Can’t miss a top when you see the head and shoulders in place! See examples of a head-and-shoulders pattern in a chart of SPY
By Elliott Wave International
A head-and-shoulders pattern is one of the most well-known classic chart patterns. In this 4-minute video from Jeffrey Kennedy’s Trader’s Classroom, you’ll see an example of a bearish head-and-shoulders formation and a bullish, inverted head-and-shoulders pattern in the chart of SPY, the ETF that tracks the S&P 500. You’ll also learn how to calculate the minimum expected target for the pattern.
Learn How Technical Indicators Can Give Your Trading The Edge
In this free report, you will learn some of the most effective tools of the trade from analysts at Elliott Wave International. Find out which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, even which are best for spotting high-confidence trade setups — plus how they all complement Elliott wave analysis.
This article was syndicated by Elliott Wave International and was originally published under the headline Learn to Recognize a Popular Old School Chart Pattern. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
We don’t have all the answers. But we do have 30-plus years of market experience on our side.
As the books were closed on 2015, the Chicago Tribune reported:
“After a dismal stock finish to 2015, your natural conclusion might be: Why did I bother?
“The Standard & Poor’s 500 finished the year down 0.73%… The DJIA suffered its worst year since the 2008 financial crisis, declining 2.2%… Only the Nasdaq ended the year up… 5.7%…
“…energy stocks as a group plunged 24%, and individually, many fell 30 or 40%. The energy plunge hurt unsuspecting retirees as master limited partnerships, or MLPs, dropped 36% — a shock since analysts previously claimed that pipelines and other infrastructure in MLPs would be immune to an energy crash. Another retiree favorite for dividends — utility funds — lost 9% in 2015, according to Morningstar.
“Bond funds weren’t comforting either. The average bond fund investing in a broad mix declined about 2% … …junk bond funds have declined 4% on average, according to Morningstar.”
We’re only a few trading days into 2016 — yet, so far, the new year isn’t looking any more promising. Right now, you may be scrambling to make sense of the DJIA’s huge tumble on Monday. (It was, in fact, the Dow’s worst intraday start to the year since 1932 and worst full first day start since 2008.) This excerpt from our December Elliott Wave Financial Forecast (published Dec. 4) may help:
“According to the consensus view, the thinking inside the Fed is that the economy is finally healthy enough to return borrowing costs to ‘more ‘normal’ levels.’ Such a move would actually be consistent with many of the most important market peaks in history, such as September 1929 and January 2000 when the Fed famously ‘pulled the punch bowl’ by increasing the Federal Funds rate as stocks reached the extremes of major advances. China did something similar in 2007, raising borrowing costs several times. The Shanghai Composite Index made its all-time high in October 2007.
“Of course there is one big difference: On each of those occasions, the central bank rate hike was part of a series that pushed rates through 6%. This time, the rise will be the first in more than six years, and it will come from a virtually non-existent level of 0.25%. With the economy so much weaker, some will view it as the straw that broke the back of the global economy.
“The truth is that the Fed is succumbing to the feel-good sentiment of a peak in positive social mood by doing what it has always done in the past; confidently raising interest rates just before the start of a major bear market.”
In the days to come, you may hear opinions that the stock market turmoil is the fault of the Fed. Note that the argument we make is more nuanced. We track and forecast Elliott waves, or waves of social mood, and there is a history of central banks acting confidently by raising rates just as the mood (as reflected by the stock market) hits a peak.
So, where does that leave us?
We don’t have all the answers. We do what we’ve done for more than three decades: Study the wave patterns, look at key sentiment indicators, compare them to previous tops and bottoms — and put it all together to give you a forecast and a unique perspective on how markets behave.
Monetary “Yentervention” did not cause the currency’s depreciation — it only COINCIDED with it
Talk about “star” wars.
“Asia’s biggest action star” Donnie Yen was just cast in the next installment of the never-ending Star Wars movie franchise. Mr. Yen, in case you aren’t aware, is known as “the strongest man in the entire universe.” (Huffington Post)
It wasn’t that long ago you could say a similar thing about the Japanese yen. Count three years back, to 2012, and the yen looked like the strongest monetary unit in the financial universe, standing at an all-time record high against the mighty U.S. dollar, the world’s “reserve” currency.
Flash ahead to now (circa September 2015), and the yen is down 30% whilst clinging to its lowest level against the dollar in 12 years.
So, what changed?
