FOREX EDUCATION AND ANALYSIS

Global Markets, Economies Mired in Early Stages of Biggest Disaster Ever

2013-03-10T09:54:00.000-07:00

Global Markets, Economies Mired in Early Stages of Biggest Disaster Ever

By Elliott Wave International

The following is a sample from Elliott Wave International's new 40-page report, The State of the Global Markets -- 2013 Edition: The Most Important Investment Report You'll Read This Year. This article was originally published in Robert Prechter's September 2012 Elliott Wave Theorist.

Global markets and economies are mired in the early stages of the biggest disaster ever. Most people think both areas are in the early stages of a prolonged recovery, but in fact they are on the cusp of the second downturn, which will be of epic proportion.

The world is in the grip of a bear market. You wouldn’t know it from watching the S&P and the NASDAQ, but just about every other major market average in the world has been falling, including those of China, Japan, Europe, the BRICs, emerging markets, and even the broad U.S. market, shown in the chart below. And these indexes have fallen far further in inflation-adjusted terms.

Global-equity hedge funds, run by the smartest people in the business, have lost money for clients over the past 10 years. According to Income Research & Management and Bloomberg, over that time annual five-year returns have been up for two years, flat (0.0-0.8% gain) for three years, and negative for five years.

Our recommended short position in 2007-2009 gives us a positive five-year stock market experience. But we returned to a bearish stance too early. If we lived in China, our timing would have caught the exact top of the rally; if we lived in Europe, our current trade would be at a profit, too; but we don’t live in China or Europe. Only in the U.S. does the levitation continue, and even then it’s only in the blue-chip averages. The broad U.S. market, comprising all NYSE stocks, topped out nearly a year and a half ago, per the New York Composite Index shown at the bottom of the chart.

Market perversity is on display here, as both bulls and bears are suffering their own special water torture.

Many bullish fund managers have lost money since April 2011, because their portfolios tend to mirror the broad market. Garrett Jones reminded us that the most-owned stocks among institutions are down by a full one-third since 2000, as shown by the Institutional Index, a capitalization-weighted index of the 75 most-owned stocks by institutions (see the figure inside the State of the Global Markets report). Yet aggressive bears who shorted the S&P or NASDAQ have lost money, too, since the futures-related markets have risen.

It seems pertinent that only the indexes that one can leverage in quantity with futures -- the S&P and NASDAQ -- have risen over the past several months. Maybe this selectivity is for technical reasons, but there might be another explanation. Institutions, not the public, have driven the rally, and they can borrow billions of dollars from banks to leverage their bets. The divergent action among the indexes suspiciously fits the circumstance that major investment banks can make a lot of money by buying futures and then committing their own and clients’ funds to buying stocks that push up those particular underlying indexes. They could even sell other stocks to make it happen. Employing that strategy would account for the big differences in the averages over the past half-year. The low volume and volatility help serve up the opportunity. When the current plateau of optimism ends, the indexes now leading on the upside will catch up quickly on the way down. But in the meantime it’s an annoying situation, as momentum-based sell signals are flashing continually but the market has yet to succumb.

Adding to the injury is that fact that all of these indexes have been re-priced higher in dollar terms due to the temporary re-expansion of dollar-based credits since 2009. A chart on page 7 of The State of the Global Markets report shows the real path of stock values.

Most people seem to believe that the Fed has engineered the stock market rally. I also keep reading about how ECB President Mario Draghi is making stock markets go up by announcing bond purchases. This is wrong. As shown in the chart above, European stocks are below their highest level since the ECB bond-buying programs began. Likewise the largest debt-buying program the Fed ever undertook -- a $1.3 trillion binge -- occurred in 2008, and it failed to prevent the biggest bear market since 1932. The bear market ended three months after the Fed stopped the program. The Fed and the ECB are not the primary cause of optimism or rising stock prices. The rally was due for natural reasons, i.e., a swing toward more positive social mood, which our market forecasting publications anticipated. But QEs and other policies do provide big institutions with nearly unlimited credit, allowing them in optimistic times to put it to use. Doing so temporarily elevates prices beyond what they would be if unlimited credit weren’t available.

Optimism is necessary to allow the Fed and its banks to create credit for financial speculation, which keeps the market levitating. Conversely, when pessimism returns -- as it soon will -- the reduction of leverage will add to selling pressures.

Robert Prechter is the founder and president of Elliott Wave International, the world's largest financial forecasting firm. The rest of EWI's 40-page report, The State of the Global Markets -- 2013 Edition: The Most Important Investment Report You'll Read This Year, is available for download. Follow this link to download the full report – for free.

Two Signs That Deflation Is Far From Over

2013-03-10T09:49:00.000-07:00

Two Signs That Deflation is Far From Over
A key economic index turns south

By Elliott Wave International

The federal government defines the Producer Price Index (PPI) as "the average change over time in the selling prices received by domestic producers for their output."

With help from the Federal Reserve's massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09.

All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.

The New York Times declares, "Economic Gloom Starting to Lift."

Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.

The latest Financial Forecast published Dec. 7, and the latest evidence reinforces the message of the chart's title. The PPI elevator has already descended to a lower floor.

The Labor Department said its seasonally adjusted producer price index slipped 0.8 percent last month, the second straight decline.

November's drop in wholesale prices was the sharpest since May.

Reuters, Dec. 13

The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment.

The Thomson Reuters/University of Michigan's preliminary reading of the overall index on consumer sentiment plunged to 74.5 in early December, the lowest level since August.

It was far below November's figure of 82.7.

Reuters, Dec. 7

The Federal Reserve's machinations -- which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases -- will not stave off a developing deflationary trend.

In the second edition of Conquer the Crash (p. 114), Robert Prechter describes what generally happens, depending on the position of the Elliott waves, near the end of the Kondratieff cycle.

Near the end of the cycle, the rates of change in business activity and inflation slip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.

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This article was syndicated by Elliott Wave International and was originally published under the headline Two Signs That Deflation is Far From Over. 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.

[Video] Bollinger Band Basics

2013-03-10T09:43:00.001-07:00

[Video] Bollinger Band Basics
Senior Analyst Jeffrey Kennedy shows you how these volatility indicators support pattern recognition

By Elliott Wave International

As a technical trader, are you able to view financial market fluctuations clearly and reliably?

At Elliott Wave International, we hold that the Elliott Wave Principle is the most effective tool for analysis. Yet the Wave Principle works well with other technical tools. If you are ready to trade with Elliott, our educational subscription editor Jeffrey Kennedy can teach you how to integrate ancillary technical indicators -- such as Bollinger bands -- to build high-confidence setups in the markets you trade.

