The Ray Wave I

One essential point to bear in mind about the Ray Wave is this: its primary function is to manage risk; it leaves trading, entry, exit etc to the Barros Swing and Market Profile. Unlike the Elliott Wave, the trend of a timeframe is defined not by a 3-wave or 5-wave structure, but whether a market is making higher swing highs and higher swing lows (in an uptrend) and lower swing highs and lower swing lows in a downtrend.

RW is a risk management tool in that it provides a structural roadmap as well as possible termination targets. To arrive at the theory, I borrowed liberally from the Elliott Wave. If you are unfamiliar with the theory, here is a good primer:

http://www.acrotec.com/ewt.htm

There are major differences between the Ray Wave and the Elliott. In the Ray Wave:

  1. Impulse structures can be 3-wave or 5-wave structures. The depth of Wave-2 provides a good indication of whether we can expect a 3-wave or 5-wave structure.
  2. In a 5-wave structure, wave 2 and wave-4 have to be within 20% of one another (i.e. they must have symmetry).
  3. 3-wave and 5-wave structures use different ratios and anchor points to define end of moves.
  4. The corrective waves differentiate between the differing wave structures. Whenever a correction exceeds 20% of wave-2, a new (larger structure begins).
  5. Structures begin at the swing low of the First Higher Timeframe and end either when we breach a swing low (in an uptrend) or swing high (in a downtrend) or there is a line turn in the First Higher Timeframe.
  6. In complex corrections, a new swing extreme that retraces beyond the Primary Zone of the preceding swing is treated as the ‘B’ leg of the of the correction.

Let’s turn to an example, the S&P as at January 04 2008:

03-10-2008-figure-13w-sp.jpg

FIGURE 1 S&P WEEKLY

In Figure 1, the first thing I did was place a 13w swing and Time Price Labels on the swing extremes. I then noticed that the correction in March 03 looked larger than the first 13w swing. So, I placed Time Price Label there and found that it was. For this reason, I included it in my count.

I now had to distinguish the differing degrees and separate the impulsive and corrective waves in any complex structures. I start with the largest correction and work downwards. In Figure 1, we have the following corrective sizes (in chronological order):

  1. 166.40 +/- 20%
  2. 102.9 +/- 20%
  3. 94.1 +/- 20%
  4. 104.25 +/-20% (symmetry with [2]?)
  5. 92.30 +/- 20%
  6. 183.7 +/- 20% (symmetry with [1])

I decided that:

  • [1] and [6] were symmetrical.
  • [2] and [4] were not symmetrical because they failed the Rule of Alternation; see http://www.acrotec.com/ewt.htm)
  • None of the other waves showed symmetry.
  • There was one complex correction.

In Figure 2, I have placed a rectangle around the complex correction.

03-10-2008-figure-13w-rw.jpg

FIGURE 2 Ray Wave Count

Let’s apply the counts step-by-step. My nomenclature hierarchy is:

  • Impulse Waves: Capital Roman numerals []. (), ‘no brackets’; Arabic numbers []. (), ‘no brackets’; Small caps Roman numerals []. (), ‘no brackets’.
  • Corrective Waves: Capital letters [], (), ‘no brackets’; Small caps letters [], (), ‘no brackets’.

On the first pullback of 166.4 points, I automatically labeled it on a weekly chart as a [I], [II]. The deep retracement suggested a 5-wave structure. Once the market accepted above the maximum extension of Wave-[I], I applied the First Shock Ratios to project targets for Wave-[III] and Wave-[V].

At the next correction, we had a pullback of only 102.90 points. There was no symmetry, so I could label this Wave-(I) & (II). At the next correction, we had a complex correction (‘C’ accepted below the Primary Sell Zone of ‘I to A’). This pullback was less than 102.9 +/-20%. So, we could label it Wave I & II.

The next correction 104.25, the second largest correction to date, caused a problem. Firstly, it was within 20% of 102.90. However both were simple corrections so that once the market accepted above the Maximum Extension of 1331.7 to 1227.45, I could safely label the structure as being one independent of 102.90 +/- 20%. Once I formed that opinion, I need to re-label the chart. The re-labels are the ones in Figure 2.

We then had a correction at 1465.95. But since this was smaller than 104.25 +/-20%, it was a wave of a smaller degree.

