After years and years of using the same technique, I was forced to go back to the drawing board in 2010-2011. The reason? My favorite pattern to trade off of, which I will be detailing later this chapter which I called “W3 pattern break” appeared to be going obsolete. I have a record of be- ing 80%+ accurate with my trading for over 11 years now, but in 2010 it seemed like every time I bought that pattern, the next day I’d be faced with a gap down, or barely enough movement to make a profit and a big fade. It was like everybody was doing the same thing that I was doing with the SAME stock (or my subscribers and followers of Wavegenius.com) and I ended up getting the brunt end of a screw job. Were people screwing with me, or was this technique becoming way too obvious and obsolete?
I would post a Wave 3 pattern chart on my website during a reversal rally off of a Wave 2 zigzag, buy the higher high as I’ve always done for years at the close, and WHAM-O, the stock gaps down and I’m sitting there with a 2%-4%
￼loss that I would be forced to stomach until either my stop hits, or un- til I couldn’t take it any longer. Typically it would be the stop triggering at my standard 2.5% (5% on margin) loss threshold, but they began to add up.
Each loss I noticed came the next trading day, like someone or some thing out there knew what I was holding and wanted to screw me—OR—
￼everybody was doing the same thing, like I stated earlier, and the tech- nique became obsolete. Here’s the pattern that I’m talking about.
This is a chart of a typically successful trade with AAPL back in 2005 (when it was merely $55 a share!) Anyway, the area in blue is Wave 1 which peaked at 56.25, AAPL then begins to correct in a Wave 2, in pink right to .618 retracement in a zigzag, and the “pattern break” is the rally ￼off the Wave 2 low, where I either buy when it retraces .786 of the Wave 2, or 1.00 of the Wave.
Back in 2005, this pattern didn’t seem to get screwed with very often, and I ended up making a minimum of 2% (1% non-margin) on each trade. I’d frequently get a gap up the next day in a congestion gap, and grab my 2% or up to 10%-15%, the big kahuna moves happened 20% of the time where the congestion gap 2% move happened 60%-65% of the time. The other 15%-20% of the time resulted in a loss.
It was like a machine gun/Joe DiMaggio approach. I’d buy this pattern over and over again, grabbing “singles” (2%) before eventually hitting a gap up home run of 10% (or 5% non-margin). It was so successful in 2003-2004 that
my frequent trades, which were profitable 80%-85% of the time, re- sulted in a real net profit of 1776%. Yes, I turned an account valued at around $2025.00 in Feb of 2003 into around $45,000.00 by the summer of 2004.
Where would I buy? At times if the market was very strong that day off of a Wave 2 reversal, I’d buy at a .618 Fibonacci retracement of the Wave 2, ￼.786 of the Wave 2 or more frequently 1.00 retracement of the Wave 2. It was a gimme basically. It seemed like the market makers were forcing con- gestion into the close so they could grab the same 2% too. Here’s where the problem started,” they could grab the same 2% too,” if hundreds or thousands of traders were trying to grab the congestion gap, or maybe even tens of thousands of traders were to grab the congestion gap, what happens to it? IT VANISHES.
My worst trades of 2009-2010 were a direct result of buying trying to grab that small percentage gain. Pre-market I’d see a small gain, which was ok, but by the open I’d often see the gain evaporate quickly and turn into a gap down, it got so bad that I’d run into truncated 5th waves that I may have created on my own. There’s the problem with having a lot of fol- lowers or disciples of your work. The trick you’ve been playing on the market makers became obsolete, and if you don’t re-invent yourself, you’re a goner.
2010 really sucked for me. Early 2010 and a couple AAPL losses later, I was forced to reevaluate, and take a long break from trading. Which is why there’s large gaps of infrequent posts on my old websites and blogs.
I was pretty damn frustrated with this phenomenon, so I had to go way back to an old technique that I used in 2001. Tricking everybody and forc- ing people to buy into what they worse feared. Trying to buy a bottom.
I applied this same pattern to Forex in 2005, and thanks to this tech- nique, I almost doubled my account in a matter of days.
￼2008 I tried it again, this time the first couple trades were great, but soon I knew those pricks at Forex.com
knew who I was and what techniques I used. Pretty soon I noticed the “3rd wave pattern” was vanishing on me, and I even called up Forex.com to lash out at them for fading the pattern on me. I knew for a fact that they knew me from 2005 and wanted to hop onto my trades, trade by trade. In 2008 came my new discovery, let’s make them too scared to bother.
