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TRADING SIGNAL IMMEDIATELY THE DIRECTION OF THE CURRENT MOMENTUM
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Here, we must first determine the relative position between the 5/34 histogram of the oscillator and the signal line (the signal line is the 5-bar simple moving average of the 5/34 oscillator) and then take trades only in the direction of the current momentum. (See Figure 7-23.) This technique is the most sensi­tive and accurate filter for measures of change in momentum. If the histogram is below the signal line, we only take shorts. If the histogram is above the signal line, we only take longs.

We need to look at one more small detail to increase our accuracy in counting the waves. When the proportion of bars (100-140) is correct and we see a divergence that does not go back to the zero line, what we are seeing is a wave 3 peak inside a larger wave 3. The MACD will retrace (but not to zero), then come back and generate a divergence, telling us that it is wave 5 of wave 3 and therefore the peak of larger wave 3 is at that point. Again, the most common mistake Elliotticians make is confusing the peak of wave 5 inside a larger wave 3 for the end of wave 5. Based on this error, they take new positions in the opposite direction and are killed as the real wave 5 evolves and stops them out.

After finishing wave 5 inside the larger wave 3, the MACD will come back to zero line for the indication that the minimum requirements for the larger wave 4 have been met. Wave 4 will often end near the end of the wave 4 inside the larger wave 3. If this point is near a common Fibonacci retracement, it gives more credibility to this target.

With skill in trading this MACD, you can throw away your stochastics, RSI, momentum indicators, and similar tools. Nothing comes close to the accuracy demonstrated by this MACD. This indicator alone should be invaluable to any serious trader.

This divergence pattern happens many times every day in every commodity. It is priceless for both intraday and longer- term position trading.

In Chapter 10, we will put together in a single format (the Profitunity Trading Partner) everything we have discussed thus far and add two more indicators.

SUMMARY

In this chapter, we examined the Elliott wave by looking at the basic rhythms the market follows. Next, we analyzed the characteristics of the individual waves and introduced a tool that takes the ambiguity out of wave counting.

We focused on the four uses of the 5/34/5 Profitunity MACD and reviewed charts that illustrated its capabilities.

In the next chapter, we will examine the underlying structure of the Elliott wave, which is the fractal. We will learn how to trade the Elliott wave even if we don't know exactly where we are in the wave count.

REVIEW QUESTIONS

•  What are the three "unbreakable" rules of Elliott wave
analysis? Which one is often broken?

•  Which one of the three corrective wave patterns should
always contain three waves? Which should always con
tain five waves? Which may contain either five or three
waves? If that wave has five waves, what can you con
clude about the type of correction needed?

•  What are the most common (therefore most expected)
Fibonacci ratios in wave b of (a) zigzag, (b) flat, and (c)
irregular correction?

•  What are the most common (therefore most expected)
Fibonacci ratios in wave c of (a) zigzag, (b) flat, and (c)
irregular correction?

•  What is the best way to trade a triangle correction?

•  Describe the characteristics of wave 1, wave 2, wave 3,
wave 4, and wave 5.

•  What oscillator most closely matches and gives you an
on-line instant readout of the average MFI?

•  What advantage does an MFI have over an oscillator?

•  What vital information does the signal line on the
5/34/5 Profitunity MACD give?

•  What four important bits of trading information does
the 5/34/5 Profitunity MACD offer both long-term
and short-term traders?

•  On what number of divergences will most trends end?

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