Home—Online trading—Spread betting explained—Spread betting blog—Is the Dow set for a big fall?
Aug 13, 2012, 04:19
Posted byJohn C Burford
Comments (18)
In recent weeks we’ve looked at how to trade Elliott waves. We know that a typical Elliott wave follows a five-wave pattern – consisting of three up waves and two corrective waves. And I’ve been looking for such a pattern in the Dow.
Well since my article on 3 August, the Dow has rallied off my lower tramline. Am I now close to a great short trade on the Dow? Let’s look at the chart (below).
The Dow has edged up towards my upper tramline just above the 13,200 area. We are in a critical region, as the 1 May 13,340 high lies only 160 pips above the current market.
I have labelled the May high as the large-scale fifth (final) wave up from the October 10,400 low. And this could herald a major fall in the Dow as it bounces off our upper tramline.
(Click on the chart for a larger version)
Of course the market could rally above this May high. And if we do get a new high, then the situation does get a little more complicated. The question then would be: do I have a possible new labelling?
I don’t think I have to worry about this for now. Take a look at the chart below:
As you’ll see, the wave 4 overlaps with wave 1. And this breaks one of the key rules for an Elliott wave: wave 4 must not overlap wave 1. So I’m comfortable with my labelling for now.
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What should I do from here?
Well, to be honest I am not at all certain how this will play out. Looking back over charts, we can all have a decent stab at identifying the correct wave labels. But the market does not pay out on this ability.
So on that basis I am standing aside for now. I am simply too confused to trade.
Thankfully, the other indexes – S&P and Nasdaq – are trading well below their recent highs, and my Elliott wave labels are in much less danger of being overturned. So I’ll return to these in forthcoming issues of MoneyWeek Trader.
But before I go, I just wanted to address a very interesting question from a reader about my article on Friday.
As you’ll remember, we were looking at the Elliott labelling on the US T-bond.
Let’s remind ourselves of the chart:
On Friday I stated that I had to abandon my wave 4 label because I could see no 5 wave. The problem was that no new lows were put in below the 3 wave low.
But a reader asked: why not call the rally to the 1.52 level as my new wave 4, and then the Friday low could be the fifth wave I am looking for?
Yes, that is possible, but I do not believe it a likely interpretation simply because of the different scales of the waves. In particular, wave 2 up is short in time and the new wave 4 up would be much longer in time. Basically, they are out of scale – and that illustrates one of the guidelines in using Elliott waves. The relative size and time duration of the waves must be in proportion.
The other problem is if I label Friday’s low as my fifth wave, it would be very complex and the longest of the five waves in time, and that is uncharacteristic of true fifth Elliott waves.
So I will stay with my A-B-C formation down for now. We could see another challenge of the lower tramline, but I would expect that to hold, at least for now.
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• The essentials of tramline trading • Advanced tramline trading • An introduction to Elliott wave theory • Advanced trading with Elliott waves • Trading with Fibonacci levels • Trading with 'momentum' • Putting it all together
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Leave a comment
(13 August 2012, 05:20PM) Complain about this comment
I guess the answer to the question posed in the title of this article is "maybe". This would also seem to be the answer to the opposite question, "is the Dow set for a big rise?".I'm having great trouble convincing myself there is something in the Elliot wave approach which I can profitably use.It seems that the objective is to predict large moves in either direction using identifiable waves that only ever appear with hindsight and which seem bent on disproving any such predictions.A
(13 August 2012, 05:21PM) Complain about this comment
ftfter many years of trading, the main conclusion I have reached is that you can use charts as an indicator of what other traders are doing or likely to do. This is why trend lines and lines of support and resistance are so useful.But the flaw in Elliot waves appears to me to be simply that there are so many subjective ways of interpreting them that they are not helpful as an indicator of what others are likely to do!Tramlines are really just trend lines and, as such, are useful but waves? What am I missing here?
(13 August 2012, 05:42PM) Complain about this comment
Thanks for your observations John Part of the Dow longer term chart is now revealed with the 1-2-3-4-5 shown and this is looks to be part of what may be a bigger major wave 5 since march 2009.Although you say that wave 4 broke the rules then presumably wave 3 must have broken the rules as it went to a new high when a lot of people thought we had reached the high of an A-B-C bear market rally in mid 2011.The new high in 2012 points to a continuing bull market not a bear market but we did not appear to have wave 5 yet . So as you have concluded this is highly confusing and your labelling seems the best guess, and stand aside waiting to see if the last new high is confirmed.I would be interested in your longer term wave labelling on the USD index as I believe this highly influences where we go from here. You commented recently on being at wave 3 but i count an upward 5 wave just completed. regardsJoe
(13 August 2012, 06:18PM) Complain about this comment
Could this not be an example of a truncated fifyj wave?
(13 August 2012, 06:21PM) Complain about this comment
Kind of sums up my problem, Joe.