In 2008 during the financial crisis I rarely made stock or options trades mostly because of how terrible it was obviously, massive point losses in the DOW NASDAQ and S&P seemed to happen frequently that fall, so I decided to take a break from the site yet again and focus on Forex. (To this day I pray that E- Trade gets Forex because E- Trade and Schwab are the only online brokers that offer the debit card..Forex.com you need to wire the money if you want access to it, and that takes 2-3 days. I gotta pay my bills! I trade for a living!) Anyway, I opened a Forex.com account and stuck with my 3rd wave pattern break, knowing that nobody knew what I was doing, up until I noticed my pattern breaks were fading like stocks, or my short setups were getting gaps up. I knew these idiots were following me, so I decided to go to an old technique. Buying the bottom of 5th waves and zigzags, lo and behold I doubled my real life account again in 2 weeks, they were too scared to follow me!
￼The reason I had the guts to use this old technique is because I’m pretty darn good at spotting rare Elliott wave 5th wave patterns, I’ve picked bottoms so frequently in the past 11 years that it’s “scared people in high places’. Because they refused to follow this, my profits exploded. In early 2009, I decided to go back to stocks and options, because I picked yet another bottom in late February (it occurred the middle of March 2009)
Don’t get me wrong guys; this technique isn’t completely obsolete. In very bullish uptrends this technique works wonders. But in the recent market in 2011, due to the sideways (and CRASH-like) like nature, pick- ing bottoms of formations and having the balls to buy them is extremely important.
As of Sept 01, 2011, I’ve made 25 swing trades, and have profited on 22 out of the 25 (23 out of 25 if you don’t count the small escape trade losses) and have been successful be- cause I’ve mixed up my techniques to trick the market makers/ subscribers/ followers. Hit them with this, and hit them with that, and throw ‘em a curveball. Instead of being the predictable Joe DiMaggio, I became Nolan Ryan with a wicked curve.
If were in a purely bullish market instead of a sideways mess that we’re seeing in 2011 the Joe DiMaggio approach is fine, basically.
Now finally, I’ll get straight to why you bought this EBook—the reinven- tion of my technique. It seems pretty simple, right? Buy low sell high? Not quite that simple. Using Elliott Wave you need to be able to spot the
￼5th wave down or the bottom of a C wave in a zigzag, from there you need to spot the clues of this 5th wave or C wave and pinpoint when fear in an intraday chart seems the worst.
When I used “the 3rd wave pattern break” technique I would buy when the euphoria was reaching a crescendo, when the market is sideways to down or REALLY down, this ain’t a good idea. Euphoria in a sideways market can evaporate fairly quickly and you could be stuck with a really bad position, buying at the highs and you’re staring down a 200 foot cliff. But my new/old 2001 technique cannot and WILL not become obsolete simply because it requires more balls and confidence to trade off of.
I found that nobody apart from subscribers wanted to follow the bot- tomless black hole of a 5th wave technique, and because of this when I re- leased a trade alert, instead of a gain evaporating, I’d get quite a spike. I made a trade in August 29 2011, which spiked almost 2, its in matter of seconds with AMZN. You could say that I’m finally becoming “aware”. Here’s where it starts.
If you notice, there’s Wave 1, Wave 2, Wave 3, Wave to .382 before a 5th wave down. In the chart I pointed an arrow to the downside that shows that we may get a 5th down. What happened was in this trade setup that there was a
truncated 5th wave down to around 362 near the bottom of my recent Aug 19th bottom call in the S&P DOW and NASDAQ.
￼Example of a successful trade setup
Right at the bottom of this formation was a 5th wave truncation. I saw that it was clearly 5 waves down and bought 1200 shares (600 first and 600 after that at an average price of 362). I ended up selling the 1200 shares for around 372 (could have had sold it at 376, but Steve Jobs hap- pened to step down as CEO from Apple the day I sold it) for a 10 point profit!
Now how did I spot this 5-wave pattern? And when do they form? Right after a stock or ETF peaks after 5 waves up, there’s a retracement. If this retracement drops in a 5-wave pattern, I get very excited. What perfection is to me, is not just 5 waves down, but 5 PERFECT waves down.
Here’s the formula for perfection. It doesn’t appear hard, but when you have real money involved, it can be a little scary, because we’re so used to buying highs and higher highs lol.
Here’s what I typically want in my new trading pattern.
1. 5 perfect waves UP complete in the stock. 2.) We get the first wave down.
2. The second wave or upward B retraces near or exactly .618 of the Wave 1
3. The 3rd wave down is exactly 1.618 X Wave 1 or even 2.618 X Wave 1.
￼4. Here’s THE most important part. The 4th wave up retraces EX- ACTLY .