Bollinger bands identify periods of increased and decreased market volatility. Learn about the significance of these fluctuations in this video about Bank of America Corp. (BAC) taken from Jeffrey's Elliott Wave Junctures service:

Here are Jeffrey's notes from the lesson:

Bollinger bands form a two-period standard deviation channel based on a 20-period simple moving average. This channel will contain 95% of all price action with the moving average acting as a center line, which often provides support and resistance. The width of the Bollinger bands increases and decreases with market volatility.
Narrow Bollinger bands coincide with low market volatility, which often leads to big price moves. Option traders like this because option prices are low at this time. Conversely, wide bands imply that market volatility is high, which translates into expensive options.
The recent narrowing of the Bollinger bands in BAC signals decreasing volatility. Since periods of low volatility precede periods of high volatility, look for a big move in the days to come.

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The Secret Word: Deflation - And the Next Five Years of Financial Turmoil

2013-02-16T13:41:00.003-07:00

The Secret Word: Deflation - And the Next Five Years of Financial Turmoil

By Elliott Wave International

The following is a sample from Elliott Wave International's new 40-page report, The State of the Global Markets - 2013 Edition: The Most Important Investment Report You'll Read This Year. This article was originally published in Robert Prechter's July 2012 Elliott Wave Theorist.

In the first five months of 2012, there were 20 times as many Google searches on "inflation" as there were on "deflation." This is down from a ratio of 50 times in June 2008. If any theme has been overdone over the past six years, it is the theme of inevitable inflation if not hyperinflation.

Inflation reigned for 75 years, from 1933 to 2008. People are so used to it that they cannot imagine the opposite monetary environment. Bullish economists have been calling for recovery, which means more inflation, and bearish advisors have been calling for a crash in the dollar, which means hyperinflation. No wonder those are the terms on which most people have been searching.

But only one word allows you to make sense of what's going on in the world, and inflation is not it. The secret word is deflation.

Deflation explains:

why interest rates on highly rated bonds are at their lowest levels in the history of the country;
why the velocity of money is the lowest since the 1930s;
why huge sectors among investment markets are down over 40%;
why the Consumer Price Index (CPI) just had its biggest down month since 2008;
why Europe is in turmoil.

Here are some details: Ten-year Treasury notes pay out less than 1.5% annually, their lowest rate since the founding of the Republic. Treasury bills yield essentially zero, their lowest level ever. The velocity of money failed to rise during the past three years of partial economic recovery, and it recently made new lows. Real estate prices have fallen 45% in the past six years. Commodity prices -- as measured by the CRB Index -- are down 39% over four years. This group includes oil and silver, two of the most hyped investments of the past decade. Remember in March when articles quoted analysts calling for $5, $6 and $8-per-gallon gasoline? In just three months since then, gas prices have fallen 15%, knocking the CPI into negative territory.

Deflation also explains why European loans are at risk, why Germany is tapped out, why Greeks are protesting in the streets, and why U.S. corporations' overseas profits are down. Deflation lets you make sense of the world.

What is deflation? Economists define it three different ways, but I find only one definition useful: Deflation is a contraction in the overall supply of money and credit.

Why must deflation occur? Answer: There is too much unpayable debt in the world.

As argued in Conquer the Crash, it ultimately does not matter what the authorities do; they can't stop deflation. This prediction is being borne out. Since 2007, the Fed has monetized $2 trillion worth of debt; the federal government has borrowed another $7 trillion; and it has pumped out $1 trillion worth of student-loan credit. Yet real estate and commodities slumped 40% anyway.

These drunken-sailor-type policies have indeed succeeded in nearly maintaining the overall volume of money and credit. But in the long run you can't fight a systemic debt overload by piling on more debt. The Fed and the government are shifting the burden of trillions of dollars' worth of debt obligations from reckless creditors onto innocent savers and hapless taxpayers. The ploy might work if the public's resources were infinite, but they aren't. Perhaps this policy temporarily prevented a series of big institutional disasters, but it was only at the ultimate price of a gigantic public disaster.

Such actions have become politically less palatable. Some observers realize that the student-loan program of lending at below-market rates is exactly the model the government used for housing loans, which ended in a spectacular bust. Others know that the government cannot continue to borrow at the current pace and expect to stay solvent. Politicians on both sides of the aisle are tired of the Fed's bailing out of highly leveraged financial-speculation institutions. But whether these policies continue or are curtailed is irrelevant to the outcome. If the government slows its borrowing, the overall value of debt will fall. If the government maintains or increases its present pace of borrowing, interest rates will eventually turn up, and the overall value of debt will fall. There is no escape from deflation.

Ironically, investors in the past decade have been doing exactly the opposite of preparing for deflation. Convinced of perpetually rising prices, they have bought every major investment. They chased real estate up to a peak in 2006. They bought blue chip stocks into the high of 2007. They pushed commodities up to a peak in 2008. They chased gold and silver up to highs in 2011. And through spring 2012, they continued to buy stocks and commodities on any rumor that promised inflation: European bank bailouts, Operation Twist, the Greek election, Group-of-8 summits, Fed meetings, Bernanke press conferences, improved economic numbers, predictions of QE3, central-bank interest-rate cuts, you name it. Meanwhile, the U.S. Dollar Index hasn't made a new low for four years. During deflationary times, cash is king, and by far most investors have chosen to own anything but cash.

Deflation is still not obvious to the majority. Even now, most economists expect continued recovery, mild inflation and a rising stock market. But the essays on deflation.com are 180 degrees apart from conventional thinking. It may be too late for you to get out at the top, but there's still time to learn how to sidestep the worst of the crunch.

People will be using the secret "d" word much more often over the next five years. By the end of that time, they will also be using its cousin "d" word, depression.

Robert Prechter is the founder and president of Elliott Wave International, the world's largest financial forecasting firm. The rest of EWI's 40-page report, The State of the Global Markets - 2013 Edition: The Most Important Investment Report You'll Read This Year, is available for download. Follow this link to download the full report - for free.

This article was syndicated by Elliott Wave International and was originally published under the headline . 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.

Risk Management for Technical Traders [Interview Excerpt]

2013-02-16T13:41:00.000-07:00

Risk Management for Technical Traders [Interview Excerpt]
Tips from EWI Senior Analyst Jeffrey Kennedy's Stocks and Commodities interview

By Elliott Wave International

If you trade with Elliott wave analysis, your trading decisions are all about the difference between where the market is vs. where it will be. According to Jeffrey Kennedy, editor of our Elliott Wave Junctures service, risk management skills are vital to being a successful technical trader.

Here's what Jeff had to say in a recent interview:

Risk management is all about consistency. It is all about longevity. It is like going back to the story about the tortoise and the hare. You want slow or small consistent profits...

Being an analyst and trader involves two totally separate skill sets. As an analyst, you are a master of observation. You are focusing on what could happen. As a trader, your primary focus is on what is happening. Regardless of whether you think the market's about to top, if the trend is up, as a trader, you've got to play it. Divergence is a great example of what I am referring to.

