Question of the Week: 7/10/2006

What do you think about Elliott oscillator use?


This question was sent in by a customer in Varazdin Croatia, who asked to remain anonymous (as many do). Iím surprised it has taken so long for this question to come up since many programs that offer Elliott Wave analysis make use of such things.

To better understand my answer, we need to understand the problem with oscillators. By their vary nature, oscillators are based on specific, finite time periods. As a result, an oscillatorís "perspective" on current market conditions is not dynamic, not flexible and merely reflects the mathematical formulaís "opinion" of which wave is forming.

Under orthodox Elliott Wave, when in an uptrend, there are six types of rallies possible (labeled 1, 3, 5, b, d or x) and five types of declines (labeled 2, 4, a, c or e). Each of those 11 conditions possesses unique behavioral characteristics.

On the other hand, an oscillator provides three primary readings - overbought, oversold and "neutral." You could say varing degrees of over overbought and oversold exist, but what constitutes those varying degrees is a matter of personal judgement, which probably changes with frequent regularity based on recent experience.

With 11 distinct, behavioral environments under orthodox Elliott Wave (and 15 under NEoWave theory), the problem becomes clear - an oscillator can only give you "its" opinion of which wave might be forming within the context of "your" overall opinion of current wave structure. So, once again, it boils down to whether your wave count is correct to begin with. Plus, remember, the oscillatorís opinion is "entrapped" within time limits imposed by its mathematical design, which prevents it from adapting as the "pulse" of the market changes.

The bottom line - using oscillatorís to count waves is merely a crutch and one that will not hold you up during complex market environments. If you canít figure out a wave count on your own, it usually means that market is near the center of a large, complex formation. When in such a position, no amount of "help" from outside indicators will make the analysis process any easier or any more accurate.

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