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THE 5/34/5 PROFITUNITY MACD
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We found that, by adding a 5-period moving average to the oscillator, we changed the oscillator into a moving average con­vergence divergence (MACD). This last average becomes a "signal line'' or an indicator of market rhythm (discussed in Chapter 9), which allows us further confidence in the trades we are placing. It gives a leading indicator, showing exactly where the market begins to run out of steam. This signal will happen before there is a directional (momentum) change observable in the price. The 5/34/5 Profitunity MACD tells instantly which side of the market we should be on.

There are four primary uses for the 5/34/5 Profitunity MACD:

•  Identifying the peak of wave 3;

•  Determining the end of wave 4, or when its minimum
requirements have been met;

•  Looking for the end of a trend and the top of wave 5;

•  Signaling immediately the direction of the current mo
mentum, or which side of the market the trader wishes
to trade.

Identifying the Peak of Wave 3

In a five-wave sequence, both the average MFI and the 5/34/5 Profitunity MACD will peak at the top of wave 3 (see Figure 7-17). If we place the 5/34 oscillator in a histogram format, we can easily determine the bar on which the peak occurs. Because all oscillators are lagging indicators, the peak of wave 3 will be the highest (lowest) price that occurs between 1 and 5 bars prior to the peak in the oscillator.

Immediately after the peak, we notice the histogram moving below the signal line. The signal line is the 5-bar average of the oscillator itself. When this happens, be careful about plac­ing any longs: the momentum is running out of steam. If long, you may choose to hold on through wave 4 or you may decide to take your profits and wait until this oscillator indicates that the minimum requirements for wave 4 have been met.

Determining the End of Wave 4

After the end of wave 3, the oscillator will pull back with the retracing wave 4. The histogram will fall below the signal line,

telling us that this is not a good place to initiate a long position. However, we must address one more important consideration here. The 5/34/5 Profitunity MACD is a very accurate indica­tor for the Elliott wave, providing the user understands how this indicator works. It is always measuring an Elliott wave. The question arises: Which degree of Elliott wave? Our research indicates that, for the most accurate measurement, the wave under consideration should occupy from 100 to 140 bars. If we are looking at a wave sequence of fewer than 100 bars, the MACD will be measuring the Elliott wave of a larger degree. If the wave sequence occupies more than 140 bars, the MACD will be measuring an Elliott wave of a smaller degree.

As an example, Figure 7-18 is an hourly chart of the Japanese yen. In examining the move from point X to point Y, we are looking for the next profitable trade. Assume that you are not in this market at the moment. It appears to be a five-wave move-up covering the last six trading days.

The first question might be: Are you sure that wave 4 is over? The 5/34/5 Profitunity MACD will give you a definite answer only if you have the appropriate number of bars (100-140) on the screen. From point X to point Y, there are only 33 bars. Notice, though, that the MACD peaks at point A but does not cross the zero line at point B. Because we have only 33 bars on the hourly chart and we need at least four times that many, we can tab down to a 15-minute chart (Figure 7-19) to get a precise reading.

Figure 7-19 shows the same Japanese yen on a 15-minute chart containing 102 bars between points X and Y. There are two important activities to notice in this chart. First, the MACD has crossed the zero line at point R, telling us that the minimum requirements for wave 4 have been met. Thus, early in the trading day on June 9, we could start looking for a good trade location to go long.

Second, this chart gives vital information about what is happening between points P and Q. There is divergence (the price is higher but the oscillator is not), but the oscillator does not go back to zero. This occurrence indicates that point P is wave 3 of wave 3, and wave 5 of wave 3 is at point Q. This knowledge will save you from the most common mistakes Elliotticians make: counting wave 3 inside of wave 3 as the end of the third wave, and then counting wave 5 of wave 3 as a larger degree wave 5.

When that happens, the Elliotticians are short at point ®. The market finishes wave 4 and they get "creamed" because of that error in their count.

Assuming that you found a good trade location based on the crossover of the zero line and you have the appropriate number of bars in the wave count, you are ready to start planning your profit taking. To count more precisely the waves between points © and (D, we must consult a 5-minute chart and get enough bars to count wave 5 of wave 5. From Figure 7-20,

we can see that we are in the fourth wave of wave CD. We have fulfilled the minimum requirements for wave 4 of wave (D {again, as noted by the MACD crossing the zero line), and we can estimate the target zone for the end of wave 5 of wave (D.

These three charts (Figures 7-18 through 7-20) deserve careful study. If you have a thorough understanding of this approach, you will maximize your profits and minimize the risk you need to take. Your entries and exits will generate the con­fidence needed to move to higher levels of trading.

Remember, once you have your wave sequence in the proper perspective (100-140 bars for the wave series you are counting), you can determine when the minimum requirements for wave 4 have been met, that is, when the oscillator crosses the zero line. An important note here: the oscillator crosses the zero line after a peak in wave 3 indicates the minimum requirements for wave 4 have been met. It does not indicate hat wave 4 is over, and it would be premature to place a trade for wave 5 until after this indicator has crossed the zero line.

To increase the preciseness of entering a trade at the end of wave 4, look for the a-b-c or triangle correction. Further, look inside the last wave (c; or e, if in a triangle) for the five magic bullets inside of that smaller wave.

Another way to anticipate the end of wave 4 is to look at the Fibonacci time projections. First, measure (timewise) the dis­tance between the peaks of wave 1 and wave 3. Then multiply this distance by two Fibonacci ratios. You will find that most wave 4s will end in the time period between 1.38 and 1.62 times the length from the peak of wave 1 to the peak of wave 3 when measured from the bottom of wave 2. Putting all these indicators together will give you an excellent target zone, both

Time Period for Possible End of Wave 4

Figure 7-21 A timing model for estimating the end of wave 4.

in time and price, for the ending of wave 4 (Figure 7-21). You then can put on low-risk trade for taking advantage of wave 5.

Looking for the End of a Trend and the Top of Wave 5

After wave 4 is over and wave 5 gets under way, we can begin estimating targets for the end of this five-wave sequence. First, measure the price distance from the beginning of wave 1 to the end of wave 3. Take this number and add it to the end of wave 4. Then, mark off 62 percent of this distance. Between these two numbers (62 percent and 100 percent of the price distance from the beginning of wave 1 to the end of wave 3, added to the beginning of wave 4) is the best target for the end of wave 5.

Next, count the five waves inside wave 5. Repeat the above measurements for each of the five waves inside wave 5. This will give you a smaller target zone for the completion of both wave 5 and wave 5 of wave 5 (Figure 7-22). Remember that all trends end in a divergence between price high and oscillator high at the end of wave 5.

Figure 7-22 The end of wave (5) of wave 5 of wave

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