As an analyst, if I am looking at a momentum tool, and I see divergence, well, that is suggestive of market weakness. As a trader I have to focus on what is happening, not what could happen.

If I see the daily trend is up, I have to buy the market. How do I resign myself to the fact that I have divergence, which means a decrease in momentum, a possible weakness, and a possible trend change? I have to focus on what is happening as a trader and the trend is up. How do I reconcile that?

This is where risk management comes into play. For example, you are allowed to play the buy side to the tune of $100,000. If you are seeing divergence begin to enter the market, you may say to yourself, "I have to trade the trend, and the trend is up, but because of this divergence, I am not going to go all in." ... [and] you have to have a very tight stop on the position.

... That is how risk management comes into play, and how you focus on what is happening and reconcile what is happening as a trader. But you also have to take into consideration what could happen when you are wearing your analytical hat and see that potential for divergence because there are markets I have seen where the divergence continues for six months. Analysts trade what could happen, whereas traders trade what is happening.

Effective risk management is indispensable to successful trading. Ultimately it doesn't matter how accurately you spot divergence or label your waves if you risk too much on your trades.

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This article was syndicated by Elliott Wave International and was originally published under the headline Risk Management for Technical Traders [Interview Excerpt]. 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.

Gargantuan and Growing: The U.S. Debt Figure You've Probably Never Heard Of

2013-02-16T13:40:00.000-07:00

Gargantuan and Growing: The U.S. Debt Figure You've Probably Never Heard Of
The widely reported $16.1 trillion federal debt is a drop in the bucket

By Elliott Wave International

Financial transparency is a must for U.S. publicly traded companies. But if the federal government had to abide by those same regulations, more Americans would know that the often-reported $16.1 trillion federal debt doesn't come close to the truth about the nation's liabilities.

In a Nov. 26 Wall Street Journal opinion piece, a former chairman of the Securities and Exchange Commission and a former chairman of the House Ways & Means Committee write:

The actual liabilities of the federal government -- including Social Security, Medicare, and federal employees' future retirement benefits -- already exceed $86.8 trillion, or 550% of GDP.

The authors say that few people know about the $86.8 trillion figure because that figure is not in print on any federal government balance sheet.

Federal debt is staggering enough. Municipal liabilities also pose a danger to the nation's financial health.

Illinois has an unfunded pension liability of at least $83 billion. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states.

Bloomberg, Aug. 29

The article also noted, "California, with an A-ranking, one level below Illinois, remains S&P's lowest-rated state."

Budget shortfalls in California and Illinois are just the tip of the municipal financial iceberg. Many other state governments are financially swamped.

How did municipal spending get so out of control? Well, a stupefying story out of Bell, Calif., provides a hint. On Nov. 26, CNN reports that the Bell police chief earned $457,000 a year, and "He is now asking for more money." In 2010, the Bell city manager resigned after controversy over his $787,000 yearly salary.

States Are Broke and Approaching Insolvency

... States' legislatures continue to blow money. For years, state governments have been spending every dime they could squeeze out of taxpayers plus all they could borrow. (The lone exception is Nebraska, which prohibits state indebtedness over $100k. Whatever Nebraska's official position on any other issue, by this action alone it is the most enlightened state government in the union.) But now even states' borrowing ability has run into a brick wall, because the basis of their ability to pay interest -- namely, tax receipts -- is evaporating. ... The goose -- the poor, overdriven taxpayer -- is dying, and the production of golden eggs, which allowed state governments to binge for the past 40 years, is falling. The only reason that states did not either default on their loans or drastically cut their spending over the past year is that the federal government sucked a trillion dollars out of the loan market and handed it to countless undeserving entities, including state governments.

The Elliott Wave Theorist, November 2009

If there's another leg of the economic downturn, expect a further dwindling of tax receipts.

Finally, consider the wobbly financial dominoes in Europe and what may happen in the U.S. after the first one falls.

8 Chapters of Conquer the Crash -- FREE

Can the Fed Stop Deflation? Should you rely on the government to protect you? What should you do if you run a business? You can get answers to these and many more questions in Robert Prechter's Conquer the Crash. And you can get 8 chapters of this landmark book -- free.

This 42-page report can help you prepare for your financial future. You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Gargantuan and Growing: The U.S. Debt Figure You've Probably Never Heard Of. 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.

How the Federal Reserve is Showing Financial Fear

2013-02-16T13:39:00.002-07:00

How the Federal Reserve is Showing Financial Fear
Have you heard about the Fed's 180 degree turn?

By Elliott Wave International

Think about one of those movie scenes when the leading man does all he can to defeat the big, bad enemy -- punches, kicks, slams, stabs, shoots -- but the bad guy just won't go down. In fact he doesn't even look fazed.

That's when the protagonist really starts to worry.

In real life, that's where the Federal Reserve finds itself today.

The central bank has thrown everything in its arsenal at the economy, but most key economic metrics have barely budged.

In the epic struggle, the Fed's policy has been turned upside down.

In the latest Elliott Wave Theorist, Bob Prechter noted:

The Fed has changed its policy, and it has done so in dramatic fashion. Look at this history of what the Fed has done.

Prechter continues his commentary:

You can go all the way back to 1929, and [the Fed] was doing what its job is supposed to be, which is to put dampers on exuberance and only make money easier when the markets are down and the economy is contracting.

Following that plan, the Fed raised the discount rate in 1929 to 6%. Here at the 1937 high, it raised margin requirements and bank reserves. In the 1968 bull market, when the public was excited about stocks, the Fed raised margin requirements and raised the discount rate to 6%. In 2000, right at that high, the Fed again raised its discount rate to 6%. In 2006, when the housing market was topping, and a year before stocks topped, it raised it to 6¼%.

What is it doing now? The market is right back in the rarified areas that it was when the Fed dampened speculation, but now the Fed is doing the opposite. Not only has the Fed not raised the discount rate to 6%, or even to 1%, but it is keeping the Fed funds rate at zero, and it is promising a 0% Fed-funds rate through 2015, three whole years.

This 180-degree turn tells me that the Fed is in a panic.

The Elliott Wave Theorist, Special Video Issue, October 2012

If the Federal Reserve itself is frightened about the financial future, perhaps you should be concerned too.

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This article was syndicated by Elliott Wave International and was originally published under the headline How the Federal Reserve is Showing Financial Fear. 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.

Forex Trading: Why You Need to Look Past "Fiscal Cliffs"

2013-02-16T13:38:00.002-07:00

Forex Trading: Why You Need to Look Past "Fiscal Cliffs"
The "fiscal cliff" agreement did not set the course for EUR/USD -- here is why.

