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Saturday, October 31, 2009

Fractals!!

"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"


(Click here to see the fractal in motion, and for credit due)

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 its Halloween). Did you notice the counts of them?, both are wave 2 up, and one degree apart in the larger picture, the perfect definition of a fractal!!

So lets 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!!
So if you believe in fractals, that things repeat can themselves, then we could apply some of the knowledge we gleaned from the preceding fractal. Most notable, the size of the first wave down comes to mind (hehe, now you know where I am going with this). 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. But then you say 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. There are times that conditions can stay overbought/sold, longer then most people can remain solvent, but the odds don't favor this.

Monday's price action will be very telling if this whole scenario is possible, 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!!

Now can you guess what my Halloween costume was?, hehe!!

7 comments:

  1. Col, this is a beautiful post man! This is really phenomenal work. Between this one and the Hindenberg omen post, these are some of the best blog posts I have _ever_ read. Fantastic work, thoughts and analysis. Thanks brother!!!

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  2. Binve, from you that is the ultimate compliment, I dream of having only 5% of the writing skill you possess!!
    Thanks, alot, Bro!!!!

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  3. Michael, nice pattern recognition catch. Very interesing. However, I don't think the indices are head off a cliff anytime soon, so I don't want to trade it. Great work non-the-less.

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  4. Did you see my post on 2003 - 2006? Same fractal - different resolution. I keep saying this over and over again - history does not repeat itself (exactly) but it rhymes.

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  5. Aren't you getting sharper and sharper by the moment? What an incredible and profound observation. Now, with this blog you are officially has been anointed "Free at last". :) Welcome to the club of the fortunate people my brother. You truly made it far beyond what you give yourself credit for. You are doing a very good job and your writing skills are getting better everyday. Keep at it and sure you might end with Pulitzer prize one day. :)

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  6. GV, it has truly been an incredible ride the last 10 months. It amazes me how far we have all traveled and grown together, all starting because of one simple question from Mary!!!
    I believe the journey has only began for all of us.
    Thanks for all of time and energy you have spent keeping this going :)

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