Recently I addressed an issue raised by a question on from a reader named Cam. Well, our correspondent (who I promise you is not a relative!) has submitted an interesting follow-up question:

“…..I’m now curious about 2nd and 3rd wave 5s. What do you mean by that? I thought there was only 1 wave 5. I like your simple analysis. No confusing indicators. I try and live life by the ‘Keep It Simple Silly’ rule….”

So, for Cam and anyone else who follows Elliott Waves, here are my thoughts:

I will use WBC to illustrate my theory on Wave Fives. I bought WBC a few weeks ago so naturally I am watching it closely. The first chart is as at Wednesday (when I usually write my articles) and the second steps back in time to the end of August – a great feature of ProfitSource!

click chart for more detail
click to enlarge

click chart for more detail
click to enlarge

I will deal with the second chart first. And yes, I know that is ‘Irish’.

Note the three horizontal lines for each Wave Four and Wave Five. This is a snapshot as at the end of August and a retreat was expected. (In fact, in the first chart you can see this is what happened, which was ‘textbook’ Elliott.) That was why I got on board. When textbook Elliott presents, the probability of making money is high and the risk is more manageable.

My view is that probabilities can be assigned to Waves being met. I am sure there must be statistical analyses on exactly what these probabilities are but I have been watching these for years and I know the likely outcomes from my own experience.

Here’s my stab at what may happen: If the Oscillator does not fall below zero, the probability of the first Wave Five being met is about 70%. Not bad. The probability of the Second is maybe 20-25% and the Third is around 10%. Of course, it is not quite as simple as that and there are other factors at play. We should use further analysis, testing and indicators to help us.

In effect, there are three levels of all five waves – one through to five.

You might ask why am I still in WBC if the first Wave Five has been met? Good question.

My default Elliott chart is periods of 90 – days or weeks - but I do look further out too. If I go to 300-days, this is what I see:

click chart for more detail
click to enlarge

Voila! This may seem like pulling a rabbit out of a hat at a kids’ Saturday afternoon birthday party but it is more real than that, even though I do like kids’ parties, rabbits and Saturday afternoons. Therefore, I intend to stay with WBC and monitor it as we get closer. It is a medium-term play.

There are currently other stocks trending like WBC but space does not permit me to cover them all in detail. Nevertheless, some of the stocks I am looking at include AMC, SUN, WES, KCN, NUF, NWS, OGC, ORI, OSH, PNA, BSL, CSR, FMG, IGO and IPL. I know it’s a long list but I intend to refine it within the next couple of days and short-list some winners using the techniques I have described above. Maybe we’ll look at a couple next week.

I want to close with a reference to Cam’s last statement. He is right - it is important to keep it simple. If what you are doing is complicated and/or you are not winning or enjoying it, then you should revise your approach. There is money to be made.

Enjoy the ride

Tom Scollon