By Elliott Wave International

First, a word on how we all are conditioned to think that, "momentum will remain constant unless acted on by an outside force." Read this excerpt from Robert Prechter's May 2004 Elliott Wave Theorist:

"...'Momentum will remain constant unless acted on by an outside force.' This mode of thought is deeply embedded in our minds because it has tremendous evolutionary advantages. When Og threw a rock at Ugg back in the cave days, Ugg ducked. He ducked not necessarily because his mind had inherited and/or learned the consequences of the Law of Conservation of Momentum.

"The rock would not veer off course because there was nothing between the two men to act upon it, and rocks do not have minds of their own.

"Earlier animals that incorporated responses to the laws of physics lived; those that didn't died, and their genes were weeded out of the gene pool. The Law of Conservation of Momentum makes possible our modern technological world. People rely on it every day.

"Despite its use in so many areas, however, it is inapplicable to predicting [the financial markets]..."

Why did Prechter postulate that following this fundamental law of physics does not help you trade better? Here's a fresh example; see for yourself.

Hours before the December 31 deadline, U.S. lawmakers reached an agreement to avoid the "fiscal cliff." When trading resumed on January 2, most markets around the world opened higher. EUR/USD, the world's biggest forex market, also rose. Said one January 2 headline:

"Yen, Dollar Weaken as US Budget Accord Damps Demand for Refuge"

In other words, the "rock" was thrown: The "fiscal cliff" deal was reached, which "increased the demand for riskier assets," such as the euro, and dampened the demand for "safe assets" like the U.S. dollar. Now, unless some "outside force" were to act on the momentum of this important event, EUR/USD should have kept moving higher. But it didn't.

After jumping as high as 1.3295 in overnight trading on January 1, by mid-day on January 2 EUR/USD erased all of the gains. Take a look:

What happened? What "outside force" veered the "rock" off its course?

Well, none, really. Sure, pundits can rationalize now, after the fact, what details in the "fiscal cliff" deal may have changed the minds of forex traders. But the fact remains that, as EUR/USD was rising, nothing was suggesting that the "rock" would soon stop its ascent -- and fall.

Here's where Elliott wave analysis gives you an edge. With Elliott, you don't rely on the news stories ("outside forces") that almost everyone else uses to forecast the markets ("the rocks").

Instead, you study Elliott wave patterns in market charts. Every rally and decline reflects the decisions -- and emotions -- of the traders. Study that instead, and you'll soon realize that, more often than not, the markets tip their hands before the news is ever announced.

For example, our Currency Specialty Service analysts did not know that the "fiscal cliff" would be averted. And they didn't need to, because Elliott wave patterns in EUR/USD were already bullish:

EURUSD (Intraday)
Posted On: Dec 31 2012 11:13PM ET / Jan 1 2013 4:13AM GMT
Last Price: 1.3200
[Consolidating before higher] Prints above 1.3286, the 'b' wave high, would begin to favor a thrust from a fourth wave triangle going forward.

Now, that's a real, tangible advantage.

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This article was syndicated by Elliott Wave International and was originally published under the headline Forex Trading: Why You Need to Look Past "Fiscal Cliffs". 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.

Moving Averages Can Identify a Trade - FREE Lesson

2013-02-16T13:37:00.002-07:00

Moving Averages Can Identify a Trade - FREE Lesson
These 3 charts help you understand how moving averages work

By Elliott Wave International

Moving averages are a popular tool for technical traders because they can "smooth" price fluctuations in any chart. EWI Senior Analyst Jeffrey Kennedy gives a clear definition:

"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... one way to think of a moving average is that it's an automated trend line."

Moving averages are both easy to create and extraordinarily dynamic. You can choose which time frame to study as well as which data points to use (open, high, low, close or midpoint of a trading range).

Jeffrey Kennedy shares 3 of the most popular moving averages in this excerpt is from his 10-page eBook: How to Trade the Highest Probability Opportunities: Moving Averages. Learn how you can download the entire eBook here >>

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 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).

The 13-period SMA is a widely used simple moving average that works equally well in commodities, currencies, and stocks. 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 figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. 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 buyside and sellside trading opportunities.

How to Trade the Highest Probability Opportunities: Moving Averages

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-probability trading opportunities.

Improve your trading and investing with Moving Averages! Download Your Free eBook Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Moving Averages Can Identify a Trade - FREE Lesson. 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.

A Classic Impulse Wave in General Electric

2013-02-16T13:36:00.000-07:00

A Classic Impulse Wave in General Electric
Explore the rules, guidelines and Fibonacci multiples of impulse waves

By Elliott Wave International

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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This article was syndicated by Elliott Wave International and was originally published under the headline A Classic Impulse Wave in General Electric. 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.

Global Markets, Economies Mired in Early Stages of Biggest Disaster Ever

2013-02-16T13:35:00.000-07:00

Global Markets, Economies Mired in Early Stages of Biggest Disaster Ever

By Elliott Wave International

Learn to Label Elliott Waves More Accurately

2012-12-31T16:06:00.000-07:00

Learn to Label Elliott Waves More Accurately

EWI Senior Analyst Jeffrey Kennedy shows you how to use momentum patterns to confirm your count

By Elliott Wave International

Are you looking for an easy way to improve your confidence as you analyze the charts you trade? Take a quick look at this chart (adapted from Jeffrey Kennedy's December 26 Elliott Wave Junctures lesson) to see how divergence relationships help clarify your analysis.

According to Jeffrey, divergence relationships are easy to identify. Whenever prices make a new extreme, look for underlying indicators to move in the opposite direction. Specifically,

The momentum relationship most often seen in waves 3 and 5 is divergence. Bullish divergence forms when prices make a new low while an accompanying indicator does not. Conversely, bearish divergence occurs when prices register a new high while an accompanying indicator does not. Bullish and bearish divergences are common to waves A and C, just as they are waves 3 and 5.

Notice the bearish divergence between waves 3 and 5 in the daily price chart of Halliburton Company (HAL) -- Prices reach a new high, yet the MACD indicator moves in the opposite direction:

Jeffrey notes that if you label an advance as a 5th wave move, and yet you do not see momentum divergence, that tends to argue for an extended 5th wave.

Next, at waves A and C, you can see an example of bullish divergence. Wave A bottomed at $32.90 in HAL and wave C ended much lower at $29.83. The histogram readings that correspond to waves A and C are -36.26 and -26.60, respectively.

Here's another example of divergence between waves A and C in Akamai Technologies (AKAM).

Notice that wave C is lower in price than wave A. However, if you look at the MACD histogram, you'll see that it registered a higher reading in wave C than it did in wave A, thus giving us a bullish divergence.

Understanding that Elliott waves demonstrate unique momentum relationships as well as price structure allows you to label waves more accurately and with greater confidence.

Learn to Use Technical Indicators to Improve Your Trading and Analysis

This is merely one chart example of how you can use technical indicators to strengthen your analysis. You can also learn about Moving Averages, one of Jeffrey Kennedy's favorite indicators, in a
Free 10-page eBook from Elliott Wave International.

