Reader's Request: FTSE 100

I received the following request and I hope other readers may benefit from my answer. Attached is the chart in question.

Q: I was looking at your wave count of the FTSE 100 weekly chart and noted you had the March 2009 low as a W1 circle. My view is that the FTSE has made 2 previous lows without making a new low and therefore see the FTSE as making a series of W1 and W2s and your W1 circle being a W2.

A: Elliott named nine degrees of waves, from the smallest to the largest. When labeling waves on charts, it is necessary to differentiate degrees of waves. In the labeling of the FTSE100, w.b designates the wave structure at the cycle level, with w.1circle at the primary level.

What is important when labeling a chart is to first look at the higher time frames. This identifies the larger trend and provides the framework for further analysis. All lower time frames have wave patterns of lesser degree that should confirm your higher time frame analysis and the wave labeling should be consistent. In the case of the FSTE100, let's look at the higher time frame at the yearly level.

In order for my interpretation to be correct, I labeled the high set in 12/99 as a Supercycle designated as

w.(III). Since I am looking for a corrective structure for w.IV, I can't view the structure as a pair of 1-2's to the upside. The Rule of alternation applies whereas w.II was a sharp correction therefore w.IV should be a sideways correction. Sideways corrections are always tricky and often an analyst isn't certain of the structure until it is almost complete. Frankly there are a number of interpretations that could play out. The key to evaluating your count is twofold.

 

1. What wave pattern do you recognize?

• I see possibly two at the moment. Currently I am using a flat interpretation as my operative wave pattern because w.b of flats almost retraces to the origin of w.a. Price should eventually trade below w.a under this scenario but there is a low probability that w.c of the flat had already terminated in a truncation... where I have labeled w.1 circle. If this were the case then w.V up has started. The flat interpretation is negated upon a break above 6802, i.e. critical resistance. 

• I see a possibly triangle building. This is my alternative wave count.

2.  Does the wave personality match your count - Often I find myself counting a series of 1-2's and the personality of the wave structure doesn't match the interpretation. Using your interpretation, a 3rd wave should now be unfolding to the upside. If so, this market has to go big right now. A break of critical resistance and the upper boundary of the channel line is a requirement that bolsters your interpretation. However, technicals show a momentum divergence as new highs are being made. Momentum should be confirming the advance.

In conclusion, there is nothing wrong with having a bullish and a bearish interpretation. Continue to monitor the technicals against the wave count for clues that either interpretation is suspect. I've identified where my count becomes wrong. Your count is wrong at critical support of 3443.

Hope this helps. 

Best of Trading