ELLIOTT WAVE

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Monday, September 12, 2011

Motive Elliott Wave

Motive waves subdivide into five waves with certain characteristics and always move in the same direction as the trend of one larger degree. They are straightforward and relatively easy to recognize and interpret.

Within motive waves, wave 2 never retraces more than 100% of wave 1, and wave 4 never retraces more than 100% of wave 3. Wave 3, moreover, always travels beyond the end of wave 1. The goal of a motive wave is to make progress, and these rules of formation assure that it will.

Elliott further discovered that in price terms, wave 3 is often the longest and never the shortest among the three functionary waves (1, 3 and 5) of a motive wave. As long as wave 3 undergoes a greater percentage movement than either wave 1 or 5, this rule is satisfied. It almost always holds on an arithmetic basis as well. There are two types of motive waves: impulses and diagonal triangles.

Impulse

The most common motive wave is an impulse. In an impulse, wave 4 does not enter the territory of (i.e., "overlap") wave 1. This rule holds for all non-leveraged "cash" markets. Futures markets, with their extreme leverage, can induce short term price extremes that would not occur in cash markets. Even so, overlapping is usually confined to daily and intraday price fluctuations and even then is extremely rare. In addition, the functionary sub-waves (1, 3 and 5) of an impulse are themselves motive, and subwave 3 is specifically an impulse. Figures 1-2 and 1-3 in Lesson 2 and 1-4 in Lesson 3 all depict impulses in the 1, 3, 5, A and C wave positions.

As detailed in the preceding three paragraphs, there are only a few simple rules for interpreting impulses properly. A rule is so called because it governs all waves to which it applies. Typical, yet not inevitable, characteristics of waves are called guidelines. Guidelines of impulse formation, including extension, truncation, alternation, equality, channeling, personality and ratio relationships are discussed below and through Lesson 24 of this course. A rule should never be disregarded. In many years of practice with countless patterns, the authors have found but one instance above Subminuette degree when all other rules and guidelines combined to suggest that a rule was broken. Analysts who routinely break any of the rules detailed in this section are practicing some form of analysis other than that guided by the Wave Principle. These rules have great practical utility in correct counting, which we will explore further in discussing extensions.

Extension


Most impulses contain what Elliott called an extension. Extensions are elongated impulses with exaggerated subdivisions. The vast majority of impulse waves do contain an extension in one and only one of their three actionary subwaves. At times, the subdivisions of an extended wave are nearly the same amplitude and duration as the other four waves of the larger impulse, giving a total count of nine waves of similar size rather than the normal count of "five" for the sequence. In a nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure 1-5, illustrating extensions, will clarify this point.

The fact that extensions typically occur in only one actionary subwave provides a useful guide to the expected lengths of upcoming waves. For instance, if the first and third waves are of about equal length, the fifth wave will likely be a protracted surge. (In waves below Primary degree, a developing fifth wave extension will be confirmed by new high volume, as described in Lesson 13 under "Volume.") Conversely, if wave three extends, the fifth should be simply constructed and resemble wave one.

In the stock market, the most commonly extended wave is wave 3. This fact is of particular importance to real time wave interpretation when considered in conjunction with two of the rules of impulse waves: that wave 3 is never the shortest actionary wave, and that wave 4 may not overlap wave 1. To clarify, let us assume two situations involving an improper middle wave,above Figures.

 wave 4 overlaps the top of wave 1. In Figure 1-7, wave 3 is shorter than wave 1 and shorter than wave 5. According to the rules, neither is an acceptable labeling. Once the apparent wave 3 is proved unacceptable, it must be relabeled in some way that is acceptable. In fact, it is almost always to be labeled as shown in Figure 1-8, implying an extended wave (3) in the making. Do not hesitate to get into the habit of labeling the early stages of a third wave extension.

Extensions may also occur within extensions. In the stock market, the third wave of an extended third wave is typically an extension as well, producing a profile such as shown in Figure  illustrates a fifth wave extension of a fifth wave extension. Extended fifths are fairly uncommon except in bull markets in commodities covered in Figure.


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Elliot Wave Degree & Fuction

WAVE DEGREE

All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest:

Grand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette

It is important to understand that these labels refer to specifically identifiable degrees of waves. For instance, whenwe refer to the U.S. stock market's rise from 1932, we speak of it as a Supercycle with subdivisions as follows:

1932-1937 the first wave of Cycle degree

1937-1942 the second wave of Cycle degree

1942-1966 the third wave of Cycle degree

1966-1974 the fourth wave of Cycle degree

1974-19?? the fifth wave of Cycle degree


Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor and sub-Minor waves. By using this nomenclature, the analyst can identify precisely the position of a wave in the overall progression of the market, much as longitude and latitude are used to identify a geographical location. To say, "the Dow Jones Industrial Average is in Minute wave v of Minor wave 1 of Intermediate wave (3) of Primary wave [5] of Cycle wave I of Supercycle wave (V) of the current Grand Supercycle" is to identify a specific point along the progression of market history.

Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary or countertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters. Reactionary waves are labeled with even numbers and letters.

All reactionary waves develop in corrective mode. If all actionary waves developed in motive mode, then there would be no need for different terms. Indeed, most actionary waves do subdivide into five waves. However, as the following sections reveal, a few actionary waves develop in corrective mode, i.e., they subdivide into three waves or a variation thereof. A detailed knowledge of pattern construction is required before one can draw the distinction between actionary function and motive mode, which in the underlying model introduced so far are indistinct. A thorough understanding of the forms detailed in the next five lessons will clarify why we have introduced these terms to the Elliott Wave lexicon.

