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Friday, March 29, 2024

Fractals!!

Elliott Wave theory, introduced in 1933 by R.N. Elliott, is based on Fibonacci numbers and used to describe market trends. Robert Prechter’s socionomic theory, an ambitious "theory of everything," is based on Elliott Wave theory, Fibonacci numbers and fractals (patterns in nature). It can be applied to patterns seen in stock market charts. It can also be applied to social mood, length of women’s skirts, measures civil unrest such as crime and war, and more (not necessarily accurately, that’s another matter.)

The theory holds that variables such as market indexes, skirt hem lines, and civil unrest, are dictated by the numerical series influencing collective social mood. How? That answer requires a bit of mystic-thinking. While Elliott Wave counts are useful for traders, counting the waves is subjective and easier in retrospect. Consequently, there can be many predictions flowing from the same charts. Using Elliott Waves for trading purposes requires learning how to interpret the charts and applying the information for trading purposes. Ilene

Fractals!!

Courtesy of Michael at EW trends and Charts

The structures Elliott described also meet the common definition of a fractal (self-similar patterns appearing at every degree of trend). Elliott wave practitioners say that just as naturally-occurring fractals often expand and grow more complex over time, the model shows that collective human psychology develops in natural patterns, via buying and selling decisions reflected in market prices"

 

fractals (Click here to see the fractal in motion, by BafS, Ultra Fractal, image and license at Wikipedia)

I wanted to spend the week-end exploring more about a fractal that has developed in the last few months. Parts of it have already been discussed on the blogs, but I have expanded the fractal from the original wave to include the waves preceding it. And to see if it is possible to see into the future a bit, to maybe foresee the coming wave structure and the size of it. Of course this is only a hypothetical situation, and I will not trade off of it, but will keep it on my radar. You never know what nature is capable of until you sit back and watch the power of it!!

This is the big picture, the SPX all the way back to the end of 2008, from the start of the sell-off and one of the largest corrective waves in history. There is an eerie similarity that has developed between wave 2(blue 2) of P1(green 1) down, and wave P2(green 2) up. The over-all structure between the waves, both have a-b-c counts, and both are showing a bearish rising wedge that are almost identical. Even the preceding waves 3 and 4 are almost identical. But to make it a fractal, it must make a copy of itself in a smaller degree. And this is where the spooky part comes in (hey it’s Halloween [weekend, almost over…]). Did you notice the counts?, both are wave 2 up, and one degree apart in the larger picture, the perfect definition of a fractal!!

 

So let’s take a look at what happened after the end of wave 2 up in the first fractal. It had a full five wave impulse pattern that retraced almost 32.8%, that just happens to be an almost a perfect and very common retracement level, finishing the first wave down before a correction started for the 2nd wave. It also was a very strong wave with very little retracement for the minor 2nd and 4th waves. A very swift and violent wave kicking off the start of wave 3 down, and we all know what happened next!!
 
 
If we apply the same level of retracement as we had in the previous fractal, which was 38.2%, then we could estimate where the first wave down would most likely end, before we started the 2nd wave up. That level works out to around 935-950 at 38.2% retracement from 666. How would that be possible?


What if we really did have a 2nd 1-2 built into this wave this week, instead of a 3-4 as I mentioned in my post yesterday, Friday updates. We could then theoretically achieve that level of 38.2% retracement to 935-950 in the first wave down, before we have any significant rally to relieve the oversold conditions.

From a technical analyst point of view, we are already in very oversold conditions now, and the TA does not support such a large sell-off without first some sort of correction to relieve those conditions. While cnditions can remain overbought or oversold longer then most people can remain solvent, the odds don’t favor this.

Monday’s price action will be very telling.  Either we finish off the micro 5th wave, ending the first wave down from the top, and start a powerful 2nd wave up that will scare most shorts in to covering and setting a bull trap as all the dip buyers jump in, or we have a small correction up for the 2nd wave of iii of 3 down, then one of the most powerful sell-offs we have seen so far this year, iii of 3 down with a target of 935-950!!

****

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