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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.
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
Bernanke is printing money, but commodities are falling. Why?
The size of the wave will surprise most everyone
On Monday Oct. 8 I sat down with Elliott Wave International’s senior analyst Jeffrey Kennedy to discuss his favorite wave pattern of all: the Elliott wave diagonal.
Nico Isaac: You say if you had to pick just ONE of all 13 known Elliott wave structures to spend the rest of your technical trading life with, it would be the Elliott wave diagonal. First, tell us what the diagonal is.
Jeffrey Kennedy: The diagonal is a five-wave pattern labeled 1 through 5, in which each leg subdivides into three smaller waves: 3-3-3-3-3. Unlike motive waves, however, diagonals are the only five-wave structures in the direction of the main trend in which wave 4 almost always moves into the price territory of wave 1.
Nico: So, what makes this pattern so darn special?
Jeffrey: As you can see in the above charts, the diagonal is a terminating pattern. They can only occur in waves 5 of impulses or C-waves of corrections. This is why they’re so exciting. Diagonals precede a dramatic change in trend. And, when they end, prices tend to retrace the entire pattern, or more, and fast.
Put simply: If you see a diagonal, you know it’s soon time to “look up above” or “out below!”
Nico: Could you give us a real-world example?
Jeffrey: Sure. Let’s go back to the May 2011 Monthly Futures Junctures. In the “Featured Market” segment of that publication, I presented the following chart of cocoa that showed a complete multi-year ending diagonal wave pattern and wrote:
“Another piece of evidence that forewarns of an acceleration in recent selling is the larger operative diagonal pattern… This suggests that cocoa prices will continue this year’s sell off for many more months.”
Nico: And then what happened?
Jeffrey: Take a look at this AFTER chart: Cocoa prices sold off to a 3-year low as they were nearly cut in half — the sharp manner characteristic of post-diagonal moves:
Nico: Thank you so much for taking the time to explain the ins and outs of your favorite structure, the diagonal.
Learn the Benefits of Elliott Waves, One Pattern at a Time
Elliott Wave Patterns — a new FREE educational feature from Elliott Wave International — gives you basic lessons and videos clips which explain individual patterns, their rules and guidelines. Real-life examples show you how each pattern fits into the overall wave structure.
New patterns will be added periodically, so check back often.
Elliott Wave Junctures editor Jeffrey Kennedy talks about “the elephant in the room” that no trader can ignore. August 19, 2012
By Elliott Wave International
Senior Analyst Jeffrey Kennedy is a busy man. Along with his regular duties at Elliott Wave International, he prepares 3-5 video lessons each week that teach technical traders how to anticipate — and act on — trading opportunities.
Subscribers say that what sets Jeffrey’s educational service apart is his unique ability to combine easy-to-understand, actionable advice along with a no-nonsense, uncensored look at trading psychology.
Of course, Elliott Wave Junctures is full of useful charts and technical tips. Yet some of Jeffrey’s most priceless content is his straightforward discussion of the problems that most traders face — but few experts talk about.
When I asked Jeffrey about one such lesson that resonated with his subscribers (we call it his “Patience and Persistence” episode), here’s what he said:
I think that hit home because it was honest — someone is finally talking about the elephant in the room.
Patience. Because of modern society, everything is “instant gratification.” Mobile communication, fast food, you name it. Whenever you’re counting waves, there’s a tendency to rush the wave count. It’s something that you’ll always have to be on guard against. That’s why I insist on confirming price action. When the pattern is indeed done, it will tell you it’s done. When you’re not patient, you tend to want to pick tops and bottoms.
Persistence: Just because things don’t unfold exactly the way you want doesn’t mean you’re wrong. If you ask for a raise, and you only get 60% of what you asked for, that’s not a failure. What’s important is the movement; the general trend; your overall assessment of motive wave vs. corrective wave.
Being able to top-tick or bottom-tick the market is ego trading, and it’ll cost you.
