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Since we cannot know in advance whether a move will consist of three (abc, corrective) or five (12345, impulse) waves, we must begin by labeling each wave as 1/a, 2/b, 3/c, and so on. However, because financial markets generally trend upward over the long term through an impulse, we typically prefer five waves until proven otherwise, such as breaks below our colored warning levels.
Moreover, financial markets are fractal, and consequently, larger waves subdivide into smaller waves, which can, in turn, subdivide. Thus, the SOX has completed the orange W-3/c of the grey W-iii/c of the green W-3/c of the red W-a. See Figure 1 above. Assuming five orange waves upward from the late-April grey W-ii/b low, the index should now be in the orange W-4, followed by orange W-5, ideally reaching $5150+/-50, etc. This is all contingent on the index holding above at least last Monday’s low (~$4700) and especially above the orange W-1/a high at ~$4430.
Zooming Out
With the added price data, we can provide a more detailed update on our overall EW count for the SOX, which currently places the index in a Cycle-4 wave. See Figure 2 below. Fourth waves are typically described in EW terminology as flat corrections. Furthermore, EW theory includes a rule of alternation: Wave 4 differs from Wave 2. In this context, Cycle W-2 was an extended nine-year zigzag; therefore, Cycle W-4 is expected to be a multi-year flat.
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