Well, that depends on whom you ask. According to the mainstream pundits, one main “force” has drained the yen of its superstar status: the almighty “Light S-ABE-R.” Or, in non-geek terms, Japan’s Prime Minister Shinzo Abe, who’s been shaping the country’s monetary policy. See:
And: “Japan Bulls Rest Hopes for Yen Weakening on Abenomics” (Bloomberg)
There’s just one flaw in that logic:
The yen’s record-shattering bull run ended in late 2011 — more than a year before Abe took office in January 2013!
What’s more, Abe did not implement his “three arrows of fiscal stimulus, quantitative easing, and deregulation” — the factors widely held “responsible” for the yen’s weakness — until later in his term as Japan’s Prime Minister.
Now, let’s go back to the very beginning, to late 2011, and examine the yen’s broader trend through the lens of Elliott wave analysis. Here, we come to our November 2011 Global Market Perspective (GMP), where our Senior Currency Strategist, Jim Martens, identified a historic, decades-long Elliott wave “ending diagonal” pattern on the yen’s price chart.
As its name implies, an ending diagonal is found at the termination points of larger wave patterns, indicating exhaustion of the larger trend. When an ending diagonal … well, ends, the prices reverse and carry to the pattern’s origin — or even further.
The terminal nature of ending diagonals fortified the November 2011 Global Market Perspective’s bearish yen/bullish U.S. dollar forecast:
“USDJPY has been falling since June 2007 in a thrust from a [4th-wave] triangle that would end an impulsive decline lasting at least 40 years. The thrust [lower] has been unfolding as an ending diagonal, and as such, an abrupt turn [higher — towards weaker yen and stronger dollar –] should come as no surprise.”
The rally indeed took off the 2011 low, yet took a while to warm up. But, by January 2013 — coinciding with Prime Minister’s Abe taking the office — Global Market Perspective confirmed a long-term reversal was now underway:
“The recent advance in USDJPY since September  is typical of third waves. There will undoubtedly be pauses along the way but next year or so [i.e., in 2014] should easily see USDJPY in the 124.16 area.”
This final chart captures the full extent of the USDJPY’s three-year long, 30%-plus uptrend:
Bottom line: Abe’s monetary “Yentervention” did not cause the yen’s depreciation; it coincided with a terminating Elliott wave ending diagonal pattern on the USDJPY’s price chart, which called for an upward reversal (towards weaker yen and stronger dollar).
You’ve just seen how invaluable Elliott wave analysis can be in clarifying long-term trend changes before they occur — and regardless of the political and economic factors.
Now, you can see how equally useful our technical analysis model is in anticipating near-term trend changes in EURUSD, Chinese yuan, and more — 100% FREE!
Right now, our free-membership Club EWI is featuring an exclusive new interview with EWI’s Senior Currency Strategist, Jim Martens.
In this compelling one-on-one ElliottWaveTV interview, Jim walks you through multiple labeled price charts of the world’s leading currency pairs — including the USDJPY.
You’ll watch Jim focus on the recent USDJPY “nosedive” towards a stronger yen and give you specific price levels which, if breached, would tell you if the yen is to get even stronger.
So, here’s what you need to know:
This 6-minute Club EWI interview with Jim Martens is absolutely FREE to all Club members
Besides USDJPY, Jim also shows you the “exciting” road ahead in the EURUSD and China’s yuan.
This article was syndicated by Elliott Wave International and was originally published under the headline Why the Japanese Yen’s Bull Run REALLY Ended. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Elliott Wave International senior analyst shows you how to identify quality trade setups
“I always will be an Elliottician, but other technical tools have merit and are indeed worthwhile: they allow me to build a case, build a more confident reason for making a forecast and for taking a trade; making a trading decision.”
I recently asked Elliott Wave International analyst Jeffrey Kennedy to name his 3 favorite technical tools (besides the Wave Principle). He told me that Japanese candlesticks, RSI, and MACD Indicators are currently his top methods to support trade setups.
In this 3-part series, we will share examples of how to use these 3 tools to “build a case” in the markets you trade. These practical lessons allow you to preview how Jeffrey applies techniques with proven reliability to support his analysis.
We begin this first lesson with a basic candlestick-style price chart.
You may be familiar with an Open-High-Low-Close (OHLC) chart: comprised of vertical lines with small horizontal lines on each side. The top of each vertical line is the high and the bottom is the low. The small horizontal lines on either side represent the open and close for that period.
Here’s an example of a Japanese Candlestick chart:
Japanese candlestick charts employ the same data that OHLC price charts do except that the data is expressed differently. The real body is the range between the open and close, and appears as a small block. Shadows are the lines that extend upward and downward from this block, and represent the highs and lows.