In my mind, there’s nothing in the world that’s worth anything that doesn’t take a little bit of patience and persistence to achieve. A relationship, an education or career, a healthy body: how do you get these things? You keep working at it; you keep showing up every day.
14 Critical Lessons Every Trader Should Know
Learn about managing your emotions, developing your trading methodology, and the importance of discipline in your trading decisions in The Best of Trader’s Classroom, a FREE 45-page eBook from Elliott Wave International.
Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know.
Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more!
Deflating debt across the world is providing support for US dollars across the world. OPEC sells OIL in US dollars. For decades people, countries and companies borrowed dollars and promised to pay back with interest. The time to pay it back has arrives and borrowers must find dollars. But how high can the dollar go? Will QE3 provide head winds? What is the long term picture for the next few years?
On July 6, the EUR/USD fell to a new 2-year low.
The reason for the drop?
From a fundamental standpoint: nothing.
There were no new devastating reports out of Europe to explain the euro’s weakness.
Nor good economic news from the U.S. to explain the dollar’s strength.
Nothing other than the “eurozone worries “…which, frankly, have been with us for what, two-plus years now?
In other words, market fundamentals failed to give FX traders a tell-talesignal that a drop to a new low was imminent.
At least one technical analyst did see the drop coming in his charts and alerted his readers to the move with enough time to act.
Update For: Wednesday/Thursday, July 4/5 Posted On: Tue, 03 Jul 2012 14:57:51 GMT EURUSD Last Price: 1.2605
[Topping] The impulsive but incomplete decline from near 1.3500 and the corrective recovery during the first three weeks of June dictate a bearish outlook. From below 1.2744, and ideally below 1.2693, the euro should resume its decline.
(Excerpted from Jim Martens’ Currency Specialty Service, provided by Elliott Wave International.)
EWI Senior Currency Strategist Jim Martens is one of the most sought-after FX strategists and trading instructors in the world. His technical, Elliott wave approach to the FX markets has been featured in numerous forex publications including ForexPros, FX Street, Trading Stocks and others. Jim has spoken at several trading events including The Traders Expo and Traders’ Library Trading Forum.
Here’s what Elliott wave analysis is all about: You study charts to find
non-overlapping 5-wave moves (trend-defining) from overlapping 3-wave ones
With that in mind, please take a look at this chart of the S&P 500, which
our U.S. Intraday Stocks Specialty Service (FreeWeek
is on now) posted for subscribers at 9:37 AM June 14:
Immediately, you can see that the S&P 500 has been moving sideways in a
choppy, overlapping manner. That’s the definition of a correction — i.e., that
is NOT the trend. The trend, as the U.S. Intraday Stocks Specialty
Service editor Tom Prindaville said in the morning market overview, was
higher — at least in the short-term:
…sideways-to-up over the very near term will be expected.
Simply put, overall higher near-term remains the intraday call
— to complete a corrective second wave.
And here’s a chart of the S&P 500 at the close of the market that the Service posted at 3:34 PM on the same day:
To make this bullish forecast, the Service editor Tom Prindaville
was simply following the Elliott wave model of market progression. The model
called for a completion of the developing wave 2 — in this case, “higher
Market corrections — the sideways, choppy moves you see in both charts above
— are notoriously hard to forecast. And not every Elliott wave forecast works
out. But you do get a real, practical roadmap
of the expected market action.
There were few “fundamental” reasons to be bullish on U.S. stocks on Friday
morning (June 15).
If anything, the news that the U.S. unemployment rose in 18 states in May
sounded downright bearish. But stocks rallied anyway — for a seemingly unlikely
reason, explained the pundits: Because all the bad news lately makes it likely
that the Fed will step in again.
(Just as a side note, how many times did the Fed “step in” in
2007-2009 while the DJIA was dropping from over 14,000 to below 6,500? But hey,
that’s ancient history, and besides — “it’s different this time,”
From an Elliott wave perspective, there was another reason for the June 15
rally: the S&P 500 had some unfinished technical business on the upside.
