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:
There are major differences between the Ray Wave and the Elliott. In the Ray Wave:
- 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.
- 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-wave and 5-wave structures use different ratios and anchor points to define end of moves.
- The corrective waves differentiate between the differing wave structures. Whenever a correction exceeds 20% of wave-2, a new (larger structure begins).
- 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.
- 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:
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):
- 166.40 +/- 20%
- 102.9 +/- 20%
- 94.1 +/- 20%
- 104.25 +/-20% (symmetry with ?)
- 92.30 +/- 20%
- 183.7 +/- 20% (symmetry with )
I decided that:
-  and  were symmetrical.
-  and  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.
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:
- 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].
- 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.
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.