Elliott Wave And Double Divergence Signal Great Trade In S&P 500 (SPY)

There I go again with the long titles, but I had to fit it all in.  Today, there were two excellent trading opportunities I wanted to highlight in today’s intraday structure.  One was a “buy the 4th wave” into confluence support (with a TICK divergence) and the second was a “sell short the 5th wave” that formed on a negative TICK and Momentum Divergence.  Let’s see both of these trade set-ups and how they played out.

Let’s start with the 1-minute structure:

(You’ll need to click for full image)

I’m only showing part of the day in this large chart so I can focus on the fractal Elliott Wave structure intraday and more than that, focus on the two trades that set-up in the highlighted zones. Let’s take this chart step-by-step - don’t get overwhelmed just yet.  Let’s walk through slowly.

First, we had a large gap-down that meandered its way up to fill early in the morning session.  Then we had a fractalized Elliott structure set-up in to the intraday highs just after 10:00am (CST).  You can also see a rising wedge that formed into those highs.

The way I use Elliott Wave intraday is not perfectly like you’re seeing here in hindsight, but to target the yellow zones.  The key to Elliott Wave is the “Third” Wave which clues you in to the possibilities or the “Ripples” in price that are expected to form.  In short, once you recognize a “third wave” (which is usually a large move), your trading strategy becomes the following:

1.  Look to buy the pullback/retracement into confluence support which comprises a 4th Wave

2.  Look to Sell Short the top of the fractalized 5th Wave to anticipate an A-B-C correction.

I argue that you can’t easily identify the first, second, or even the 3rd wave as they develop, but once you see what looks like a 3rd wave (aka - big impulse) you can look back to see if there might have been a possible Wave 1 and then Wave 2.  In today’s action, we had it.  Also, the 3rd wave itself subdivided.

So, jumping ahead, we want to buy when we think the 4th wave completed.  In the 1-minute chart, the 4th wave formed an “A-B-C” 3-wave pullback into confluence support via the 200 SMA and yesterday’s close.  On the 5-minute chart (see below), we pulled back into the confluence of yesterday’s close, the 20 EMA, and the 50 EMA.  You could have placed your stop beneath the (blue) 50 EMA and played for a target of a new swing high - which we got quickly after.  Look closely and you’ll see a slight positive TICK divergence as price came into confluence support.

Price then made a 5-wave fractal advance - of which you could have been long - into new highs, though this time we formed a negative TICK divergence (which leaps off the chart at you).  At this time, you could have exited your “4th wave long” and then entered a “sell after the 5th wave short” and played for an ABC wave (which actually went far lower than most people expected).

Notice how the fractal 5th wave (see 1-min chart) formed on a negative 3/10 Oscillator Momentum Divergence and TICK Divergence - both of which heightened the probabilities of a successful trade (you could have placed your stop just beyond your entry when you felt the final wave completed).

SPY 5-min structure:

The 5-min structure clearly highlights the negative divergence.

Now, in conclusion, do you *have* to use Elliott Wave in your intraday trading?  Absolutely not.  You could have simply bought a pullback into support and then sold a negative momentum and TICK divergence.

However, if you add Elliott Wave into your trading as a confirmation/non-confirmation tool, you might be able to add a little more alpha by putting on a larger position due to increased confidence and probability, or you’ll decide to take a trade that you might not otherwise have taken.

Yes you can do it because a client of mine pointed this out to me excitedly in real time today and we discussed all this as it happened (buying wave 4 and then anticipating the end of the 5th wave).  We had discussed some of the nuances of intraday Elliott during our weekend phone call and here was a great opportunity to walk through a real-time example that played out very nicely.  I couldn’t have asked for a better example!

The point of this is to show you that Elliott Wave is just one of many indicators (or strategies) that can help you in your trading - no, it’s not perfect but no indicator is perfect.  All we can do is place the odds as much in our favor as possible and then honor our stops (manage our risk) accordingly… and try to have fun while doing it.

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