Next, take a look at the chart below.
Two bearish candlestick reversal patterns that Jeffrey finds highly reliable are the Evening Star and the Bearish Engulfing Patterns. This weekly continuation chart for the Canadian Dollar combines a 20-period moving average to show that the trend is down — allowing you to focus on bearish reversal candlestick patterns to spot trading opportunities.
Jeffrey notes that “combining these reversal patterns with moving averages makes them even more dynamic because they focus your attention in the direction of the larger trend.”
Japanese Candlesticks begin our spotlight on Kennedy’s top 3 ancillary tools for trading with the Wave Principle. Over the next two weeks, we’ll share parts two and three– how Kennedy uses RSI and MACD Indicators to support his Elliott wave interpretation.
If you are interested in learning how to become a more successful technical trader, get more lessons like this in Jeffrey Kennedy’s free report, 6 Lessons to Help You Spot Trading Opportunities in Any Market.
This free report includes 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow, starting now!
EWI’s senior analyst shows you a beautiful example of how supporting indicators help identify a trade setup in Halliburton (HAL).
“There are many different forms of technical analysis. A completed Elliott wave pattern supported by additional evidence allows for more confident forecasts and higher probability trades.“
Trader and technical analyst Jeffrey Kennedy has more than 25 years of experience using with the Elliott Wave Principle. To support his Elliott wave analysis, Jeffrey says that 3 of his favorite technical tools are Relative Strength Index (RSI), MACD, and Japanese candlesticks.
This 3-part series includes Jeffrey’s practical lessons and proven techniques to support his wave counts (read Part 1 here >>). Today’s video clip shows you how RSI range rules can help identify trading opportunities: Part 3 will cover MACD.
This lesson, excerpted from his Trader’s Classroom educational service, gives an overview of RSI followed by a video example. Be sure to look below the video for an opportunity to get more free lessons from Jeffrey Kennedy.
Buying pullbacks in uptrends and selling bounces in downtrends are great ways to trade trending markets.
Developed by J. Welles Wilder, Jr. and presented in his 1978 book, “New Concepts in Technical Trading Systems,” RSI measures the strength of a trading vehicle by monitoring changes in closing prices and is considered a leading or coincident indicator. Andrew Cardwell popularized RSI as a trading tool by introducing the concept of range rules.
The theory behind range rules is that countertrend price action in trending markets has specific momentum signatures. RSI, for example will find support within roughly the 50-40 region when pullbacks in uptrends occur. Conversely, when bounces develop in downtrends, RSI will meet resistance in the 50-60 area.
Taking the path of least resistance is a benefit of trading in the direction of the trend. Moreover, the use of RSI and application of Andrew Cardwell’s range rules help identify when a trader can rejoin the trend.
In these three free video lessons, Jeffrey Kennedy shows you how to look for trading opportunities in your charts. Kennedy, instructor for Elliott Wave International’s popular Trader’s Classroom service, reviews the 5 core Elliott wave patterns and shows you how to combine technical methods to create a compelling forecast.
This article was syndicated by Elliott Wave International and was originally published under the headline (Video) Top 3 Technical Tools Part 2: Relative Strength Index (RSI). EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Here below, you can read an exclusive excerpt from Chapter 1:
Chapter 1: A Useful Trading Methodology
Of the many ways the Wave Principle can improve trading success, for me, points 1, 2, and 6 are the most important. I like to trade with the trend, and the Wave Principle allows me to identify that trend…
The setup waves — the waves we’re trying to identify in order to prepare for the trading opportunities — are wave (2), wave (4), and wave (B)…
Let’s concentrate on trading wave (3), since it is usually the strongest and longest wave, and its trend is clear. That means that we want to identify the wave (2) that will lead into a strong third wave.
Now, let’s jump off the page and into the real world where you can see exactly how Jim used this one simple lesson to identify a major turning point in euro/dollar (EURUSD).
The time was mid-2014. The euro was orbiting a 2-and-1/2 year high against the U.S. dollar. But, as early as mid-May, Elliott wave patterns already showed cracks in the euro’s bullish case. And on June 27, Jim recorded an urgent video for his Currency Pro Service subscribers in which he warned the buck’s luck was about to change.
You can listen to a clip from Jim’s June 27, 2014 Currency Pro Service video right here. Note the basis for Jim’s dramatic forecast — an imminent third wave.
Soon after, the EURUSD followed its Elliott wave script. The third wave initiated the market’s largest annual decline since 2005 and pushed the U.S. dollar to its highest level in 12 years.
