Trading an Extension

Traders are excited about large and fast moves. One such move, which traders would love to trade, is called an extension. These are also known as Elliott impulse waves with exaggerated subdivisions and an ability to catch the majority of the trading community by a surprise. Identifying a beginning of an extension can be extremely profitable. And just like beginning, knowing where the extension is ending could also offer a good exit avoiding unwarranted losses.
So how should we identify them and where is one likely to find them? Extensions can happen both in rising and falling prices. The third wave is the most commonly extended in the stock markets as they are part of a larger impulse within Elliott’s five wave structure. Extensions can also be witnessed in corrections. When an extension happens in a falling market, it’s generally referred to as collapse or capitulation. Extensions of SUPERCYCLE degree lower caused ‘The Great Depression’ and the 2008 crisis also saw emerging markets erode 90% in value owing to extensions.
Since asset markets are linked and human psychology is similar at all time frames (fractalled), extensions can be seen in every asset class at all degrees. Elliott named it the ‘powerful wave’, because it generates the greatest volume and price movement and creates large gains in the market. An extension of a primary, cycle or higher degree third wave sees unprecedented price growth, creating euphoria.
How does an extension look like? We have illustrated here a typical third wave extension in an Elliott five wave structure. As you can see the counting on the chart, this is what Elliott called an extension within extension. Inside the extended intermediate (3) wave, the minor 3 wave is also extended. Do you see how the prices keep extending? Now since the underlying asset in a currency, rising extension is causing increase in worry and fear in the society. The Romanian central banker and the society is afraid regarding the macro economic situation of the country. But as we said the emotion linked with such an extended natural market pattern is an extreme.
We at Orpheus read extreme sentiment as unsustaining and believe that just like BETFI, which is witnessing a negative extension, EURRON is seeing an up extension, both of which suggest more of exhausting trends rather than an unending crisis. In the case of an extended three wave, we can expect the fifth wave to be simple as both fifth and third extensions together are rare.
EURRON here seems to be in the final wave of the Elliott structure, we expect the final fifth to nout push up above 4.7 where we see the currency turning back (strengthening) for a multi month period. This should be accompanied by a reversal on BETFI. Time windows suggest a key inflexion point early MAR and then in JUN.
In conclusion, identifying an extension is useful because it’s a guide to the expected lengths of the ongoing trend both in value and time. Call it fractals, patterns or time cycles, interpreting markets is a science which has more predictability attached to it than all the external information one can ever process. Even if we had access to all the information, we believe an extension simplifies and expresses the essence.
Trade Well
The Orpheus Team