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-confidence trading opportunities.

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Happy New Year!!

2012-12-28T16:47:00.001-07:00

Ring in the New Year in Pips!

Happy 2013 from your friends at ForexJourney

Chart Example - How to Identify High Confidence Reversal Zones

2012-12-28T13:28:00.000-07:00

Chart Example - How to Identify High Confidence Reversal Zones Senior Analyst Jeffrey Kennedy shows you to how to use 3 technical tools to find price reversals

By Elliott Wave International

"Price gaps, wave relationships and Fibonacci retracements act as support or resistance for countertrend price moves. When combined, these characteristics help identify high-probability reversal zones."

-Jeffrey Kennedy

Technical analysis offers several ways to spot pullbacks that indicate a reversal of the larger trend. When you use the Elliott Wave Principle, it can be very useful to "gain a consensus" from more than one indicator to spot a high-confidence trading opportunity.

The following lesson is adapted from Jeffrey Kennedy's December 11 Elliott Wave Junctures educational subscription service:

Identifying high-probability reversal zones is simple, IF you know what to look for.

Price gaps occur when the range of a price bar does not include the range of the previous bar. It acts as a reliable level of support and resistance for subsequent price action and should always be monitored.
Elliott wave relationships help identify a range that will lead to the resumption of the larger trend. The most common relationship between waves C and A of zigzags and flats is equality, the second being a 1.382 multiple.
Fibonacci retracements: Fourth waves tend to encounter Fibonacci support/resistance at a .382 multiple of wave three. Depending on the depth and duration of the correction, prices may also test the .500 and .618 retracements.

In the daily chart for Akami Tech Inc. (AKAM), you can identify all 3 characteristics:

Price gap at 34.69
Elliott wave relationship of 1.382 between waves C and A of a zigzag pattern at $33.79
Fibonacci retracement at 50% of the prior advance at $34.04.

Using this information, you can see the very tight zone in which you may locate a probable reversal in this market (within the red circle).

Rather than focus on a single indicator, Jeffrey encourages you to combine them together to better identify high-confidence reversal zones in your price charts.

Learn About Moving Averages, One of Jeffrey Kennedy's Favorite Indicators, in this Free 10-page eBook from Elliott Wave International

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-confidence trading opportunities.

Improve your trading and investing with Moving Averages! Download Your Free eBook Now >>

Two Signs That Deflation is Far From Over

2012-12-28T13:12:00.005-07:00

Two Signs That Deflation is Far From Over

A key economic index turns south
By Elliott Wave International

The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment. The Federal Reserve's machinations -- which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases -- will not stave off a developing deflationary trend. How much farther does the economic cycle have to go before it reaches the bottom? Read more.

Don't Expect the News to Tell You Where EUR/USD Is Going Next

2012-12-28T13:09:00.000-07:00

Don't Expect the News to Tell You Where EUR/USD Is Going Next Retrospective explanations of market moves don't keep you ahead of the trend

By Elliott Wave International

On December 27, EUR/USD shot up as high as $1.3283. Forex news headlines were quick to comment:

"Dec 27 - The euro slightly extended gains against the dollar after strong U.S. new home sales data last month further lifted the market's appetite for riskier currencies."

But after EUR/USD hit that high, it promptly reversed and fell back down to the $1.3200 level, where it had been stuck all week.

You may ask: What happened to that "appetite for riskier currencies"?
Good question, and here's the answer: That explanation came after the EUR/USD rally, not before.

See, it's easy to fit the news to market action after the fact: Just grab the news story that best "explains" the move. But retrospective explanations don't keep you ahead of the trend. To win in forex, you need forward-looking analysis, and you need it before the market moves.

On December 26, the editor EWI's forex-focused Currency Specialty Service, Jim Martens, posted this comment on his Twitter feed:

EWI Forex Insider: @FX_ElliottWave
Now that we got the EUR rise we expected, the double zigzag rise from 1.3158 to 1.3256 leaves EUR/USD vulnerable to a decline.

Then, on the morning of December 27, Jim updated his Currency Specialty Service subscribers via this intraday forecast (excerpt):

EURUSD (Intraday) Posted On: Dec 27 2012 10:01AM ET / Dec 27 2012 3:01PM GMT Last Price: 1.3269

The overlapping rise and possible double top near 1.3309 could lead to a larger correction. A flat or triangle would lead to weakness...

And here's the decline EUR/USD saw shortly after:

Note that neither of these two forecasts mentioned the news. And for good reason: The December 27 euro-bullish news would have had you buying EUR/USD all the way into the top.
Instead of the news, we at EWI look at objective Elliott wave chart patterns. That, and not the news, is what helps us to forecast the markets before they move.

We don't always succeed. However, as you can tell from this example, our Currency Specialty Service delivers true forward-looking analysis. Get our forecast for the U.S. dollar plus 5 hidden market opportunities for 2013 in a brand-new FREE report >>

Free Report: 5 Hidden Market Opportunities for 2013
In this special 21-minute video report, EWI Senior Currency Strategist Jim Martens looks past the obvious -- the "fiscal cliff," the Fed, etc. -- to give you a U.S. dollar forecast for 2013 that would astonish the mainstream experts. Jim then walks you through 5 precise Elliott wave "roadmaps" for 5 key FX market opportunities in the year ahead.

BONUS: You also get Jim's new 5-minute video update featuring 2 major currency pairs.

All you need to access this video report is a FREE Club EWI profile.

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Club EWI is the world's largest Elliott wave community with more than 325,000 members. Membership is 100% free and includes free reports, tutorials, videos, special events, promotional offers and access to the valuable EWI Q&A Message Board.

2012-12-17T21:34:00.000-07:00

Prechter: "This is Not a Picture of a Bull Market"

The three-and-a-half-year rally has occurred on declining volume December 14, 2012

By Elliott Wave International

What a comeback for the Dow Industrials!

From a March 9, 2009, close of 6,547, the senior index climbed to 13,610 on Oct. 5, 2012.
Moreover, the Dow achieved this feat in the face of a weak-kneed economy, and it has grinded forward now for three and a half years.

The persistent rise has emboldened stock market prognosticators.

S&P Could Still Hit 1,600 Year-End
--CNBC, Oct. 23

All the while, fewer and fewer investors have been participating in the so-called recovery.
Take a look at the chart below from the just-published October 2012 special video Elliott Wave Theorist, and then read Prechter's commentary.

People have started ignoring volume because bears have been talking about declining volume ever since 2010. But it is extremely important. Volume overall has been shrinking ever since the market's low of March 2009. This line that I've drawn tracks the volume on the rising portions of the rally from 2009. Every time the market gets hit very hard-such as in the collapse of 2008, the "flash crash" of May 2010 and the market plunge in August last year-volume picks up.
This is not a picture of a bull market. In a bull market, the opposite happens. Volume should be going up during the entire period, and it should be declining every time the market corrects. But we're getting exactly the opposite situation.