(13 August 2012, 08:30PM) Complain about this comment
Hi JohnVery much do like the Trams technical functions, as for current Dow action, have to say 13399 is a must sell attempt... to destination to 11300-11200 area.... from when in November, USA Election week, Dow is a buy....This is my trading plan.As for Elliot Wave...I Dont use this but your Tram Lines are like Gold Mines.....Back to Wave 5...I do believe 13399 should be the next attempt to try for.I am convinced markets are major sell from this weekKindest regards. M.Kerai
(13 August 2012, 09:15PM) Complain about this comment
To be honest I don't get paranoid hunting out subjective waves. Generally, if they're not obvious it's probably cos therey are not there!Forms of waives occur all the time. Triple tops, double tops, head and shoulders etc etc. They all follow the elliot wave type pattern. More often than not traders are looking for news justify the patterns. Thats why we're trading sideways. The current consolidation will break in the next 3 days and it's direction will be based some news event which will then set the new pattern.
(13 August 2012, 09:16PM) Complain about this comment
M KeraiInteresting but on what basis do you say these things?Right now I'm aiming to sell Dow above 13235 but so what?
(13 August 2012, 09:18PM) Complain about this comment
Dear John, love your analysis, been a regular reader for months now - how can I sign up for your training day? When is it? Looking at momentum on the DOW daliy chart don't we have negative momentum divergence indicating a fall? Markets haven't really sold off much but momentum is well down.... Stochastics also at 95% on %k and %d... Look forward to your next article!!!
(13 August 2012, 10:23PM) Complain about this comment
Yes the charts show that a decent move is coming soon and looks to be down, but first, (maybe) a bit more upside to the high of 13300 in May. At the moment break of 13100 would see 13000 again. A break of this would eventually see at least 12800. I'm sorry this has nothing to do with waves but just plain and simple good ol' Bollinger Bands and moving average cross-overs.
(13 August 2012, 10:26PM) Complain about this comment
On the T Bond: I suggest your wave 3 is actually wave 1, Wave 2 ends in the 152 area, we have just ended wave 3 and have commenced wave 5.
(13 August 2012, 10:32PM) Complain about this comment
I think most of the above posts are confirming my view that none of us knows what is coming next.Yes the Dow may go up & then it may come down or it could be the other way round.I will carry on trading what I see. If it goes up significantly tomorrow I will short & if it goes down significantly I'll buy it.What is "significant"? Whatever my experience and intuition tell me I guess.I may not - certainly will not - predict the big moves but I will make a profit & get out when the chart tells me to.
(14 August 2012, 01:27PM) Complain about this comment
Good Afternoon ....mrReason for Market buy at 11300-11200 is Tram line support whick links from the lows of 10/04/2012, 20/05/2012 and 06/06/2012.Trend line support linking from the lows of 09/08/2011, 23/09/2011 and 04/10/2011... is projecting future support at 11100.USA Election week, the historic trend for this is bullish for markets.Dow, 12217 is a Historic Gap yet to be closed (My experience tells me 12217 is a must set buy order until met). This Gap support also coincides with the tram support mentioned above.My reasoning for Dow sell at 13399 is simply a tram line resistance which links the highs of 16/3/2012, 27/03/2012 and 01/05/2012. RSI O/B Divergence is also evident.Kind RegardsM.Kerai
(14 August 2012, 01:39PM) Complain about this comment
MrCare:13325 Dow looks to be a break out price after intial resistance when next met, from today, although a buy order at 13110 may turn out to beneficial to 13399.Kind RegardsM.Kerai
(14 August 2012, 03:16PM) Complain about this comment
Thanks MK. Like you I'm looking at the rising upper trendline on the day chart. I'm also looking at the daily action with 13225 having been hit/approached three times now so guess my earlier 'top' at 13235 can be nudged up to 13250 ish.What I still can't see is where wave theory's going to help me! I really wish I could because then I'd be encouraged to see the trade through. Right now I'm going to content myself with skimming 50 points off the top...
(14 August 2012, 03:27PM) Complain about this comment
Apolgies for error,13235 Dow looks to be a break out price after intial resistance when next met, from today, although a buy order at 13110 may turn out to beneficial to 13399.Kind regardsM.Kerai
(15 August 2012, 06:58PM) Complain about this comment
Hi mrThe wave theory is same as all other technical indicators. They all have their strengths and weaknesses, must play to the strength and stay away from the weaknesses. Now, Trams are a different animal, with in addition of any other 1 or 2 technical indicators (which ever the trader prefers to accept)All technical indicators develop as time moves forward, best to wait only for strength development of any technical indicator/s.On this note, that buy order on Dow at 13110 is a cancel now and reversed into a sell order now.The Sell order at 13399 is still good until filled or cancelled.Kindest regards and the communication has been interesting and fun.Happy Trading/Investment
(15 August 2012, 07:50PM) Complain about this comment
I am thinking, now is the time a break out eitherway is imminent from this upwards trading range and makes sense to lay some extra cards on the table in this situation. Dow Jones, Set buy order at 13225 to 13399 and also a sell order at 13110 to 11300-11200, is my ideaBoth filled until cancelled.With individual preferencences of the personal comfortable stop loss.Kindest regardsM.Kerai
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