When I'm providing a wave interpretation for this blog, I'm always utilizing the preferred count. I remain open to evaluating price structure that is contrary to my preferred count and adapting an alternate wave count that realigns price with a known wave pattern. Should my analysis be unable to identify a clear count, readers are made aware of the uncertainty of the analysis.
Conversely, as traders, we do not have that luxury. The preferred wave count is my template for how I believe the trade should unfold. While I can't be certain that the market will oblige my best wishes, I MUST trade what I see NOT what I want to happen. Should the market's price action prove my preferred count wrong, either I get stopped out or the adoption of an alternate count allows me to stay with a trade, albeit defensively, depending on my entry, existing profit/loss and stop placement.
On June 5, 2011 call, ElliottWaveLive called for continued weakness in the eminis for Monday's trade.
At the 240 minute chart level, the close of yesterdays trade as well as the market technicals and subdivisions of the most recent wave called for for a three wave countertrend rally to end w.iv circle for today's trade.
A Hypothetical Trade
In the ON session, the market began to rally and traced out w.(A) and w.(B) providing the initial evidence that price action may be following the preferred count. A trade initiating a long trade at 1286 STOP 1283.5 (1 tick below the origin of w.(A) would be targeting the predetermined levels of 1298 - 1299 and unfold as a zig zag.
Price reached w.A circle at 1293.75 and began to fall. According to the previous chart, I was looking for a zig-zag to unfold and complete near the 50% retracement of 1288.5. While w.B circle actually was a flat correction, the fact that the corrective phase ended at the target and just below w.A circle provided a trader with the confidence in real time to stay in the trade. Here's why... the low of w.B circle was 1288.25 and overlapped the high of w.(A) at 1288.75... another clue that the entire move is corrective.
Price then rallied from the w.B circle low to new highs. At this point, price hit 1294.75 , where w.C circle = .618 w. A circle. The protective stop is moved to one tick below w.B circle at 1288. The retracement from 1294.75 was deep and took out the 1291 swing low... a warning sign that something may be wrong.
It's here that trading what you see must take over. Subsequent price action is choppy and contains numerous overlapping waves. My trade plan called for a five wave advance for w.C circle without overlap.... it's not..... a second warning that the entire corrective move from 1283.25 to 1294.75 may be complete or that a more complex correction is unfolding. At a minimum, I'm moving stops to just below the last swing low of 1289.25 and lock in profit while looking to identify an alternate count that realigns me with the price action. I may also consider trailing my stop in a defensive manner under each higher swing low and let the market take me out of the trade.
In conclusion, the trade plan accurately identified an area suitable for buying the market, yet price has failed to reach our price objective at this time or do so in the manner that was called for. By having a clear expectation of what should unfold we remain flexible, objective and know where we're wrong as traders.
As part two of this lesson, I'll provide updated charts in a separate post so the trade can be followed.
I hope you found this information helpful and best of trading.
(1) Elliott Wave Principle, Frost and Prechter, page 94.
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