Here’s what the editor Tom Prindaville wrote on Friday morning in EWI’s U.S.
Intraday Stocks Specialty Service (try
it free now):
S&P 500 (Intraday) Posted On: Jun 15 2012
9:30AM ET / Jun 15 2012 1:30PM GMT Last Price:
Trade pushed beyond the 1319.74 level yesterday…[which] is significant
because it implies that, minimally, the S&P wants to take a closer, more
deliberate look at 1338, and the overall proportionally of the recent Elliott
wave action backs that up. For today, persistence atop 1319.74 is needed to see
the very near-term trend up with a minimum upside target of 1338.32.
The S&P 500 closed trading on June 15 at 1342.84, exceeding the bullish
price target U.S. Intraday Stocks Specialty Service gave on Friday
morning by 4 points.
Stock market is struggling. Gold is no longer the safe heaven. Oil is shaky. What is the next big thing? Natural gas rallied 40% in the last two months. Is the cleaner alternative to crude oil braced for another big move to the upside?
EWI’s Senior Analyst Jeffrey Kennedy joins Yahoo! Finance Breakout host Jeff Macke to offer his take on what’s in store for the market that has plagued long-term investors since falling over 80% from its 2005 highs. Kennedy takes viewers through the technicals and offers his long- and short-term forecasts for the market.
Enjoy the interview that was originally recorded on June 19, 2012.
Get 6 Free Lessons to Help You Find Trading Opportunities in Any
In this FREE report from Elliott Wave International, Senior Analyst Jeffrey
Kennedy presents 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. Get
Your Free Trading Lessons Now
Are you nervous when you trade? Trigger happy? Can you not take the volatility well? These will hinder your trading success. Copy the tiger when stalking and capturing a “pounce-ready” trade.
Tigers know the prey they covet is elusive: they show great patience and care when stalking the target.
I came across this description of the tiger’s technique:
“When hunting, this cat…may take twenty minutes to creep over ground which would be covered in under one minute at a normal walk…the tiger will sometimes pause…move closer and so lessen that critical attack distance…before finally raising its body and charging.
“…they wait until a victim comes close and spring up…This ambush method of hunting uses less energy and has a greater chance of success.”
You must “ambush” high confidence trades. Long-time professional trader and teacher Dick Diamond says patience is vital before the ambush.
I talked to Diamond about his famous 80/20 trade, which he means literally — he says it has at least an 80 percent chance of success. It’s the only trade set-up Diamond will take.
Q: Could you tell me about the 80/20 trade?
Diamond: The 80/20 trade is based on indicators that create a specific trading set-up. A trader must act on this set-up immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five minute chart, the 80/20 set up may come along a few times a day. If you’re trading a longer time frame, like off of a 120 minute or 240 minute chart, the 80/20 will come along less frequently, but when it does, the opportunity will be bigger. The 80/20 trade can be especially rewarding for position traders. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades.
Q: What emotional factors do students need to work on the most?
Diamond: Traders must be calm and confident. You can’t be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques.
Q: What’s different about trading today vs. when you started out in the 1960s?
Diamond: When I started trading, execution took up to five minutes — now it takes less than a second. Time is money, so computers provide a great advantage to today’s trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.
Get instant access to our FREE report from Veteran Trader Dick Diamond
In this 12-page report, you will learn practical tips and tricks from veteran trader Dick Diamond.
He and his assistant, Roberto Hernandez, share many of their time-tested techniques with you, with excerpts from interviews and course materials designed to accelerate your trading progress.
Today we sit down with Elliott Wave International’s Futures Junctures Editor and Senior Tutorial Instructor Jeffrey Kennedy to discuss his favorite wave pattern of all: the diagonal.
