Post Reply 
 
Thread Rating:
  • 0 Votes - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
Should we be using NEWR on Indices?
01-29-2011, 08:06 AM
Post: #1
Should we be using NEWR on Indices?
Thsi follows on from a point raised by Tom on the S&P thread about the DOW and S&P suddenly needing to develop different counts due to an unusual relative move between the two Indices.

Following from that I raised the point about the DOW only being based on 30 things, hence it might be prone to a sudden move based on a specific set of circumstances affecting just one of them. The FTSE suffered the same thing previously with BP - only one out of 100 but massivley weighted in the calculation.

This started me thinking about using any High/Low based system, not just NEWR.

The FTSE is made up of sectors and two of them, Mining and Financials both suffered at the same time but for two different reasons. Mining due to possible Chinese attempts to limit their inflation and Financials due to yet more concerns about European debt.

It could well be that every other sector had a count which matched that on say the S&P or DOW, BUT because of the effects of those two sectors the whole FTSE couldn't.

cheers theory
Find all posts by this user
Quote this message in a reply
01-29-2011, 06:24 PM
Post: #2
RE: Should we be using NEWR on Indices?
(01-29-2011 08:06 AM)theoryman Wrote:  Thsi follows on from a point raised by Tom on the S&P thread about the DOW and S&P suddenly needing to develop different counts due to an unusual relative move between the two Indices.

Following from that I raised the point about the DOW only being based on 30 things, hence it might be prone to a sudden move based on a specific set of circumstances affecting just one of them. The FTSE suffered the same thing previously with BP - only one out of 100 but massivley weighted in the calculation.

This started me thinking about using any High/Low based system, not just NEWR.

The FTSE is made up of sectors and two of them, Mining and Financials both suffered at the same time but for two different reasons. Mining due to possible Chinese attempts to limit their inflation and Financials due to yet more concerns about European debt.

It could well be that every other sector had a count which matched that on say the S&P or DOW, BUT because of the effects of those two sectors the whole FTSE couldn't.

cheers theory

Excellent question Theory.

My understanding is that EWT describes the actions of human crowd behaviour. To best observe crowd behaviour in financial markets you need as many market participants as possible. I have always read that EWT is easiest to follow in the largest and most liquid markets (e.g. forex) and that individual stocks may trace distorted wave patterns because of the lack of market participants. So I only try and count indices and forex.

I take your point that a move by 1 constituent with a large weighting can cause the overlying index to move by a seeming disproportionate amount. My feeling is this;
(following on from your example) BP itself forms a large portion of the FTSE100. This is because it is an oil stock and the world largely depends on oil. This has allowed BP to grow into a large company. It then follows that the index is weighted in favor of the sectors that are most important to the economy. Therefore the index still represents 'the economy'. If one of these main sectors (or maybe a significant constituent of a sector) turns down then this can lead to a significant impact on the overall economy. (In this example it's arguable that the Deepwater Horizon spill caused any impact on the UK economy) Therefore one company or sector weighing down an index is no inaccuracy as the index still reflects overall market sentiment. My thoughts anyway.

If there was an index that tracked trade volume by all market participants then surely that would be the most reliable one to count?

Here's another thought;
Do we attribute price action to events or do we attribute events to price action? When a market is approaching a 5th wave terminus should we expect a cataclysmic event to occur soon? Or does a cataclysmic event cause a 5-wave move to terminate and correct?
Is the action of the FTSE the cause (because EWT predicts it) or result of actions of the Chinese government and the bail-out of Euro states?

If EWT predicts when a significant event is about to occur then what global event is building that will coincide with the impending correction of global markets? Unrest in Arabic Middle Eastern nations...?

