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The Rule Of Alternation

We can say that the 'Rule of Alternation' is very important in Elliott Wave Analysis. It can be equated to the 'Denial Mode' often cited by the bears when the markets tend to keep floating or consolidating/rallying for a prolonged period of time before finally coming down to earth.

Are the Bulls in denial mode right now?

- SnP500 Daily Chart:

Obviously the 3rd wave is far from being an Extended Wave so there is good reason for the bulls to be in denial mode. Will it immediately start a 4th wave correction or NOT is still the major question yet to be answered in time Sooner or Later.

These are the Medium-Term Charts that I am using for weeks and months on ends modifying them as additional significant price changes happen.

>> SnP500 Medium-Term Bullish View:

>> SnP500 Medium-Term Bearish View:

Again, it is quite obvious there is no winner yet on this Grand Struggle between the bulls and the bears for months on ends.

One way to have an early lead of whether the Bullish View is going to buckle down is that IF the last rally (the black iii-rd wave on Bullish View or the c-wave on Bearish View) is retraced by more than 61.8% then higher probability the bears are starting to win. For the Purist EWA practitioners; the iv-th MUST NOT break below the i-st top. For practical applications of EWA we allow a minor penetration of the first wave top since many times a i-ii-iii-iv-v rally happens with the iv-th making a minor penetration of the i-st wave top.

* The black i-ii-iii label on the weekly chart is labeled as 1-2-3 on the Daily Chart.


Trading Strategies:

The Potential Running Correction speculated in the last Instablog did not work as expected. Instead SnP500 started a meltdown by Friday that finally broke the 2-4 TestLine today.

When this happens; there are several Trading Strategies that can be formulated at this early stage to mentally condition us traders early in the game.

1. Reduce exposure on Short-term Long positions;

2. Wait and Watch what will happen next;

3. Wait for an A-B-C that could happen with a Simple Flat the first candidate for 4th wave since the 2nd is a Complex W-x-Y correction. A Triangle for the 4th is also a good candidate. SnP500 should consume more time for the 4th depending on how shallow the 4th wave proved to be. Again with the Rule of Alternation the 2nd wave is very deep so the 4th should not be as deep or deeper. Either use the lower high or the most recent high of 1597 as more price bars formed on the Daily and Weekly Charts.

4. The LATER Scenario might happen but that's one extremely hard to anticipate. The only guideline I can provide is that the ii'-wave of the 3rd MUST consume significantly less time than the 2nd wave on the Daily Chart. Thus 3 to 4 weeks can be considered significantly less than 9 weeks. But lets give some allowance of up to 6 weeks.

* My account remains at 112% with 90% Long-term Portfolio and 22% Medium-term Trades mostly bought last Oct 4, 2011 and at the June 2012 lows. Since the SnP500 has already rallied significantly from the Oct 2011 and June 2012 bottoms it is more practical to just use Protective Trailing Stops on the 22% long positions. Right now, I prefer to be in the Wait and Watch Mode before making a decision whether to make another SSO trade or not.