EWI: You say if you had to pick just ONE of all 13 known Elliott wave structures to spend the rest of your technical trading life with, it would be the diagonal. First, tell us what the diagonal is.
Jeffrey Kennedy: The diagonal is a five-wave pattern labeled 1 through 5, in which each leg subdivides into three smaller waves: 3-3-3-3-3. Unlike impulse waves, however, diagonals are the only five-wave structures in the direction of the main trend in which wave 4 almost always moves into the price territory of wave 1. (See illustrations below.)
EWI: So, what makes this pattern so darn special?
JK: As you can see in the above charts, the diagonal is a terminating pattern. They can only occur in waves 5 of impulses or C-waves of corrections. This is why they’re so exciting. Diagonals precede a dramatic change in trend. And, when they end, prices tend to retrace the entire pattern, or more, and fast — in 1/3 to 1/2 the time it took the pattern to form.
Put simply: If you see a diagonal, you know the train of change is coming into the station.
EWI: Well, in your Daily Futures Junctures service, you do, in fact, see a diagonal underway in the recent price action of a major grain market. There, you present the following Elliott wave chart (some Elliott labels have been removed, while I took the liberty to draw a blue circle around the diagonal pattern for clarity):
JK: Yes. This is a classic diagonal unfolding in the final wave of the larger trend. As you can see, prices have put the finishing touches on wave (v) of c (circled). And, if my wave count is correct, this market’s prices are about to board the “Exciting Southbound Turn” Railway.
EWI: Thank you so much for taking the time to explain the ins and outs of your favorite structure, the diagonal. And also, for alerting readers to the possible DRAMA in store for this major grain market thanks to this Elliott wave pattern.
Learn More about Diagonals and Other Elliott Wave Patterns
Get a better understanding of Elliott wave analysis with our Elliott Wave Patterns educational feature. You’ll have access to basic lessons on Elliott wave patterns, along with video clips from our online courses which will explain the pattern, the rules and the guidelines.
Plus, you’ll see real-life examples that show you how each pattern fits into the overall wave structure. Some patterns will even offer a brief quiz to test your knowledge and ensure that you understand the material.
This article was syndicated by Elliott Wave International and was originally published under the headline Diagonal: Straight Shot to a Trading Opportunity. 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.
Technical indicators help traders recognize price levels where markets turns are likely to happen. They are not always a sure shot but they do help turn the odds in your favor, perhaps because many others are watching the same indicators making them a kind of self fulfilling prophecy. Since 1999, Elliott Wave International senior analyst and trading instructor Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. While commodity markets are known as some of the toughest trading environments around, these actionable lessons from a skilled veteran can help you trade commodities, or any market for that matter, with more confidence.
“Congestion” is my term for sideways price movement or range trading. And the Elliott wave pattern that best fits this description is a triangle. Those of you who have held a position during these periods know that it’s not fun. But the upside is that congestion often provides support or resistance for future price movements regardless of when it occurs. In May Coffee (Figure 6-1), notice how the brief period of congestion that occurred in early November 2003 acted as support for the December pullback. This happened again when the January selloff fell into listless trading for the rest of the month.
The weekly chart of Sugar (Figure 6-2) shows how these periods can also act as resistance.
And if you think about it, the tendency of congestion phases to act as support or resistance is right in line with the Elliott wave guideline on fourth wave retracements: support for a fourth wave pullback is the previous fourth wave extreme of one lesser degree.
Highs, Lows and Gaps
Other areas to watch for price reversals are previous highs and lows and also gaps. You can see on the chart of May Corn (Figure 6-3), for instance, that the September 2003 high was a significant hurdle for prices to overcome. For three months, each attempt to break through this level failed to produce a sizable decline. Also notice the small gap that occurred in early October. The December selloff closed this gap, and in doing so, introduced the subsequent rally. I have mentioned before how gaps often attract prices like magnets at first. Then they repel them — literally. Prices fill the gap and flee the scene, you could say.