And another thought;
Can EWT be used to predict the end of EWT?
EWT relies on price action derived from the effects of human emotion. As more and more market volume is consumed by emotionless quantitative trading algorithms will there reach a point when EWT no longer describes price action? Price action then becomes a battle between computer program trade decisions? I hope my automated trade strategy makes me my millions before then Tongue

Ray
Find all posts by this user
Quote this message in a reply
01-30-2011, 05:56 AM (This post was last modified: 01-30-2011 05:57 AM by theoryman.)
Post: #3
RE: Should we be using NEWR on Indices?
(01-29-2011 06:24 PM)RayH Wrote:  
(01-29-2011 08:06 AM)theoryman Wrote:  Thsi follows on from a point raised by Tom on the S&P thread about the DOW and S&P suddenly needing to develop different counts due to an unusual relative move between the two Indices.

Following from that I raised the point about the DOW only being based on 30 things, hence it might be prone to a sudden move based on a specific set of circumstances affecting just one of them. The FTSE suffered the same thing previously with BP - only one out of 100 but massivley weighted in the calculation.

This started me thinking about using any High/Low based system, not just NEWR.

The FTSE is made up of sectors and two of them, Mining and Financials both suffered at the same time but for two different reasons. Mining due to possible Chinese attempts to limit their inflation and Financials due to yet more concerns about European debt.

It could well be that every other sector had a count which matched that on say the S&P or DOW, BUT because of the effects of those two sectors the whole FTSE couldn't.

cheers theory

Excellent question Theory.

My understanding is that EWT describes the actions of human crowd behaviour. To best observe crowd behaviour in financial markets you need as many market participants as possible. I have always read that EWT is easiest to follow in the largest and most liquid markets (e.g. forex) and that individual stocks may trace distorted wave patterns because of the lack of market participants. So I only try and count indices and forex.

I take your point that a move by 1 constituent with a large weighting can cause the overlying index to move by a seeming disproportionate amount. My feeling is this;
(following on from your example) BP itself forms a large portion of the FTSE100. This is because it is an oil stock and the world largely depends on oil. This has allowed BP to grow into a large company. It then follows that the index is weighted in favor of the sectors that are most important to the economy. Therefore the index still represents 'the economy'. If one of these main sectors (or maybe a significant constituent of a sector) turns down then this can lead to a significant impact on the overall economy. (In this example it's arguable that the Deepwater Horizon spill caused any impact on the UK economy) Therefore one company or sector weighing down an index is no inaccuracy as the index still reflects overall market sentiment. My thoughts anyway.

If there was an index that tracked trade volume by all market participants then surely that would be the most reliable one to count?

Here's another thought;
Do we attribute price action to events or do we attribute events to price action? When a market is approaching a 5th wave terminus should we expect a cataclysmic event to occur soon? Or does a cataclysmic event cause a 5-wave move to terminate and correct?
Is the action of the FTSE the cause (because EWT predicts it) or result of actions of the Chinese government and the bail-out of Euro states?

If EWT predicts when a significant event is about to occur then what global event is building that will coincide with the impending correction of global markets? Unrest in Arabic Middle Eastern nations...?

And another thought;
Can EWT be used to predict the end of EWT?
EWT relies on price action derived from the effects of human emotion. As more and more market volume is consumed by emotionless quantitative trading algorithms will there reach a point when EWT no longer describes price action? Price action then becomes a battle between computer program trade decisions? I hope my automated trade strategy makes me my millions before then Tongue

Ray

Ray,

The problem is that unknown unknowns cannot show up in EWT based patterns - how can anyone be reacting ahead of something that no-one had considered a possibility?

There is another category though, the "blind spot unknown unknown". I like to think of that as being when the smart money got in/out based on realising something was possible. Whereas others didn't because their blind spot didn't allow them to even consider something was possible.

cheers theory
Find all posts by this user
Quote this message in a reply
01-30-2011, 05:21 PM
Post: #4
RE: Should we be using NEWR on Indices?
(01-30-2011 05:56 AM)theoryman Wrote:  The problem is that unknown unknowns cannot show up in EWT based patterns - how can anyone be reacting ahead of something that no-one had considered a possibility?

