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:

http://www.acrotec.com/ewt.htm

There are major differences between the Ray Wave and the Elliott. In the Ray Wave:

1. 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.
2. 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. 3-wave and 5-wave structures use different ratios and anchor points to define end of moves.
4. The corrective waves differentiate between the differing wave structures. Whenever a correction exceeds 20% of wave-2, a new (larger structure begins).
5. 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.
6. 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):

1. 166.40 +/- 20%
2. 102.9 +/- 20%
3. 94.1 +/- 20%
4. 104.25 +/-20% (symmetry with [2]?)
5. 92.30 +/- 20%
6. 183.7 +/- 20% (symmetry with [1])

I decided that:

• [1] and [6] were symmetrical.
• [2] and [4] 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.

In Figure 2, I have placed a rectangle around the 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:

1. 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].
2. 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.

Refer this blog post to a friend or colleague…