--The Elliott Wave Theorist, October 2012

Volume is an important momentum indicator that many overlook. It's time to start looking at your investments independently. EWI is here to help.

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(Video) Alcoa and Aluminum: Latest Price Action Suggests 2 Major Opportunities

2012-12-06T09:31:00.000-07:00

(Video) Alcoa and Aluminum: Latest Price Action Suggests 2 Major Opportunities
Alcoa (NYSE:AA) and aluminum futures prices have "come into critical price areas."
November 30, 2012

By Elliott Wave International

The editor of Elliott Wave International's Metals Specialty Service, Mike Drakulich, has just recorded a new, free video forecast:

"Aluminum and Alcoa: Exciting Juncture (Nov. 29, 2012.)"

Says Mike (excerpt):

"This is the first video of what is going to be a series of videos on the industrial metals markets, as they come into critical price areas that may tell us the big [moves] I've been talking about in my daily analysis are getting underway -- or, in fact, are underway."

ALUMINUM: The video starts off by showing you "the big picture from 2008-2009 bottom." Mike Drakulich walks you through the Elliott wave pattern since then and shows you how, off the recent high, the price has come down in a familiar ABC pattern. Moreover, the decline has retraced 62% of the previous rally -- a key Elliott wave signature and important Fibonacci proportion.

Here is an abridged version of the aluminum chart from the new video:

What's more, the price action in aluminum has just penetrated two key moving averages, the 50-day and the 200-day.

ALCOA (NYSE:AA): The second half of the video gives you a detailed look at Alcoa stock. Mike shows you that, going back to the same 2008-2009 period, AA has followed the price of aluminum very closely. You get a detailed view of Alcoa's recent drop below a key support price level, plus the analysis of an important trendline the stock has been "flirting" with -- which, if broken, should "open the gates" to a rare opportunity.
Mike Drakulich ends the video by saying:

"Bottom line, we have some really nice action in aluminum and Alcoa, and this is being seen across the board in many of the industrial commodities."

Visit Elliott Wave International to watch the full, FREE video forecast on these two emerging trading opportunities.

Using Momentum Analysis

2012-11-29T22:38:00.000-07:00

Momentum Analysis Using MACD

Learn more about using Momentum analysis to make Elliott wave trading decisions in this video by EWI European Interest Rate Analyst Bill Fox. Find more lessons on technical indicators in EWI's newest free report. See the information below.

Learn the Best Technical Indicators for Successful Trading

In this free report, you will learn the tools of the trade directly from the analysts at Elliott Wave International. This free report uses both video lessons and reports to teach you how to incorporate technical indicators into your analysis to improve your trading decisions. Get your technical indicators report now.

USD/JPY: Lemons into Lemonade

2012-11-28T05:48:00.000-07:00

USD/JPY: Lemons into Lemonade

How Elliott wave analysis helps you as a forex trader with built-in, risk-defining safeguards November 27, 2012

By Elliott Wave International

Elliott wave analysis is not a crystal ball. (No market-forecasting method is.)
But here's what is remarkable: Even when your Elliott wave forecast doesn't pan out, you have built-in safeguards to alert you -- and help you manage risk. Here's a real-life example.

Going into the November 14 low, USD/JPY charts had been showing an impulsive downward Elliott wave pattern. Impulses are 5-wave moves, but on November 13-14, the pattern looked incomplete: the fifth wave down seemed to be missing.

Here's a chart our Currency Specialty Service subscribers saw early on November 13:

So, our analysis on November 13 suggested that USD/JPY would fall further. But USD/JPY just would not fall; instead, it went sideways.

That suggested to our Currency Specialty Service team that the wave (4) you see in the chart above was extending. Perhaps it was developing as another Elliott wave pattern -- maybe a contracting triangle? This chart and analysis described to subscribers that scenario:

"A bearish fourth-wave triangle is another idea that's in a position to yield new lows in wave (5). Resistance rests at 79.655/765."

Note that line: "Resistance rests at 79.655/765" -- it represents the very risk-defining safeguards I mentioned earlier.

How? Well, there are things that Elliott wave patterns just are not allowed to do. In a contracting triangle (an A-B-C-D-E formation), prices must stay within converging trendlines -- and they cannot overlap the start of wave A, the origin of the pattern. Resistance at 79.655/765 was exactly that: the price point where the contracting triangle interpretation would be invalidated.
Practical application: If you were bearish on USD/JPY on November 14, you could have used the price area of 79.655/765 to manage your position risk.

As you probably know, USD/JPY did not go sideways for long. Nor did it go down. Soon after, it went higher and breached that key resistance level:

When one Elliott wave pattern ends, another one begins. As soon as that key resistance in USD/JPY was breached, a new road map for the Japanese yen became clear.

Download Your Free 14-page eBook: "Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success"
Here's some of what you'll learn:

Which Elliott waves to trade
Which Elliott waves set up your forex trade
When your analysis is wrong
Guidelines for projecting price targets
How to evaluate an Elliott wave structure
How to use the bigger picture to give you perspective on the market's next major move

Jim also takes you through two real-world trading examples to reinforce what you've learned and apply it to your own trading.
All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

Get a Second Opinion on Your Trades with a 5-Chart Example

2012-11-27T23:02:00.002-07:00

Get a Second Opinion on Your Trades with a 5-Chart Example

EWI Senior Analyst Jeffrey Kennedy shows you how to "get a consensus" before placing a trade. November 20, 2012

By Elliott Wave International

If you've ever considered a major medical procedure, you likely know the importance of a second opinion. Even if your doctor or specialist is experienced and strongly recommends a certain course of action, it's still risky to make a critical health decision based on one person's view.

Likewise in trading: One solitary piece of technical evidence rarely provides enough information to make a trading decision. According to Elliott Wave Junctures editor Jeffrey Kennedy, it is best to get a second (or third, or fourth) opinion from supporting indicators before you commit to a trade.

In Orange Juice, July 2008 was a good shorting opportunity not merely for one reason, but because four pieces of evidence showed that lower prices were ahead.

To illustrate my point, let's examine some price charts of Orange Juice and look at the reasons why the consensus of evidence in Orange Juice in July 2008 argued for lower prices (Chart 1).

The first piece of evidence is glaringly obvious in Chart 2: the weekly trend is down:

Why is this important? Because a cornerstone belief of technical analysis is that trends persist. With the weekly trend down in O.J., odds favored more of the same in the weeks to come.

Chart 3 illustrates another piece of evidence: that the May-July advance in Orange Juice (basis the September 2008 contract) consisted of three waves.

Three-wave moves are important to Elliotticians because they are corrective wave patterns (i.e., countertrend moves).