Riding forex “bike” isn’t easy. But right now, you can utilize the “training wheels” of Jim Martens’ enduring classic “How to Use the Wave Principle to Boost Your Forex Success” — free. With 14-pages of original analysis, detailed charts, and timeless trading examples, this report is a must-have for every serious trader in not just currencies, but every single financial market.
The best part is, the entire report is available at the incredible discount price of $0.00! Yes, you read that right. Jim’s “How to Use the Wave Principle to Boost Your Forex Success” is ready to view as soon as you become a free Club EWI member, a 325,000 member-strong online community of your fellow Elliott wave fans.
If you’re already a Club EWI member, click here to instantly download your copy of Jim Martens’ “How to Use the Wave Principle to Boost Your Forex Success” (.pdf)
This article was syndicated by Elliott Wave International and was originally published under the headline The U.S. Dollar’s 2014-2015 Rally: Wave 3 in Action. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
The following trading lesson has been adapted from Jeffrey Kennedy’s eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. You can download the 14-page eBook here.
“How to draw a trendline” is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.
Yet you’d be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of Trader’s Classroom service, puts it:
“A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic.”
In other words, a trendline can help you identify the market’s trend. Consider this example in the price chart of Google.
That one trendline — drawn between the lows in 2004 and the lows in 2005 — provided support for a number of retracements over the next two years.
That’s pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that often “contains” the corrective price action. When price breaks out of this channel, there’s a good chance the correction is over and the main trend has resumed. Here’s an example in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.
For more free trading lessons on trendlines, download Jeffrey Kennedy’s free 14-page eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed. Download your free eBook.
As of 2013, the daily trading volume in foreign exchange was more than $5 TRILLION a day. EWI’s currencies expert, Jim Martens, discusses the pros and cons of trading forex vs. trading stocks.
Who is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s forex-focused Currency Pro Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including two years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.
Vadim Pokhlebkin: Jim, many readers of elliottwave.com tell us that they want to make money trading the markets. Would-be speculators have lots of options. Your area is forex — the market which has been growning by leaps and bounds. Can you explain why I’d want to look at forex and not, say, the more “traditional” stock trading?
Jim Martens: A few reasons are immediately obvious.
1. Liquidity. Currency markets are much larger than equity markets. By most estimates, the daily volume in forex is as much as 10 times larger than the combined volume of ALL of the world’s stock markets. That makes it a very liquid market.
2. 24-hour-a-day trading. We are also talking about a market that trades around the clock. That means that if you are a short-term trader and the price spikes after hours, you can adjust your existing position or enter a new one without having to wait until the market reopens the next morning. Sometimes you can do that with stocks too, but typically the spreads (the bid/ask) in stocks after hours widen out, so you may have to pay extra to buy a stock that, for example, announced great earnings after the close of the stock exchange at 4 PM.
That’s not the case with forex. Liquidity stays plenty deep for most investors around the clock. Yes, there are moments when currencies are less liquid, but for most participants, liquidity is fine even then. Spreads stay tight, too — for example, for the euro-dollar exchange rate, or EUR/USD, they are typically 2 pips (points) or less, and they may go to 3 pips when liquidity is not as high. But rarely do we ever see a major widening in spreads.
3. Manageable number of trading choices. I think the ease of choosing a currency to trade is also a big advantage. How many stocks now trade around the world? Between the U.S., European and Asian stock markets, there are at least 40 industries, each with a number of sub-industries, and each one of those with 100+ stocks. So we’re talking about tens of thousands of stocks — and you have to choose the right one! Even in bull markets, while “the rising tide lifts all boats,” as the saying goes, it may not lift your particular “boat” — in fact, your stock may even decline if it’s not the best stock in its peer group, or if you’re in the wrong sector. Often, you see your sector or stock fall even as the general market rises, so you have to be very good — or lucky — at your stock picks.
The currency market has far fewer choices, and it’s a good thing, because that makes your job much easier. Most forex traders stick to the major pairs; in fact, the bulk of trading is between the U.S. dollar and euro — by some estimates, up to 70% of the total daily volume. Besides EUR/USD, we have 5 or 6 other major pairs — and by watching those, you are basically watching the entire world. In EWI’s Currency Pro Service, we track and forecast 11 most popular forex pairs, plus the U.S. Dollar Index.
Of course, you could expand your forex trading into cross rates — those are non-U.S.-dollar currency pairs, like EUR/GBP, for example. But even then we’re still talking about maybe two dozen most active markets versus tens of thousands of stocks. So currencies are just easier to follow in that regard.
