The Elliott wave Theory is a famous trading tool and is based on the idea that the Market advances in 5 waves and corrects in 3 waves. The Theory has some basic rules which are listed below

1) Wave 2 never retraces more than 100% of wave 1.

2) Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5.

3) Wave 4 does not overlap with the price territory of wave 1, except in a diagonal formation.

These rules are the ones which appear in a 5 waves advance but also the one that make traders around the globe to be misled into trading on wrong side of the Market. Many traders develop the habit to pick tops and trade into corrections when they see what looks like a 5 waves move and believe that a pullback or sell off is imminent. The reality is that those 3 rules are not enough and we have been saying for years that the Theory is too simple and too old to be used without any other tools. We have added several new rules or conditions to validate the Market and consequently gain an edge over the Market and the theory itself. In this blog, we will explain why the YM #F which is the Dow Jones Futures is being wrongly counted as a 5 waves move from 2 significant lows i.e. the 2009 cycle and the 2.2016 low cycle. We believe wave 5 in an advance needs to provided momentum divergence against the peak of wave 3 , otherwise the move is either corrective and ending a 3 waves advances or even more powerful when the market is still within the wave 3 with the waves 4 and 5 to come. Let’s now take a look at the charts below

YM#F Cycle from 2.2016 low: 5 Waves or not?

The Chart above is showing the cycle since 2.2016 low and if we look at RSI at the bottom of the chart, we can see that move from 8.2017 low has erased RSI divergence with respect to 3.2017 peaks, in other words, RSI is currently at the highest level since the move started from 2.2016 low so we are either ending the whole cycle as a 3 waves corrective sequence or still within wave 3 of a 5 waves advance.