A Bearish Engulfing pattern is evident in Chart 4, which also argued for lower prices in Orange Juice. It is a Japanese Candlestick pattern in which the distance between the open and close of the current price bar encapsulates the distance between the open and close of the prior bar. More important, the close of the current bar is below the open, and the close of the prior bar is above its open:

The final piece of evidence is illustrated below in Chart 5, which displays a bearish Popgun pattern:

A Popgun is a simple two-bar pattern that I have written about before... It typically forms at turning points and is composed of an outside bar that is preceded by an inside bar, similar to the Engulfing Candlestick pattern

With a strong downward trend and three additional supporting technical indicators, Jeffrey knew that he had a good opportunity to short Orange Juice. He had not just a "second opinion," but a third and fourth argument to strongly support his trading decision.
Jeffrey often says that market analysis and trading have taught him "a lot about life, and vice versa."

Just as one doctor's opinion may not be sufficient evidence to undergo the knife, a bearish wave count alone or a simple divergence in two indicators is probably not enough to raise your confidence level sufficiently to place a trade.

Learn to Apply Some of the Most Powerful Technical Methods to Your Trading
Get more lessons like this in a FREE 10-lesson video series from Elliott Wave International. Jeffrey Kennedy will show you how to incorporate technical methods into your trading to help you spot high-confidence trade setups. You'll learn the methods the professional traders use, like Elliott waves, MACD, RSI, candlestick patterns, Fibonacci and more!
Access your free lessons now >>

Which Works Best -- GPS or Road Map? (Part 3)

2012-11-27T01:53:00.000-07:00

Which Works Best -- GPS or Road Map? (Part 3) Trading with Elliott wave analysis November 21, 2012

By Elliott Wave International

(Here are Part 1 and Part 2 of this article.)

Think of Investing as a Trip

Here's my advice: View the Elliott wave Principle as your road map to the market and your investment idea as a trip.

You start the trip with a specific plan in mind, but conditions along the way may force you to alter course. Alternate counts are simply side roads that sometimes end up being the best path.
Elliott's highly specific rules keep the number of valid interpretations to a minimum. The analyst usually considers the "preferred count" to be the one that satisfies the largest number of guidelines. The top "alternate" is the one that satisfies the next largest number of guidelines, and so on.

There are only three hard-and-fast rules with the Wave Principle:

Wave two cannot retrace more than 100% of wave one.
Typically wave four does not end within the price territory of wave one but may do so from time to time in highly leveraged markets.
Wave three is never the shortest wave of an impulse.

Elliott's rules give specific "make-or-break" levels for a given interpretation. In Figure 2, for example, if the move labeled (2) continues below the level of the beginning of wave (1), then the originally preferred interpretation would be instantly invalidated.

By eliminating subjectivity, the rules help you firm up your investment strategy -- and reduce your risk.

"Are We There Yet?"

You've heard that irritating question, "Are we there yet?," from the back seat just about a million times. Every map has a scale, and it's the scale that helps me determine how many miles I have to travel before I reach my destination. When using the Wave Principle, Fibonacci relationships are the scale.

Many investors today know that Fibonacci ratios are used for market forecasting. But few realize that Fibonacci analysis of the markets was pioneered by R.N. Elliott. The use of Fibonacci ratios requires a valid Elliott wave interpretation as a starting point. Unfortunately, many non-Elliott analysts try to find Fibonacci proportions between market moves that are not related to each other in any way. This has made the approach appear to be far less valuable than it is.

Elliott wave analysis has two chief insights concerning Fibonacci relationships within waves. First, corrective waves tend to retrace prior impulse waves of the same degree in Fibonacci proportion. For example, wave (2) in Figure 2 retraces 38% of wave (1). That's a common relationship. Other frequent wave relationships are 50% and 62%. Second, impulse waves of the same degree within a larger impulse sequence tend to be related to one another in Fibonacci proportion. For example, common relationships include wave three traveling 1.62 times the distance traveled by wave one of the same degree. When that occurs, wave five often tends toward equality with wave one of the same degree.

Planning the Trip

Just as I sit down and plan my trips before shoving off, I rely on wave interpretations and Fibonacci relationships to help establish investment strategies and reduce risk exposure when I analyze the markets for our clients. Investors use these same wave analysis methods to help decide where to get into a market, where to get out and at what point to give up on a strategy.

The Wave Principle lets you identify the highest probability direction for the market, as you also adopt an optimum position to take advantage of it -- all while protecting yourself against lower probability outcomes. You couldn't ask more from your own GPS.

By the way, we did make it to Cades Cove on our way back across Smoky Mountain National Park. I turned off my GPS and consulted my map. The old tried and true worked like a charm.

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 Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim's latest thoughts about FX markets and the business of trading them at his Twitter feed.

Download Your Free 14-page eBook: "Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success"
Here's some of what you'll learn:

Which Elliott waves to trade
Which Elliott waves set up your forex trade
When your analysis is wrong
Guidelines for projecting price targets
How to evaluate an Elliott wave structure
How to use the bigger picture to give you perspective on the market's next major move

Which Works Best -- GPS or Road Map? (Part 2)

2012-11-26T22:20:00.002-07:00

Which Works Best -- GPS or Road Map? (Part 2)

Trading with Elliott wave analysis November 16, 2012

By Elliott Wave International

(Part 1 of this article is posted here.)

A Quick Road Map of Wave Analysis

For this overview of wave analysis, I have borrowed from the "Cliffs Notes" version that we provide for free to anyone interested in learning about wave analysis. It's called Discovering How To Use the Elliott Wave Principle.

Elliott's road map, or basic wave pattern, consists of "impulsive waves" and "corrective waves." An impulsive wave is composed of five subwaves and moves in the same direction as the larger trend -- or the wave's next larger size. A corrective wave is divided into three subwaves, and it moves against the trend of the next larger degree. As you can see in Figure 1, there are plenty of right and left turns -- or up and down moves on a price chart.

Figure 1 reveals the general roadmap that markets follow during bull markets. Notice the building-block process. The completion of an initial impulsive wave (waves 1-5, up-down-up-down-up) sets the stage for a corrective phase (waves A-B-C, down-up-down). Combined, those waves represent the first two legs of a larger "degree" advance. In this illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive wave, labeled as wave (1).

A five-wave rally from a significant low tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction -- in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree. At that point, again, a three-wave correction of the same degree occurs.

Note that, regardless of the size of the wave, each impulsive wave peak leads to the same result -- a correction.

If we isolate the corrective waves, the subwaves A and C move in the direction of the larger trend and usually unfold in an impulsive manner. Referring to Figure 1, the (A)-(B)-(C) decline that follows the (1)-to-(5) sequence illustrates this structure. Waves labeled with a B, however, are corrective waves; they move opposite to the trend of the next larger degree. In this case, they move upward against the downtrend. Notice that these corrective waves are themselves made up of three subwaves.