There is another category though, the "blind spot unknown unknown". I like to think of that as being when the smart money got in/out based on realising something was possible. Whereas others didn't because their blind spot didn't allow them to even consider something was possible.

I'm not sure I would say that people react to an event before it occurs, as such.
I would suggest that people react in a way that is described by EWT. It then follows that a subsequent unexpected market movement is attributed, by the media and its commentators, to an event that no-one had anticipated - the unknown unknown. It therefore appears that news moves markets. Whereas maybe we would argue that the move was going to happen anyway around price x and around day y because the wave count said so, irrespective of unknowns.
I hope this doesn't come across as the insane ramblings of someone who has become detached from reality and too far absorbed in the world of Elliott Confused

I do like your point about the "blind spot unknown unknowns" though. Mr Rumsfeld missed that one Wink

.jpg  DR.jpg (Size: 10.36 KB / Downloads: 49)

But, I dont mean to stray too far away from your original question as it is a valid one. Should we trade the FTSE or indicies that either represent a market sector or are heavily weighted in favour of certain sectors? (e.g. DJTA or NASDAQ) I think so provided they have enough market participants, then they should exhibit EWT tendancies clearly enough to count. That's all we care about really, isn't it?

Now, when it comes to forex - a currency pair is traded as a price ratio. But, because the price is relative and not absolute does this distort EWT rules and guidelines the further away from parity it goes?
Find all posts by this user
Quote this message in a reply
01-30-2011, 11:52 PM
Post: #5
RE: Should we be using NEWR on Indices?
Let's not forget where RN Elliott developed EW, the DJIA.

Smile

TS Hennessy
Find all posts by this user
Quote this message in a reply
02-01-2011, 03:46 AM
Post: #6
RE: Should we be using NEWR on Indices?
(01-30-2011 11:52 PM)TS Hennessy Wrote:  Let's not forget where RN Elliott developed EW, the DJIA.

Smile

True, and back then the Industrials index represented just that - large industrial organisations. And I guess this is why the wave patterns became aparrent to Elliott - because the index represented a sector of industry where the ebb and flow of price fluctuations were not distorted by the price action of other market sectors - it remained pure so that wave formations were easy to spot.

Then, coming back to Theory's question, maybe counting indices that represent anything other than a single sector would be fraught with danger and that we should seek out purer sources of (liquid) market price action.

By counting the FTSE we are trying to track the state of the UK (and other Global economies) which is influenced by a number of sectors that are doing different things at different times. It all becomes quite noisy.
Find all posts by this user
Quote this message in a reply
02-01-2011, 12:29 PM
Post: #7
RE: Should we be using NEWR on Indices?
There is quite a bit of literature on the subject. The majority of it I
believe shows that this noise is actually the influences which drive the
herd mentality.

I do not find the fact that the DOW has only 30 major components any
limiting factor since it is quite liquid and representative of the intended
goal which is to track major USA industry.

Could one not argue that a single stock like Microsoft even though very
liquid is beset by noise such as analyst up/downgrades?

One might even take the other side of the argument such as Microsoft
being too constrained to the software sector when influences on
purchases of computers like chip prices can hold sway over profits may
not have been factored into price yet at the time of the release of the
news of changes in chip prices. This is too little noise even if briefly.

All in all I believe it is as they say, "It is all in the Price". This applies to
too much or too little and adjustments are being applied constantly,
even when the market is closed.

It is this very 'in the price' effect which gives us the patterns left as
evidence of human behavior we know as EW.

IMO to go down the road of eliminating markets you would first need to
find a universally accepted definition of 'noise'.

The title of the thread asks should we be using NEWR on indices. NEWR
applies everywhere EW applies so the answer is yes. If we don't
others will anyway and the feedback loop will continue as part of the 'noise'.

Smile

TS Hennessy
Find all posts by this user
Quote this message in a reply
Post Reply 


Forum Jump: