Question of the Week: 11/15/2006

is there any way of determaining the end of the 5th wave of a 5th Extension Impulsion (Terminal or Trending) before the break of the 2-4 trendline.


The problem with 5th Extensions is wave-5 nearly always travels further and faster than expected, creating a difficult and dangerous trading environment. This great trading question was sent in by long-term U.S. subscriber and friend Richard Campo.

In 1st and 3rd Extension Impulsions, waiting for a break of the 2-4 trendline does not require you give up much of the new trend. Unfortunately, following a 5th Extension (where wave-5 is the longest move), waiting for the 2-4 trendline to be reached would mean missing out on a large segment of the new trend.

So, how should you manage entry into a 5th Extension environment. First and foremost, do NOT attempt to pick the end of the extension. Doing so could mean getting caught in the final, violent, upside or downside gap opening that usually occurs at the end of such patterns. Financially speaking, picking the wrong moment to "sell the top" of a 5th Extension advance (or the bottom of a decline) could be your worst trading decision of your life.

To avoid a serious reduction in trading capital, these are the steps you must take to protect yourself and increase your chances of being in when the large, counter-trend move begins. First, make sure wave-5 is longer than wave-3 and that ALL NEoWave price, time and complexity requirements are fully met. Next, wait till you experience an "oh my God" feeling created during the final, nearly vertical market advance or decline. At that point wave-5 will be at least 161.8% of wave-1, wave-3 or waves-1 and 3 combined. If that condition is met, measure the largest, counter-trend price move during the formation of wave-5. If wave-5 is advancing, subtract that amount from the highest price reached by wave-5 (the opposite applies for a declining 5th wave). Increase that amount by 1-tick and place an order to enter the market in the opposite direction of the 5th Extension. If the order is filled, immediately place a stop at the end of wave-5. If the order is not filled and the 5th extension grows larger, repeat the above process until a correction larger than any seen during the development of wave-5 takes place. Once that occurs, the 5th Extension should be over.

You may have to attempt the above process twice before the real trend begins (this occurs when the 5th Extension is itself a 5th Extension), but once in, the trade will pay off handsomely. This is the strategy I used in the Gold market at the 2006 high to catch the large decline that followed.

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