THE
ROLLERCOASTER, PART 4
by Anthony M.
Cherniawski
The Practical
Investor
June 14, 2004
Consider the following:
In his Technical Analysis of the Futures Markets, John J. Murphy gives us a basic outline of the expanding triangle formation. The graph above is a more stylized version of figure 6.5a in his book with some modification. The purpose of this rendering is to see the formation from the perspective of the Elliott Wave Principle. Coincidentally, Murphy’s numbering of the pattern between points 1 and 5 also agrees with the Elliott Wave count for an ending diagonal pattern. In this case, the triangle expands rather than contracts as in the ending diagonal.
But let’s ask the question, does the expanding triangle formation occur in any other place than an ending pattern at a market top? Glenn Neely, in his book, Mastering Elliott Wave, says, “Personally, I have never seen a “4th wave Expanding Triangle.” (Page 5-32) He does seem to categorize them as possible 4th waves, b-waves and claims that, “the ‘thrust’ out of the Non-Limiting Expanding Triangle…could be the 5th wave of a terminal.” (Page 5-33) This appears to be contradictory, since he admits that he has never seen a 4th wave expanding triangle formation, yet he has created a category that places this pattern just before a terminal 5th wave.
Based on my own findings and the pattern set forth by John J. Murphy, rather than counting the expanding triangle formation as some type of corrective wave, it seems much more appropriate to label it as a 5 wave terminal pattern of a major market top, as Murphy describes. If that is the case, then points 6, 7 & 8 become a new Elliott wave pattern with the labels 1, 2 & 3. I have appropriately made the descending line between points 5 and 6 a five-wave affair.
Has the Rollercoaster derailed?
Now for the burning question…has the pattern blown up? It seems that some of the patterns are still running true to form according to Murphy’s limited description, but not all. I have received several e-mails declaring the pattern all washed up. However, let’s turn the analysis to the Elliott Wave to see if the pattern is still “on track.”
This interpretation follows all the rules and guidelines of Elliott. It also presents an excellent case that The Rollercoaster is still ready for its downhill descent. According to Frost and Prechter’s Elliott Wave Principle, wave 2 always retraces less than 100% of wave 1 (page 30). We can argue the statistical relevance of the various Fibonacci retracement percentages. But as long as wave 2 is smaller than wave 1, we have compliance with the Elliott pattern. In the case of the SPX, wave 2 is smaller than wave 1. There is agreement on that principle. The Rollercoaster is still on track.
The NYSE Composite Index has followed a path similar to the SPX. Its most recent rally has retraced 79.2% of the descent from point 5. It is very close to the Fibonacci 78.6% retracement not uncommonly seen in wave 2.
The Russell 2000 makes a perfect expanding triangle formation with wave 2 making a 61.8% retracement of wave 1.
The FTSE is an enigma. What started out as wave 1 down has overlapped. Now it counts best as an a-b-c down with an overlapping correction. I will continue to follow this pattern to see what develops.
The Dow Jones World Index is ready to roll over the top of wave 2. The wave structure is complete. This also confirms that the topping pattern is a worldwide phenomenon.
I left the old numbering in the Nikkei Index to show how perfectly the smaller expanding triangle formation has completed its pattern. Instead of stopping last week at the 50% retracement zone, the NIKK has gone on to make a 5–3–5 / a-b-c pattern from blue point 6, which also complete red point 8. It may also be finished this weekend (6-11-2004). The markets always seem to take longer than anticipated to reach their destination. Patience is ultimately the best virtue when dealing with the markets.
The CBOE Oil Index also sports a price structure ready to plummet. The retracement of wave 1 by wave 2 comes to 77.2%. Again, it is very close to the 78.6% retracement not uncommon for wave 2.
If you don’t agree with the CBOE, then take a look at the price of light crude oil. It is following behind a bit, but when finished may be looking for a possible target price around $33.50 per barrel or lower.
Summary:
The best fit for the expanding triangle formation seems to be an Elliott wave 5 as most of the patterns in this article agree. The one exception – the FTSE – seems to be following its own drummer for now. The pattern after wave 5 may be extending. That doesn’t make an automatic invalidation. We will have to see how this one develops further.
Finally, has the pattern failed? In the first article of this series, I noted that the description of the expanding triangle formation in all of the texts so far were only general. Using Elliot Wave guidelines, we can reach a little more precision or at least know what the allowable boundaries are. It fits the pattern recognition that any Elliott Wave practitioner should look for. So when you see this pattern, you will have the tools to anticipate what may be coming next.
Ladies and gentlemen, make sure that you are properly buckled. Keep your arms inside the car at all times. Enjoy the ride!
© 2004 Anthony Cherniawski
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Anthony M. Cherniawski
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The Practical Investor, LLC
East Lansing, MI USA
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