is not accurate (In neowave, B taking lesser time is considered acceptable in a triangle). 

Third: Third waves are supposed to be explosive, that usually extend and produce the maximum impact on price (5th waves probably exert more impact on sentiment than in price). But we reduce this to a mechanical rule that they cannot be smallest. And since it is mechanical, we keep finding numerous third wave impulses on any and every chart and on any timeframe. They just wander around and are no longer the "wonders to behold". Be therefore, wary when you see too many 3rd waves not covering major price ground.  And as an extension to this thought, an impulsive third wave which is subsequently completely retraced was probably a part of larger corrective and/or was not a trending impulse in the first place. The neowave mandate is that one of the impulses should extend and one should subdivide (not necessarily the same one)

Fourth: The sub-division within an impulse cannot be corrective in design except in terminal impulses. Though this is in line with simple and basic logic of EW, one sees many impulse counts which donot stand even a simple visual test of impulsion internally.

Fifth: When they do look like impulsions, they lose out by being in perfect channels (can anything in an orderly channel be an impulsion? neowave says probably no..) and the correctives to impulses looking alike with no alteration. Neowave classifies them into double or triple correctives with all similar looking waves being classified as small "X" waves. Similarly the concept of nested 1,2s that are supposed to act as coiled springs in unleashing powerful 3 of 3 of 3 are shown in many orthodox counts wherein larger degree 1 & 2 are smaller than the lower degree ones and subsequently weak 3s are retained. Neowave simply classifies them as channelled correctives. This could be important for the implications on subsequent action.  

Sixth: Most market turning points are not at the highest high or the lowest low. Why? becos, as many would agree, the market sentiment continues to be on the other side a long way after the price has turned. As a classic example, when is the start of the bull phase in Nifty; October 2008 or March 2009? Going by the market sentiment, other global indices etc, it was clearly March 2009 even though it was at a higher low. This logic clears us from highly avoidable patterns such as leading diagonals in 1st wave as propounded by one school of EW thought.

Seventh: Post-Pattern logic: Each structure should give us some post-pattern behaviour, whether it is trend continuation or trend change. A "C" or 5th failure or completion of terminal impulse should produce strong market action the other side. A weak or strong pattern should produce subsequent market action in line with the pattern. If it doesn't then probably we are into something else. Another example being the break of 0-B or 2-4 trendlines. In a heuristic manner, this is also the problem with trading in anticipation with any TA. For confirmation of a signal, you may have to wait. If you wait too much, you may miss the trade. Hence in an anxiety to catch the trade early enough, you go with what appeals to you rather than wait for confirmations. And in EW in particular, post-pattern logic is hardly looked at by most traditional EW practitioners.

Eighth: Apart from (1) and (2) above, Neo-wave proposes certain time and fibonacci relations between different waves, especially in corrective phases. While fibonacci has the logic of nature with it, there may not be any intuitive logic for timing of different corrective waves. The propositions are nevertheless open to empirical testing.

Ninth: Markets are dynamic and self-learning systems with feedback loops. As they evolve and a Principle is widely followed, it is but natural to expect complexity to increase over time. One area in which neowave seems to have done well is to identify such new complexities in the form of different types of triangles, diametrics (7 wave patterns) and symmetricals (9 wave patterns). And there seems to be some intuitive logic for the price and time similarities proposed therein.

Tenth: Many a time orthodox EW counts donot adhere to any rule of proportionality atleast in practice. Large waves are shown alongwith as very small ones at same degree. Neowave specifies a minimum price and/or time level so that a semblence of proportion is maintained.

Lastly, the number of rules in neowave may put off many practitioners, but in practical application, the neowave updates do look flexible. Many a time, they  donot claim clarity on the market positioning but suggest structural confusion and the need to await further developments. Contrast this with the orthodoxy that usually donot have a bother on this count and can propose many alternative counts at same time, all the time!

How the implications can be drastically different may be gauzed by the example that made neowave famous (given in appendix to MEW) wherein it projected a strong market, based on double three running correction in 2nd wave while other analysts were calling for completion of bull phase and a major fall. The other analysts were mistaking a large "X" for a "3". A major lesson one can draw from this is that when in an uptrend, if a market is going up in a corrective fashion, (or vice versa) one has to be doubly watchful. No doubt you may get a fall (rise) to complete the correction, but the next critical move is on the other side of what you expect.. In other words, the correction you think is the beginning of a new phase is actually the last one. By the time you recover from this wallop, much would have happened, including price gaps if it happens to be the actual 3 of 3.

My limited understanding of neo-wave has shown me some of the pitfalls I had in understanding traditional patterns or why they didnot work the way I was told in TA that they would. For instance, triangles are known to be continuation patterns and raising/falling wedges were known to be reliable reversal patterns. However post 2003, I have come across many situations where the results were different. If the neo-wave work on triangles, diametrics and terminals is considered, then these would be explained more satisfactorily. 

To conclude, there is no doubt in my mind, that neowave has pushed the envelope further on EW. It provides a much better platform for money management system if one has to use EW for trading. Within the realm of subjectivity of EW (many other tools of TA are not subjective even while the trading decision may be so), neowave attempts to make it more logical or objective.


Karthikg said...

Thats an very interesting perspective on NEO waves that you have summarized especially for novices in Neo like me.If possible do elucidate the timing aspect which i think is a major gap which traditional EW has not been able to do justice to.

KRG said...

Thanks. I think that EW orthodoxy has not been able to do justice in many ways and the above is a meagre attempt to show how.

Any theory based only on empirical observation, makes me feel uncomfortable. On the timing aspect, I would therefore need more intuitive understanding of neo-wave, to comment beyond what is mentioned.


Piyush Sharda said...

good one krg

KRG said...

thanks Piyush

Jayaraman said...

KRG ji,

Amazing analysis. It is pleasure to know your understanding of NeoWave.

I wish you all the best in all your endeavors.

I have not replied your question since I was preoccupied with some project which has taken me off from everything for the last one week. I will complete it by evening.

With Warm Regards

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KRG said...

thanks Jayaramanji & Harshita.
H: Sent you a mail

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