4. Limited impact of financial news. Here is another advantage of trading forex. When you trade individual stocks, financial news plays a much bigger role: sector news, individual stock news like earnings, etc. With currencies, we focus on “the big story” instead. There are big economic data releases coming out of each country every week, but we watch economic data calendars and know when they are coming out — and they rarely surprise us. Instead, we spend more time watching forex markets’ technical indicators like Elliott wave patterns, momentum like RSI or MACD, Fibonacci price targets, and so on.
5. Easy long, easy short. Forex offers you the flexibility to go long and short with ease — something that stocks just don’t. When the broad stock market declines, most people are uncomfortable selling short — that is, selling a stock they don’t own in hopes of buying it back later, returning it at a lower price and capturing the spread. Most investors just don’t do that, even with some new avenues for doing so that became open in recent years: mutual funds, ETFs, etc.
In forex, it’s a whole different story. Whenever we quote a currency market — take EUR/USD, again — we are comparing one currency against the other; we are tracking the value of the euro against the value of the dollar. So even when we are selling one market, we are always buying another! We are always buying the base currency, which is the first one in name of the pair. In EUR/USD, the base currency is the euro. On the other hand, in dollar-Swiss franc (or USD/CHF) we track the value of the dollar relative to franc; the dollar is the base.
6. Volatility and trend-following. Forex markets have lots of volatility, too — good for aggressive traders. And if you’re a macro-trader, currencies are well-known for staying with the trend for a long time, too. Volatile at times, yes, but steadily trending.
So, there are several reasons why one might look at forex versus stocks.
Forex FreeWeek is one of our most-popular events and always gathers thousands of your fellow Elliott wave fans from around the globe.
During Forex FreeWeek you get unrestricted, 24/7 access to intraday, daily, weekly and monthly forecasts — including charts and videos — from our premium-grade Currency Pro Service. Whether or not you trade currencies, this is a great opportunity to learn more about Elliott wave and its application in real-time markets, free.
Sign up now and you can watch a new bonus video that illustrates how the Wave Principle helped guide subscribers through the recent 6-month EURUSD drop.
Editor’s note: The following article originally appeared in a special September-October double issue of Robert Prechter’s Elliott Wave Theorist, one of the longest-running financial letters in the business.
It piques our interest when a person or company makes the front page of a magazine or newspaper. On August 15, USA Today ran an article with a chart on the share-price performance of Warren Buffett’s company, Berkshire Hathaway. The Guardian and other papers covered the news, too, which was that the stock had cleared $200,000/share.
The stock (symbol BRK-A) has returned a 19.7% compounded annual return to shareholders since 1965, the year Buffett turned a failing textile company into an investment company. It has returned 22.8% annualized since 1977. Let’s just say that the stock has produced about 20% per year compounded.
The above figure shows that the stock has just met a 16-year resistance line on arithmetic scale. The next figure shows that it is still a bit shy of that line on log scale.
As you can discern from the second figure, the stock enjoyed a persistently steep rise until early 1998. In 1996, the stock was getting a little expensive for the average investor at $30,000/share, so Buffett created a “Class B” stock, a smaller share selling at a fraction of the price of the “Class A” stock. It began trading in May of that year. So, the public was given this opportunity two years before the steep rise ended on June 1, 1998.
Since then the stock has still been beating the market but at a slower pace. To put the difference in perspective, the stock rose 2100 times from the 1974 low of 40 to the 1998 high of 84,000 and only 2.5 times from there to now, which is 1/840th of the multiple in two-thirds the time. Loosely stated, the latter rate of rise is 1/560th of the former.
Buffett’s return is amazing, but what makes it more amazing is that he started his investment empire the very year the U.S. domestically went off hard money and one year before the Dow made a major top in terms of real money (gold), which it is well below today. The era of rubber finance has goosed investment compounding, and Buffett’s style was made for it.
We could be wrong, but we think the era of inflationary finance is ending. Its time is due, the price is right, and the Fed is so far out on a limb with leverage that QE-infinity seems unlikely. It will be interesting to see how BRK-A does when the monetary environment fundamentally changes from expansionary to contractionary. Even if it continues to outperform most other funds in the bear market, it is still likely to succumb to its biggest setback ever.
Showing (in our opinion) continued acumen, Berkshire Hathaway “currently has $50-billion-plus in free cash, the biggest cash hoard ever.”
Naturally, “(Buffett) is still bullish and still looking [for buys].” (USA Today, 8/15/14) Things could hardly seem better. But often that’s a good time to sell.