Reading the Wave Analysis Map

So now that you have a wave road map in hand, let's talk about how to apply it to the actual terrain of financial markets. When I look at a price chart for the first time, my first task is to identify any completed five-wave and three-wave structures. Once I do that, then I can interpret where the market is along the pre-defined path and, from there, where it's likely to go.

Say we're studying a market that has reached the point shown in Figure 2. So far we've seen a five-wave move up, followed by a three-wave move down.

But this is not the only possible interpretation. It's sort of like having a GPS that tells you that you've arrived, when you've actually got miles to go. In this example, it is also possible that wave (2) hasn't ended yet; it could develop into a more complex three-wave structure before wave (3) gets under way. Another possibility is that the waves labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger impulsive downtrend, as shown in the "Alternate" interpretation at the bottom of the chart. According to each of these interpretations, though, the next imminent movement is likely to be upward. That tells you more than most technical analysis systems do.

Alternate counts are an essential part of using the Wave Principle. They are neither "bad" nor "rejected" wave interpretations. Rather, they are valid interpretations that are given a lower probability while the count works itself out. If the market doesn't follow the original preferred scenario, the top alternate usually becomes the preferred count.

I consider alternate counts to be similar to detours -- just a different way for the market to get to where it's going. How many times do you actually go from point A to point B non-stop in your travels? Admit it, you have to stop to grab a bite to eat or ask for directions once you realize you're lost. After consulting the map, you get back on track toward your intended destination. The new path represents an alternate count.

This seeming ambiguity about a wave structure illustrates an important point about the Wave Principle that, in my opinion, is often misunderstood. The Wave Principle does not provide certainty about any one market outcome. Instead, it gives you an objective means of determining the probability of a future direction for the market. At any time, two or more valid wave interpretations usually exist. Unlike actual physical roads that exist, price movements in financial markets are always changing, and the best you can do is be somewhat confident of whether they are moving up or down. That's the kind of confidence that the Wave Principle provides.

(Come back soon for part 3 of this series.)

Download Your Free 14-page eBook: "Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success"
Here's some of what you'll learn:

Which Elliott waves to trade
Which Elliott waves set up your forex trade
When your analysis is wrong
Guidelines for projecting price targets
How to evaluate an Elliott wave structure
How to use the bigger picture to give you perspective on the market's next major move

Which Works Best -- GPS or Road Map? (Part 1)

2012-11-26T22:17:00.001-07:00

Which Works Best -- GPS or Road Map? (Part 1)

Trading with Elliott wave analysis November 13, 2012

By Elliott Wave International

Some of the best stories about global positioning systems (GPS's) are the weird detours they sometimes recommend to drivers. Just like some of the weird detours that financial markets can make you take when you think they would be better off going in a straight line either up or down, depending on how you've positioned your trades.

Not long ago, while taking a trip with my family through Great Smoky Mountains National Park on the way to Gatlinburg, Tenn., I decided to use my GPS to drive around the park's western boundary. We wanted to visit Fontana Dam and Cades Cove to see the wildlife. We'd do the go-carts, miniature golf and rides the following day.

From Fontana Dam, my old-fashioned map made it look like it would take the better part of the day to drive around the park to Gatlinburg and then head into Cades Cove from the north. But my new GPS unit suggested that Cades Cove was less than 20 miles away. I could have kissed it -- my GPS was going to save me hours of travel time! Or so I thought. Little did I know until I got there that the road my GPS suggested for the final few miles was only the remnant of an old wagon trail -- and it was a one-way wagon trail, going the wrong way. I had to backtrack and take the much longer path my paper map suggested.

What's the moral of the story? Sometimes the new-fangled gadget is not much of an improvement over what it's designed to replace. Although my GPS unit is great when it comes to identifying the quickest and most efficient route from point A to point B, it sometimes fails to take into account some of those necessary nuances, such as whether a street is one way or whether it might be impassable at times. Every so often, the old-fashioned way of doing things is still the best way.

I believe that's true when it comes to analyzing markets, too. The method I employ every day has been around since the 1930s, and it works as well as, if not better than, any new-fangled technical analysis method for which you must buy some expensive computer software. My method is a form of technical analysis based on the Elliott Wave Principle, which Ralph N. Elliott worked out via hundreds of hand-drawn charts, well before the dawn of charting software.

If you like those GPS units that talk you through every turn, you can almost imagine Ralph's voice explaining where to turn as you follow a market. Those directions -- the road map he drew for tradable markets -- have withstood the test of time.

As I found during my trip, detours are a fact of life. They are also a part of market trends. For instance, a bull market shows periods of "punctuated growth" -- that is, periods of alternating growth and non-growth, or even decline. The patterns then build on themselves to form similar designs at a larger size, and then again at an even larger size.

You've probably heard of this idea of repeating patterns on increasing and decreasing levels of scale. This emerging science, which is called "fractal geometry," is a branch of chaos theory. And it is precisely the model identified by R. N. Elliott more than 60 years ago.

(Stay tuned for parts 2 and 3.)

Download Your Free 14-page eBook: "Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success"
Here's some of what you'll learn:

Which Elliott waves to trade
Which Elliott waves set up your forex trade
When your analysis is wrong
Guidelines for projecting price targets
How to evaluate an Elliott wave structure
How to use the bigger picture to give you perspective on the market's next major move

(VIDEO) GBP/USD: How Elliott Wave Patterns Predicted Recent Drop Under 1.60

2012-11-13T21:56:00.000-07:00

A great 6-minute video lesson in Elliott wave analysis of forex markets

November 08, 2012

By Elliott Wave International

Every Friday, the editor of EWI's forex-focused Currency Specialty Service, Jim Martens, records a video update for his subscribers. Each video delivers a real-life lesson on Elliott wave application to forex markets.

Watch this 6-minute video Jim recorded on October 12. Jim called for cable (GBP/USD) to drop below 1.60 in wave 5 of the developing Elliott wave sequence.

Ten days later, on October 23, GBP/USD fell as low as 1.5925.

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Happy 2013 from your friends at ForexJourney

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Which Works Best -- GPS or Road Map? (Part 1)

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(VIDEO) GBP/USD: How Elliott Wave Patterns Predicted Recent Drop Under 1.60

Two Signs That Deflation is Far From Over
A key economic index turns south

[Video] Bollinger Band Basics
Senior Analyst Jeffrey Kennedy shows you how these volatility indicators support pattern recognition

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Tips from EWI Senior Analyst Jeffrey Kennedy's Stocks and Commodities interview

Gargantuan and Growing: The U.S. Debt Figure You've Probably Never Heard Of
The widely reported $16.1 trillion federal debt is a drop in the bucket

How the Federal Reserve is Showing Financial Fear
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The "fiscal cliff" agreement did not set the course for EUR/USD -- here is why.

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Alcoa (NYSE:AA) and aluminum futures prices have "come into critical price areas."
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