I'll post some ongoing thoughts in Gold using EW and VSA as time permits. Hopefully this may offer some insights on how to correctly use EW. The missed point with EW is that its simply pattern recognition that offers right/wrong attributes - no different to any other type of pattern. By knowing what can possibly happen and at what point we're proven right or wrong, we can better position ourselves to take advantage of the next pattern. The following chart is a zoom in of the chart I posted at #5355.
The most important information on this chart is the move from the Sep 11 lows to the Sep 18 highs. This move is very strong, very clean and swift. In other words its an 'impulse' or some kind of a trend move. Impulse moves are located at waves-1, -3, -5, -A and -C. In this case it can't be a -3, or a -5 or a -C because there are no preceding waves. It can only be a -1 or an -A.
Its right at this point that we know when this wave will
NOT be a -1 or an -A, and thats if prices fall back below the lows set on Sep 11. I have noted those lows with 'wrong below'. However, if the current decline travels too deep, usually beyond a 75.0% retracement we can start to think that perhaps we are wrong, albeit confirmation is yet to be sought. Knowing now when we'll be wrong we can start to look for confirmation signs of being right.
After a wave-1 or -A, the following wave will tend to retrace 50.0% to 61.8% which is deemed 'typical' and is why I said that of it goes 75.0% then something is probably wrong.
Secondly a wave-2 or -B will not only retrace 50.0% to 61.8% but it will do so in a 3-wave movement. On this chart I have placed a 5% zig zag indicator which measured the lengths of waves in percentage terms. In other words I'm not using discretion here. The wave is either > 5% in length or its not. You can see that off the Sep 19 highs we can see a swing down, a swing back up and we're now seeing another swing down. In other words we are seeing (at the moment) 3-waves.
In summary so far,
- we have an impulse from the Sep 11 to Sep 19 highs,
- we have a 3-wave counter trend move that so far has retraced into the 'typical' zone between 50.0% and 61.8%
- we know exactly at what point we'll be proven wrong, but we also have a fair idea on when doubt creeps in
In theory if our analysis is correct we should expect to see prices start to reverse higher any day, but where will they go?
This depends on where the larger wave pattern stands, but if we assume that the Sept 19 high is a wave-1 or -A then we should at least expect a follow through move the same length as that Sep 11 to Sep 19 advance
as a minimum. I say as a minimum because we're not yet sure whether the next move higher will be a wave-3 or -C but either way we have a trading opportunity. If/when we see that advance we can do the exact same procedure and build the same right/wrong equation around it.
Lets see what transpires, but remember, we're not predicting the future here. We're assessing the probabilities of the pattern unfolding in the desired direction based on past examples of the same pattern. We know exactly when we'll be proven wrong ahead of time.
Nick
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