The April chart of Lean Hogs (Figure 6-4) gives us two examples of the same setup: The February advance failed at the previous high made in November 2003, and then fell back to close the late January gap. Prices failed at a previous high again in March and then closed the gap that occurred in February.
The last chart for Orange Juice (Figure 6-5) offers one example of how previous lows can provide resistance. Each bounce within the last ten months in OJ has met resistance at or near a previous low.
Learn more trading techniques in Jeffrey’s 32-page collection of practical trading lessons — absolutely free!
Here’s what else you’ll learn:
How to Make Yourself a Better Trader
How the Wave Principle Can Improve Your Trading
When to Place a Trade
How to Apply Fibonacci Math to Real-World Trading
How to Integrate Technical Analysis into an Elliott Wave Forecast
Like many of us you probably use technical analysis to gain an edge in the markets. When you look at a price chart, what do you see? A bunch of ticks, some ups and downs, perhaps a pattern? Do you see the trend, support and resistance levels, and who’s in charge of the market — the bulls or the bears?
Learn to spot these critical elements and more in Elliott Wave International’s free eBook, Learn to Identify High Probability Trading Opportunities Using Price Bars and Chart Patterns.
In this free 14-page eBook, EWI Senior Analyst Jeffrey Kennedy will teach you how to look at your charts and find critical support and resistance levels. Even more importantly, you’ll learn what these levels mean to your trading positions and stop levels.
You will learn how to look at the simplest part of the chart — the price bar — so that you can determine the next most likely market move.
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Stocks for the past 10 years have moved up and down and have reached no where after much heartache. Was it worth to take the risk? Was the stress worth it? What should we do next? Will the stocks embark on the next bull market if we sit on the sidelines? What is the risk? Or is it going to be another decade of lackluster results?
The phrase originally applied to Japan’s stock market. Yet in terms of depth and scale, it more accurately describes today’s markets and economy in the United States.
This became clearer than ever September 21, when CNNMoney ran an article titled “A Rough 10 Years for the Middle Class.” Given the data it reported, somebody’s rose-colored glasses must have substituted the word “rough” for the more honest “dreadful.”
Just when investors thought the stock market’s 50% drop in 2007-2009 was behind them, wham, the Dow dropped 2000 points within a short two-week period this summer. And since then, it’s a daily guessing game as to which way the market will go and how large the swings will be.
What does all this mean for you and your investments?
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Should Stock Market Investors “Fret Over the Economy”? No ! See Chart to Understand Why The idea that the economy leads the stock market is false
As the DJIA fell 2% to close below 12,000 on August 2, 2011, one theme rang across major financial websites. This CNN headline summarizes it:
Stocks sink as investors fret over the economy (Aug. 2)
The belief that the economy drives the stock market is common knowledge; it’s Investing 101; the idea gets pounded into investors’ heads, over and over again, by various pundits, daily.
But please allow us to suggest this: Belief that the GDP and other economic measures drive stock market trends is completely and utterly false.
The strength or weakness of the economy does not lead the stock market higher or lower. The economy follows the stock market.
“Stocks lead the economy, normally by months,” writes EWI president Robert Prechter; he has studied this subject in-depth. Here’s an excerpt from our Club EWI resource, the free 50-page 2011 Independent Investor eBook, which quotes one of Prechter’s research papers.
Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?
If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.
Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?
Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter.
But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP. Figure 10 shows these two events.
It seems that there is something wrong with the idea that investors rationally value stocks according to growth or contraction in GDP. (…continued)
If you found this insight eye-opening, keep reading the2011 Independent Investor eBook, an educational, powerful and FREE 50-page eBook to help you think independently.Thousands of investors have downloaded the Independent Investor eBook, and it has changed the way they think forever. Now YOU can get this important eBook packed with insightful analysis from 2010 and 2011 Elliott Wave Theorist and Elliott Wave Financial Forecast. — all you need is a free Club EWI password.