It’s difficult to lean against the crowd and doing so doesn’t automatically mean that you’ll be right. There are never guarantees. But the odds are in your favor.
Please know that EWI does not recommend defying the crowd for its own sake. To be sure, a contrarian can get trampled during the strongest parts of bull markets, or mauled during the worst part of bear markets.
A prudent investor looks at the best available evidencebefore deciding how, when and if to act.
Be assured, dear reader: Your risk-free review will likely be one of the most important investments you make at this juncture.
To that end, EWI offers you a no-obligation education in Elliott Wave analysis. See below for details.
The Elliott Wave Crash Course is a series of three FREE videos that demolishes the widely held notion that news drives the markets. Each video will provide a basis for using Elliott wave analysis in your own trading and investing decisions.
Robert Prechter: “Charts tell the truth. Let’s look at some charts.”
During QE3, the latest round of the Fed’s quantitative easing, the stock market rose. We all know that.
But did you also know that commodities fell?
That’s right: QE3 had zero effect on commodities — or maybe even a negative effect. In fact, an unbiased observer of the trend might conclude that the Fed drove commodity prices down.
That, of course, would be heresy to investors who believe that the Fed’s actions have been inflating all financial markets.
What should you make of the fact that commodities have failed to respond to the massive, historic, unprecedented central-bank stimulus? We see it as a red flag.
What’s more, you may be surprised to know that not one of the Fed’s stimulus programs — QE1, QE2 and QE3 — pushed up commodity prices.
As Robert Prechter, the president of Elliott Wave International, wrote in his November 2013 Elliott Wave Theorist, “Charts tell the truth. Let’s look at some charts.” These four charts and analysis that he published in May, July, and November 2013 tell the story:
(Robert Prechter, July 2013 Elliott Wave Theorist)
The CRB index of commodities has been losing ground for more than two years, as shown in Figure 3. Notice the four short arrows on the chart. Based on their positions, you might think they would mark the timing of accurate sell signalsgenerated by a secret indicator. But there’s no secret indicator. These happen to be the times at which the Fed launched its inflationary QE programs!
Investors almost universally take news at face value rather than paradoxically as they should. So they believed the Fed’s QE actions would be bullish for commodities. But — ironically yet naturally — every launch of a new QE program provided an opportunity to sell commodities near a high.
The first time the Fed bought a slew of new assets (QE0) was in 2008, and commodities went straight down during the entire buying spree.
QE1 (see below) was just a swapping of assets, not new buying, so it wasn’t inflationary; ironically, commodities rose during this time.
Commodities rose a little bit after the inflationary QE2 started but ultimately went lower. Since QE3 and QE4 — the two most aggressive programs of inflating the Fed has ever initiated — commodity prices have been trending lower as well.
Are commodities just late and poised to soar? I don’t think so. Figure 4 shows a chart of the CRB index published inThe Elliott Wave Theorist back in May 2011.
It shows a three-step, countertrend rally … inside of a parallel trend channel … at a [Fibonacci] 62% retracement … thus giving three reasons to expect a peak at that time. [Indeed] the CRB index has trended moderately but persistently lower since then.
Prechter gave another update in his November 2013 Elliott Wave Theorist:
Commodities are in a bear market. Figure 1 proves that the Fed’s feverish quantitative easing (QE) — i.e. record fiat-money inflating — is not driving overall prices of goods higher.
The bear market in commodities began two months before the Fed’s massive asset-buying program began. Despite the Fed’s inflating at a 33% rate annually for five straight years, commodities are still slipping lower.
Prechter’s final point from the November 2013 Elliott Wave Theorist summarizes it best:
None of the believers in omnipotent monetary authorities and their pledges to inflate saw any of those changes coming. Meanwhile, we couldn’t see how it could turn out any other way.
The largest inverted debt pyramid in the history of the world is the reason that QE won’t work. The future is already fully mortgaged.
15 Hand-Picked Charts to Help You See What’s Coming in the Markets
Prepare for 2014 with a complimentary issue of Robert Prechter’s Elliott Wave Theorist
Have you ever seen price charts that tell a story clearly? Prechter chose 15 charts to explain to his subscribers where the financial markets are headed in 2014. They cover markets like the S&P 500, NASDAQ, the Dow, commodities, gold, and mutual funds. With this information, they are now prepared to be on the right side of the financial markets. You can be, too, because, in a rare opportunity, we can offer you a look at the whole issue — FREE.
