Question of the Week: 6/5/2006
How important is the "Overlap" rule and do you apply it strictly or loosely.
Sent in by an anonymous client, this concept was discovered by R.N. Elliott. For a complete discussion of this rule, please see page 5-8 of Mastering Elliott Wave. The "overlap" rule is essential to accurate wave analysis and forecasting, without which the theory would be rendered virtually useless. Nearly any scenario desired can be concocted if one fails to apply the "overlap" rule. Therefore, the answer is the rule must be strictly applied.
The "overlap" rule, I suspect, has come into question the last decade or two due to the general appeal and popularity of non-agricultural, futures markets. Futures markets possess characteristics not well-suited for wave analysis. Primarily, all futures markets have expiration dates that create a disconnect and price distortion from one contract month to the next. Secondly, there is a premium added to Futures prices that slowly decays over time until expiration. Both of these realities create havoc for accurate wave analysis. This is the reason I stress the importance of non-expiring, non-spot-based, true cash data for all wave analysis.
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