Friday, August 9, 2013

Why Many EW Counts Go Wrong in India???

To begin with, I must admit that I am still pretty a novice with EW counts but have seen a lot of charts, labels, counts made with the aid of EW and yet, most often than not, things don't fall in place. Is it the case that the EW Theory is wrong? Many a time, people feel, this may perhaps be true because even Bob Prechter and his team have got a lot of counts wrong since May '11.

As I have kept mentioning earlier this year as well, the real reason why Bob Prechter and team have got counts / trades wrong is because they are 'looking for what they want to see' and 'what they feel'. It is precisely this own bias clouding judgement that has gotten them all over currently. Is this the first time that it has happened to them? No, perhaps around 2005-2006 itself, they had put some illustrative charts on Fannie Mae and Freddie Mac and predicted that they would become penny stocks. Did it happen? Yes it did but just that it took 3 more years to happen.

Coming back to the Indian scenario and why a lot of applied Elliott Wave Analysis goes wrong. Let us go back to the 'fundamental ground rules' laid down by Elliott for scrips that do follow the Elliott Wave patterns [all covered in Chapter 1 and Chapter 2 of the book]

1] Most commonly applicable on Market Indices
2] Applicable to cyclical industrial stocks and stocks that have healthy volumes [When the volumes are being spoken about here, remember that the initial Elliott Wave principles were laid down in 1920s and 1930s. So even on NYSE, the volume implied 'Delivery Volume' as the proportion of day-trading was minimal]
3] The index or the scrip must be able to follow a hierarchical structure of Super Cycle, Major Cycle, Minor Cycle going all the way down to minuette and sub-minuette levels. [Again remember, the smallest time frame available to Elliott at that time was 15 minutes and he chose to keep the least count at hourly basis]

I have seen many attempts at many forums where people are looking at 2 minute / 5 minute charts, looking for divergences etc but that is nothing more than an 'itch' to take a position or 'restlessness' to see a position move in favored direction. Sometimes, labelling at such fine degrees may fall in place but most times it won't. If one wants to have a good count of Nifty / BankNifty, the smallest time-frame used must be 1 hour IMHO

The other principle of selecting the scrip and ensuring that it is suitable for EW Analysis

First of all take the Monthly / Yearly chart of that scrip and see whether there is a hierarchical pattern with a large uptrend / downtrend and then waves / sub-waves within that. If such a pattern is visible on Monthly / Yearly charts ONLY then it should be considered for counts.

For illustrations

Nifty Monthly / Yearly Charts All-Time

The fundamental principles behind EW are

1. Mankind has been made for progress in the grand scheme of things
2. In progress, one moves 5 steps forward and 3 steps backward

So taking these principles into account on the Nifty Monthly Charts [We are still in the nascent stages of what is called 'Grand Super-Cycle]

The 1st Grand Super-Cycle Wave completed as a set of 5 Super-Cycle Waves when Nifty attained 6357 in Jan '08. After that, it has been in a corrective phase that is still on-going. If you feel that this is so time-consuming, I would encourage you to look at the Monthly/Yearly Charts of DJIA. For more than 6 decades, it was struggling in a range of 50-1000. It is the so-called 'Roaring Eighties' [The Baby Boomer Generation in Marketing parlance] that all resistances became history for a brief period of 5 years.

When will the Grand Super-Cycle 3rd Wave start for Nifty in India? Well that is difficult to answer as I don't have a crystal ball with me. However, the affirmation of the same can be confirmed when Nifty takes out 6357 with loads and loads of buying in cash by institutional investors and with significant delivery volumes. Howe high will that be? 1.618 times the 1st wave i.e. towards the 10K or 11K mark on Nifty. When will that happen? 0.618 times the time taken for the 1st wave to get over. It took almost 8 years for the 1st wave to get over. So it will still need a good 5 years after the current corrective phase is done with.

Before I dwell more upon this aspect, let me show you some charts where EW principles are clearly not applicable

DLF Monthly Chart
Is there any resemblance to the multi-year chart of Nifty? Its just headed one way since inception and that is down south i.e. sooner or later this will go to 0. Does this imply progress? I don't think so. So any trade taken on DLF with the help of EW will be a fluke as the scrip does not meet the basic criteria of EW principles.

ITC Monthly Chart
Does this qualify for EW Analysis; indeed yes as the progression is steady; volumes were high when it was trading at sub-25 levels and now it seems to have conquered all visible resistances and is trying to locate the next resistance.

Why these illustrations of DLF and ITC ? Just to drive home the point that scrips like JPAS, HDIL, IVRCL, IFCI, Suzlon etc etc never complied and perhaps will never be able to comply with Elliott Waves' fundamental criteria.

Bottom-line: EW works perfectly well on scrips that in the larger scheme of things obey the principles of 5 steps forward 3 steps backward criteria. If that is not the case, then forget applying EW principles to those scrips as probability of making losses are greater than otherwise [and we trade/invest for profits right???]

The next part that I mention maybe easier to say on hindsight but it is critical because this again corroborates my earlier comments that there are only a few trading sessions in a given year where in big gains can be locked in. One is free to look at the ticker as much as one wants but for long term gains, positions must be very little but those that garner large gains

Nov'10 onwards [13 month correction]
A:  a: 6338-5690; b: 5690-6181; c: 6181-5177
B:  a: 5177-5944; b: 5944-5196; c: 5196-5708
C: a: 5708-4721; b: 4721-5400; c: 5400-4531
[This entire structure completed a larger degree A, by the way after which the rally from 4531 started]

Again, the structure was a double zig-zag with more swing moves within but this is the larger scheme of things. In a 13 month period, these 3 corrective waves and their sub-waves gave a total of 3000 points. Given the fact that depending on time-frames one takes into consideration and stop losses being triggered etc, even if 2/3rd of these moves were captured by a savvy trader, 1 lot would have yielded 2000 points.

Now this is particularly important as the current downward move is pretty much on the same lines as the correction from Nov '10. Should you be alert and wait as a safe trader for the opportune moment to present itself on EOD basis, there are about 6 more legs of 200-300 points minimum [could go as high as 700 points] waiting to be lapped up. Rather than take a position everyday/week, hold on to the margins and once the signals come in go full throttle with 3 to 4 lots via futures and options.

So to end the entire sermon like post on Eid;
EW principles are absolutely valid [provided the conditions specified are used appropriately]
EW principles take into account Fibonacci ratios, time and price factors, supports and resistances as well
The least count time-frame to use EW analysis is 1 hour [60 minutes]
One should not be biased with one's own trading position whilst applying EW Analysis [or for that matter any form of price/technical analysis]
You just need 3 to 4 trading positions in a year to get whoppers and not positions everyday especially in the FnO segment


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