Investigations - Part 4

Note: It may help to refer to the previous postings in this series.

     This infrequent series of postings has been examining two questions. The first is whether one can tell (at the time it is occurring) whether trend exhaustion will result in either 1) just a correction (pullback or consolidation);  or 2) in a full change in trend. To help answer that question we started using D-wave analysis to investigate whether impulse waves 1, 3, and 5 at one time frame are composed of a full five wave impulse sequence on the next lower time frame. For instance, we saw that Quarterly wave 3 (D.3) was, on the monthly chart, composed of a complete five wave sequence from the late 1982 low up into the high of 2000.  However; since this five wave sequence "nested" within a quarterly chart "third wave" and not a "fifth wave", the implication was that a trend change would not occur - only a correction associated with the quarterly fourth wave (D.4). The change in trend would have to wait until the completion of a full five wave sequence at the quarterly level.
     Does this same nesting characteristic show up in quarterly wave D.1 which began at the 1974 low? Yes. You can start a monthly sequence here for two reasons. The primary one being that the higher (quarterly) wave began here. Secondly you may note that the 1974 low (60.96 in in October) is a 21 period low. The analysis then reveals D1 at the 1977.1 (January) high; D2 at the 1978.3 (March) low; D3 at the 1980.2 high; D4 at the 1980.3 low; and D5 at the 1980.11 high. And so, as with quarterly wave D.3, quarterly wave D.1 is composed of five waves on the monthly scale.
     What should we expect during a correction? Will there be a full A-B-C wave structure? That is, will the corrective wave structure "nest" within the higher time frame's single corrective wave? Examining D-wave 2 (D.2) on the quarterly chart. With this wave, the answer is 'no'. The monthly chart only shows one wave down. How then do we know that the corrective sequence is over? The authoritative indication is when the quarterly chart fulfilled the requirement for D.3 to be underway, and in my work that is a high greater than all previous 20 price bars.
     At this point our theory concerning D-waves is that impulse waves sub-divide into five's and corrective waves into one or more waves. Without a definitive number of D-waves in a correction we may want to supplement what we mean by a correction in terms of other tools. One example is to use TDST support and resistance levels. With regard to the quarterly chart, if we were only expecting a correction (pullback or consolidation) from the year 2000 high, then the TDST support level (733.54 at the time) would be expected to hold. Indeed it did, as the accompanying chart shows.
     Next time I want to investigate the decline (Quarterly D.4) from the 2000 high on the monthly chart.
     To Be Continued ....