5. the 3rd wave. NOT .236, NOT .500, or that BS that people come
up with. I’m
6. talking EXACTLY .382, if not EXACTLY .382, pretty darn close to it.
7. And the final step, we get any one of my numerous 5th wave pat- terns.
8. 5th wave has to subdivide into 5 waves and form and ending di- agonal,
truncation or standard 5th wave that’s W1 = W5 or .618 X (w1 + w3).
At times you can use the RSI, if the long-term chart has an RSI for the stock 20 or under, that’s another bottom predictor that occurs frequently. 43
That’s the beef of my technique, BUT here are more scenarios that I like to trade off of utilizing my new technique.
Trade the upward 2
Basically, if the Wave 1 down is pretty steep, say 2%-5% down, and the first wave subdivides on the 5 minute or 10 minute charts, those subdivi￼sions can form a mini 5 waves down, and the upward 2 can retrace .618 of the Wave 1. If a stock like GOOG drops from 600 to 570, a .618 retrace- ment would be about 18 points, which is a great swing trade. But if the Wave down is from 600 to 595, why even bother, of course. This approach can also work on the longer- term 3-6 month charts, which I prefer to trade because the swings are a lot wider.
Trade the upward 4
This can be a very profitable trade if you follow these steps:
1. The stock gets Wave 1 down that’s sizable (say 2%-5%)
2. Wave 2 is EXACTLY .618 (or pretty close) of the Wave 1.
3. The Wave 3 is 1.618 X W1. Must be EXACTLY or pretty close to
4. The 3rd wave has to be worth it, say a .382 retracement of the 3rd wave
5. .382 retracement of sizable 3rd waves, can provide pretty large profits. If
you saw my GOOG trade earlier this year, the 3rd wave was exactly
1.618 and I rode a 20-30 point 4th wave.
Buy the bottom of a C wave in a Wave 2 Zigzag Here’s what’s required.
￼1. The A wave subdivides into 5 waves.
2. The B wave is EXACTLY .618 of the A wave (or again, pretty
3. The C wave is EXACTLY equal length to the A wave (or pretty close and
4. subdivides into 5 waves.
5. The overall market like the S&P DOW and NASDAQ MUST be
6. same pattern.
7. When A = C, buy the bottom of the C and ride the upward 3
I rely less on the zigzag formation to buy, however. I like to buy the bot- tom of 5 waves down, typically because if there’s purity like Wave 2 =.618, Wave 3 = 1.618 X W1, and Wave 4 is .382 of Wave 3, I get pretty ex- cited. These trade setups have worked 22 out of my 25 trades this year (with a little “pattern break” mixed in.)
Here’s a list of what NOT to do.
1. If the stock is in it’s own little world and is not following the S&P DOW
and NASDAQ, don’t bother.
￼2. NEVER EVER assume that a large gap down on earnings is a 3rd wave
down. I guarantee bottom fishing garbage stocks like this is a bad bad idea.
3. The 3rd wave down must not occur on a gap down and has to follow the overall market, you have to see wave 1 of wave 3, wave 2 of wave 3, wave 4 of wave 3 and wave 5 of wave 3 clearly. If you don’t, don’t even think about it. What’s the worst that can happen?
Well, for me, not as bad as you’d think. Say you buy the bottom of what you think is a 5th wave down, and it ends up being a 3rd wave or a pretty big 5th wave, since you know that this is at least the end of a 3rd or 5th, you can typically get a retracement that can either net a good 1% or higher, retrace . 382 from where you paid, or .618 of what you paid.
If it happens to be a 3rd wave down, from my experience, the 4th wave can retrace back to what you paid or close.
If the C wave turns into a 3rd wave and is further than A = C, you can wait for a 4th wave up to make a small profit or regain what you lost. Or if you got trapped in a 3rd wave down instead of a C wave, you can average down. There are times when I buy this pattern using only 50 percent of my account and just in case it turns into a downward 3, I have enough ammunition to buy another 50% of my account to average down.
What 5th wave moves are possible?
Well, if you want the most ideal 5th waves that can provide massive swings to the upside, try to buy at W1 = W5 when the indices are follow- ing that stock, with ending diagonals (ABCDE as detailed in “Elliott Wave Secrets” EBook), and cup and handles (which is also detailed in that EBook). W1 = W5 seems to be the most frequent occurrence, but remem- ber this final 5th wave, if you zoom in on the 1 minute chart MUST subdi- vide into 5 waves. When there’s a lot of fear and the market is cascading down, use this opportunity to buy, not short. I don’t short anymore sim- ply because I believe that there’s too many people following my trades and if they short with me, they can gap it up which kills the trade.