Prechter says that “charts tell the truth.” Here is your chance to see what truths these charts are telling. If a picture is worth a thousand words, then this latest publication is like reading more than 15,000 words of his market analysis.
What is a moving average? Here’s how EWI’s Jeffrey Kennedy puts it:
A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down.
The moving average is a technical indicator which has stood the test of time. It’s been 27 years since Robert Prechter described this vital tool in his famous essay, “What a Trader Really Needs to be Successful.” What he said then remains true today:
A simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use.
He also says that you can think of a moving average as an automated trend line.
A 20-year veteran of technical analysis, Jeffrey wrote “How You Can Find High-Probability Trading Opportunities Using Moving Averages.”
[Descriptions of the following charts are summaries from that eBook]:
Let’s begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.
For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May, 2008 upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).
Let’s look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.
In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.
Another popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem.
The chart of Johnson and Johnson shows a crossover system using a 13-week and a 26-week simple moving average of the close. Obviously, the number 26 is two times 13. During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buy-side and sell-side trading opportunities.
You can read the first two chapters of this eBook FREE for a limited time.
The first two chapters reveal:
The Dual Moving Average Cross-Over System
Moving Average Price Channel System
Combining the Crossover and Price Channel Techniques
Jeffrey’s insights are all about helping you become a better trader.
Remember, the first two eBook chapters are FREE, so take advantage of this limited-time offer.
Elliott wave analysis is the blade-proof glove with which “to catch a falling knife”. Gold and Silver has been crashing for a while now, and despite Bernake’s printing press, Inflation is nowhere to be seen and commodities are taking a beating, as if deflation is the threat. Let’s look at analysis from June 20th of this year:
By Elliott Wave International
In the wee morning hours before dawn on Thursday, June 20, the precious metals’ rooster crowed, “Cock-a-doodle-DOH!”
It was the ultimate wake-up call:
First, gold prices plummeted 4% then 5% then 6% below $1300 per ounce to their lowest level in nearly three years. Soon, silver followed in an even steeper drop below $20.
At 6:45 am, one popular news outlet went live on the scene and wrote: “It’s a bloodbath at the moment with most technical support levels being broken … calling a bottom would be like trying to catch a falling knife.” -Marketwatch
As for what triggered said knife to fall, you ask?
Well, according to the usual experts and every mainstream news outlet under the sun, the gold and silver bottom fell out after investors digested stimulus-tapering comments from the June 18-19 Federal Open Market Committee minutes.
Upon closer examination, though, there are several problems with this notion:
Fears of the Fed starting to twist shut its QE tap are anything but new. Gold and silver investors have had months to digest this potentiality.
Not to mention the fact that the June 19 minutes made no direct mention of actually stopping its bond-buying program. FED Chairman Ben Bernanke was hypothetical at best, saying, “IF the incoming data are broadly consistent with … and remain broadly aligned with our current expectations … it would be appropriate to moderate the monthly pace of purchases later this year.”
That’s hardly a cease-and-desist order.
And, last, gold and silver prices did not fall immediately after the FOMC minutes were released. In fact, they rose. Headline: “Gold Prices Show Muted Reaction To Upbeat Fed” (Mining.com)
In plain terms: Gold and silver’s June 20 thrashing was not a news-driven move. After all, research shows news and events do not drive stocks and other financial asset prices.
That leaves this explanation: The gold/silver sell-off was the most probable scenario as outlined by the Elliott wave playbook. In this case, that playbook is EWI’s Short Term Update.
In the June 17Short Term Update — before the FOMC meeting even got started, mind you — our analysis set the bearish stage in gold and silver via these charts and analysis:
“[Gold]’s overall trading remains weak. The bounce we noted last evening is over…. A decline through $1373 should indicate that wave __ of __ down is under way. The downside potential indicates at least a sell-off into the $1250-1300 range.”
“[Silver] remains weak and prices appear on the verge of declining to new lows beneath $20.07…. Our near-term stance remains bearish.”
Elliott Wave International forecasted nearly every major trend and turn of the past three years in gold and silver. If you invest in precious metals, you owe it to yourself to see how we got to where we are today.
In a 10-minute video titled Gold Defies Bulls’ Optimism, Elliott Wave International’s Chief Market Analyst Steve Hochberg lays out what has transpired in gold since 2011 so you can understand where it’s headed next.
Gold and silver have been all over the financial news.
On Thursday, June 20, silver fell below $20 (-60% from 2011 high), and gold fell below $1300 (-30% from 2011 high).
We first published the chart below after metals plunged in mid-April. It shows EWI’s forecasts not only leading up to those big moves … but during the past three years of opportunity.
