Interesting Elliott Wave Count Emerging

Readers of the blog know that I'm not the kind of guy to count every single wave on intraday charts. It's not my style to take any indicator to that sort of extreme. The way I use Elliott Wave is as one tool of many that us technicians have to work with. It's a way to help manage risk while at the same time maximizing potential rewards. And this is the most important thing we can do.

I've been writing allstarcharts.com for a few years now and I've mentioned elliott waves maybe two or three times. It's rare that we discuss it, because it's rare to see a pattern that I like enough to bring up. But today I'm looking at a sweet setup in Emerging Markets Stocks relative to US Equities that I can't possibly keep to myself.

Here's the chart. Let's discuss:

We have a two year decline that fits my description of a five wave count. We have 3 impulse waves (one, three & five) and 2 corrective waves (two & four). The third wave within wave three of this two year decline is the most vicious. This 3 of 3 characteristic is probably what draws my attention the most. We normally see this type of behavior in the middle of the advance. Look at the 2008 decline - wave 3 of 3 was in the Fall (Lehman, Merrill, AIG etc). Remember the end of Europe last Fall? (see here) - Look at Wave "3 of 3" on that decline. Nice results from those bottoms, to say the least.

Now look at the symmetry in the $EEM vs $SPY chart above. The waves are similar in duration. Wave 1 and Wave 5 are similar in length.

Also look at what else is going on outside the wave count. The 50 day moving average (blue dotted line) has reversed and turned higher. The 200 day moving average is beginning to flatten out for the first time during this massive bear market. Look at momentum: RSI has been diverging positively since last Fall. The wave 3 of 3 that we brought up before took RSI down to levels we haven't seen since, even with price making lower lows, and then even lower lows after that (wave 5). The most recent bullish divergence at the end of the summer may have marked the end of this two year decline.

I'm looking at the current move since early September as the beginning of a change in trend. And it's not just about the Elliott Wave count. The beauty of technical analysis is that we can incorporate a lot of the tools that we have at our disposal. More Most importantly, from a risk management perspective, we know we're wrong early on this one. If this sucker rolls over proving my 5th wave to not be what it appears, then goodbye. Trade over and as Shawn Carter said, "On To The Next One".

The upside here if we're right though, could be tremendous...

Related Posts:

Are Emerging Markets Ready to Outperform? (Nov 1, 2012)

Reuters TV: Using Pairs To Find Trends (Nov 13, 2012)

Tags: $EEM $SPY $VWO $DEM