August 2011 Dividend Commentary

Review of July 2011 Results & This Month's Changes

Crisis of Confidence : 

It started with the political shenanigans in Washington, which drove the market and our stocks down in July. But it didn’t end with the raising of the U.S. federal debt ceiling. Instead, things got worse. When I wrote this on Thursday, the Dow had dropped 513 points. What’s happening?

The gridlock in Washington cast a pall over everything and forced many, including corporate CEOs, to curtail spending, just in case. Those decisions are already being reflected in weak economic reports, which are raising the possibility of a double-dip recession.

Meanwhile, in Europe, attention has shifted to a potential liquidity crisis in Italy, which because of its size, will be much harder to fix than Greece.

Underlying the market’s selloff is the realization that the U.S. government, which many see as dysfunctional, will be unable to cope with economic issues. Similarly, most don’t think that European leaders have what it takes to solve their problems. 

Last month.

Starting with our Sample Portfolios; Conservative dropped 1%, Growth & Income lost 3%, and High Yield/Speculative fell 7%.

                            Portfolio                                                            
 Last Mo.
                            Average
       Return
Dividend Speculators                                   
3%
ETF Monthly Income
1%
Oil Industry
0%
Canada Real Estate Investment Trusts
0%
Canada Stocks Ex-Energy
0%
Preferred Stocks
-1%
Utilities 
-1%
US Real Estate Investment Trusts
-2%
Canada Energy
-2%
Insurance
-3%
Manufacturing & Services
-3%
Partnerships - Energy
-4%
Business Development Corps.
-5%
Closed-End Funds
-5%
Large Banks
-6%
Regional Banks
-7%
Rural Telecom
-8%
Partnerships Ex-Energy
-9%

Our individual Industry and Special portfolios did no better. Speculators, up 3%, and ETF Monthly Income, up 1%, were our only portfolios to score gains. Partnerships Excluding Energy, down 9%, and Rural Telecom, down 8%, were our biggest losers. Here’s the complete list.

October 2011 Dividend Commentary


The overall market, at least as measured by the S&P 500 dropped 7% in September. Except for a couple of our Sample Portfolios, we barely kept up.

Starting with our Samples, our Conservative portfolio gained 1%. High Yield/Speculators dropped 4%, and Growth & Income lost 9%. 
All of our Industry and Specialty portfolios recorded losses. Exactly half of them (9) beat or tied the S&P 500 and half underperformed the index. Here’s the list.

Portfolio Avg.  Return%
Utilities 
-1%
Insurance
-3%
ETF Monthly Income
-3%
Canada Real Estate Investment Trusts
-3%
Preferred Stocks
-3%
Partnerships - Energy
-6%
Rural Telecom
-7%
US Real Estate Investment Trusts
-7%
Manufacturing & Services
-7%
Business Development Corps.
-8%
Regional Banks
-8%
Closed-End Funds
-9%
Large Banks
-9%
Canada Energy
-9%
Oil Industry
-9%
Dividend Speculators
-11%
Canada Stocks Ex-Energy
-11%
Partnerships Ex-Energy
-11%
What Happened European debt crisis ?
The European debt crisis and the possibility of it triggering a global recession overshadowed everything. Especially hard hit were energy stocks and everything related to the financial services industry, especially banks. Any company doing significant business outside the U.S. got hit. For instance, diversified chemical company DuPont, which dominates most of the markets where it participates, and is one of our most solid and fastest growing stocks, sunk 17% in September.
What's Next?
Towards the end of October, U.S. stocks will start reporting September quarter results. Assuming that as many expect, those reports come in generally good and the Europeans manage to muddle through, the market could strengthen. That would be consistent with usual seasonal swings. If you look at history, the market is typically down in September and that weakness often continues for the first week or two of October. Then it takes off at least until year’s-end.
Unfortunately, many things could go wrong. So we can’t bet the ranch on the rosy scenario that I described. Instead, we must be defensive and continue to reduce the risk profiles of our portfolios, just in case things don’t get better.

What's New?
In our Sample Portfolios, we’re making two changes, one each in Growth & Income and in High Yield/Speculative, both with the goal of reducing portfolio volatility.
In our Preferreds portfolio, we’re selling two existing picks and replacing them with two preferreds credit rated “A” by S&P, One offering a 6.2% yield to new money and the other is at 5.4%.
We’re also selling two stocks from our Partnerships Excluding Energy portfolio and one each from Business Development Corporations, Energy Partnerships, Rural Telecoms, and Canadian Stocks (excluding energy). In all instances, the moves are intended to reduce each portfolio’s risk profile.
In addition, we’ve downgraded one Preferred, U.S. Real Estate Investment Trust, and one Rural Telecom pick to “do not add” from “buy.” Conversely, we’re upgrading one Preferred to “buy” from “do not add.”
We’ve also changed our Risk Ratings on three Preferreds, one pick in our ETF Monthly portfolio, and one Dividend Speculator.
Looking at dividends, one Manufacturing & Services pick raised its quarterly payout by 15%, and one Closed-End fund declared a 6% special payout and raised its quarterly dividend by 2%. Also, one REIT cut its payout by 8%.