Three years of volatile price action in these two markets is plain to see. And the forecasts speak for themselves.
Overwhelmingly, most metals experts favored the other side of the gold and silver trend for the past three years – and they still do today. Meanwhile, EWI subscribers were prepared ahead of time for nearly every important turn.
Now, some periods are more vexing than others. But currently we are in a period where the wave patterns are particularly clear.
Metals prices may bounce higher near-term – like we warned they would do after the April 16-18 lows – but the quotes on the chart clearly show how countertrends are the source of opportunity. And that is the great strength of pattern analysis via the Elliott wave method, along with tools like sentiment, momentum and price.
For a limited time you can see the full story in metals in a free report from EWI. See below for more details.
Elliott Wave International forecasted nearly every major trend and turn of the past three years in gold and silver. If you invest in precious metals, you owe it to yourself to see how we got to where we are today. In a 10-minute video titled Gold Defies Bulls’ Optimism, Elliott Wave International’s Chief Market Analyst Steve Hochberg lays out what has transpired in gold since 2011 so you can understand where it’s headed next.
Fibonacci is commonly used to estimate supports and resistence levels in stock prices. Here we will not get into why it works. But we will simply observe how it could have helped you in the latest Gold crash.
If you use Elliott Waves in your technical analysis, you may already use Fibonacci ratios to determine targets and retracement levels in your charts.
But have you heard of “Fibonacci Clusters?” Here is an example from the recent Gold market action:
Performing multiple Fibonacci calculations of a price move often yields concentrations of Fibonacci levels, which act as barriers to price moves.
How do you create a Fibonacci Cluster of support or resistance?
In the following chart, you can see how to draw a line from the most recent swing high to the relevant low and then connect previous higher highs to the same pivotal low. In the rectangular box, notice where the advance in GCA reversed from a cluster:
Kennedy covers other examples to explain how slingshots, reverse divergence and positive/negative reversals highlight the same momentum signature:
A bullish slingshot forms when prices make higher lows while underlying momentum surpasses previous extremes. Conversely, a bearish slingshot occurs when prices make lower highs while momentum exceeds prior readings.
In subsequent days, Gold prices fell to below $1550.
Learn How You Can Use Fibonacci to Improve Your Trading
If you’d like to learn more about Fibonacci and how to apply it to your trading strategy, download this 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading.
EWI Senior Tutorial Instructor Wayne Gorman explains:
The Golden Spiral, the Golden Ratio, and the Golden Section
How to use Fibonacci Ratios/Multiples in forecasting
How to identify market targets and turning points in the markets you trade
Explore the rules, guidelines and Fibonacci multiples of impulse waves
Impulse waves are an integral part of the Wave Principle. Understanding their rules, guidelines and Fibonacci multiples will improve your application and your ability to identify high-confidence trade setups.
There are three rules that govern impulse waves:
wave two may never retrace more than 100% of wave one;
wave three may never be the shortest impulse wave of waves one, three and five. It does not have to be the longest, but it may never be the shortest; and
wave four may never end in the price territory of wave one.
Fibonacci multiples are the mathematical basis used to identify wave objectives. For example, we often tend to see a deep retracement in wave two. A .618 multiple of wave one and .382 multiple of wave three are the most common Fibonacci retracements for second and fourth waves. Fibonacci extensions for waves three and five include .618, 1.000, 1.618, 2.000 and 2.618.
For example in this 120-minute price chart of GE, we have an initial move to the downside. Notice the deep retracement in wave 2 – we go back to beyond the .618 retracement at 22.89.
From there, we see a wave three decline followed by a fourth wave bounce — a correction — back to the .382 retracement of wave three at 21.78.
The most common Fibonacci retracement for a fourth wave is a .382 multiple of wave three.
The most common Fibonacci retracement for a second wave is a .618 multiple of wave one.
You may notice another extension, or multiple, on this price chart coming in at 21.06. At that level, wave three equals a 2.618 multiple of wave one.
Within the structures of an impulse wave (or in corrections, for that matter), each wave of the pattern is going to have some type of Fibonacci multiple or ratio to prior waves within the structure.
One of the most relevant guidelines pertaining to impulse waves is that when an impulse wave completes, a correction occurs that pushes prices back into the span of travel of the previous fourth wave (most often ending near its terminus).
If we apply this to GE, you can see how it works:
When we finished the 5 wave decline, it set the stage for a countertrend move back up to the previous 4th wave extreme.
Learn How the Wave Principle Can Improve Your Trading
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