At 1561.35, we have a correction of 183.7; this is within 166.40 +/-20% (wave-[II]). Since Wave-[II] was simple, we could expect a complex correction. When the market broke above 1586.8 and accepted below the Primary Sell Zone of 1561.35 to 1377.65, we knew:

  1. This could be an Upthrust Change In Trend pattern but this was of a lower probability than the wave being Wave-[B] of Wave-[IV].
  2. Because Wave-[III] was so extended, and because 1576 to 1578 was target area to complete the structure, a Failed Wave-[V] was probable.

Once the market went to 1408.5 and in the process fell below the most likely Running Correction retracements for Wave-[C], we had more evidence of a probable Failed Wave-[V] to come.

On the week of December 7, 2007, the S&P got to the top of the Value Area of the complex Correction and gave a clear rejection signal. This signaled the probability that the structure that began in the week of March 7 2003 was now complete. At the very least we could expect a line correction in the 12-M (i.e. correction of yearly swing line).

However since the 12-M itself gave a possible Upthrust Change In Trend signal of the uptrend that began in 1982, the minimum target, once a 12-m bar confirmed the Upthrust was the Primary Buy Zone – labeled in Figure 3.

03-10-2008-12m-upthrust.jpg

FIGURE 3 12-M Upthrust

You’ll notice that nowhere in this analysis do I speak of Trends, Zones, Setups etc. The Ray Wave is a risk management tool. It assesses the probability of the continuation of the current structure. It leaves it to the Barros Swing and Market Profile to trade.

6 thoughts on “The Ray Wave I”

  1. Ray

    The series of choppy markets must have taken a toll on my nerves as I had to completely unwind with Rachmaninov Piano Concerto No 3 by Lang Lang and Beethoven Violin Concerto in D by Yehudi Menuhin (my favs, for hours!) Music works wonders on our nerves, like a form of meditation.

    When US market opens at 8.30pm (local)for Gold and 9.30pm (local) for ES, I was ready to face it, another kind of music, so to speak.

    I was uneasy about GC and decided to exit my existing position just before the open as it was showing a reversal of trend.

    After the first hour of opening, the market was clearer and I re-entered long again for GC.

    I then turned to ES and going by your RW Monthly and MP of a 3i down day last Friday, we are looking for a break of a spike down below the Primary Sell Zone, by end of the month, for a CIT.

    My Market Delta footprints triggered a short for ES after the first hour of opening, and I took an intra day short at 1290. The market was mixed and by about 2.45am Singtime, my orbital nerves could not hold up and I exited at best ie 1279, although it closed lower at 1275.5.

    Gold and Crude still took the top spots and I am holding my GC for a swing/position trade.

    Ray Wave has been helpful in forecasting the probability of a 12-m Upthrust CIT which when confirmed, will bring us to the Primary Buy Zone for ES.

  2. Hi Ana

    Looks like good trading. Glad you have been using the RW – I know it was hard yak in the beginning but as is your style, you persisted.

  3. Is this a bit similar to Ganns method of looking for an over balance of price and time for a change in trend? sincerely baz

  4. Hi Baz

    You could say that…. I suppose. I have not thought about it in that way.

    But there is a big difference.

    Gann took the view that a correction greater in time and/or space than previous is an indication of a change in trend.

    This is not the case for the Ray Wave. Here the key is whether a previous swing extreme is breached and whether we see a CIT pattern (NOT stuff).

    What the RW does say is: if you are at Price Targets and the structures suggest completion for that timeframe, then it’s a high risk to assume that the trend will continue. This is the case for example for the ADUS.

  5. Dear Sir,CIT does this mean correction in time? I have missed the definition somewhere.sorry. Could i think of the Ray Wave in these terms. From your study of waves, you have found a consistent structure (nature) and ratios to the wave and that an abberation to this pattern could indicate a possible change,thereby assisting with risk management. Baz

  6. Baz,

    You have been away from Australia too long; I can’t remember the last time an Aussie called me ‘sir’! (G). Ray will do.

    Abbreviations: No I am sorry, I should have not used abbreviations.

    CIT: Change in Trend

    Ray Wave: That is a very way of putting it. In fact, with your consent, I’ll use that phrase from now on.

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