A Four-Chart Lesson in Spotting Trade Setups

A Four-Chart Lesson in Spotting Trade Setups
June 29, 2011

By Elliott Wave International

You can find low-risk, high-probability trading opportunities by trading with the trend. The trick is to find the end of market corrections, so you can position yourself for the next move in the direction of the trend.

This excerpt from Jeffrey Kennedy's free 47-page eBook How to Spot Trading Opportunities explains where to find bullish and bearish trade setups in your charts and how to zero-in on these opportunities. If this lesson interests you, the full 47-page eBook is free through July 6.

On the left-hand side of the illustration below, there are two bullish trade setups. As traders, we want to wait for the wave (2) correction to be complete so we can catch the move up in wave (3) – this is the trade. What we are trying to do in this bullish trade setup is anticipate the potential for profits on the buy-side as prices move up in wave (3). Another bullish trade setup is at the end of wave (4).

As traders, we are looking to buy the pullback and position ourselves within the direction of the larger up-trend. Remember, three-wave moves are corrections, which means that they are countertrend structures. On the other hand, five-wave moves define the larger trend. As traders, we want to determine what the trend is and trade in the direction of the trend. Our buying opportunity to rejoin the trend is whenever the trend pauses and forms a correction.

Now, let’s look at the right-hand side of the illustration where we see two bearish setups. When a five-wave move is complete, it is retraced in three waves as a correction. The end of the five-wave move presents the first trading opportunity that we can take advantage of the short side (or the sell side) as the wave (A) down begins.

Notice the second bearish trade setup gives us another shorting opportunity as wave (B) tops.

So, within the classic wave pattern of five waves up and three waves down, we have four high-probability trading opportunities in which we are either positioning ourselves in the direction of the trend or identifying termination points of a trend. I want to share with you some tricks I have picked up over the years about how to analyze corrective waves and their termination points. The single most important thing I’ve learned from analyzing corrections is that corrective or countertrend price action is usually contained by parallel lines.

As shown above, draw the parallel lines by beginning at the origin of wave A and going to the extreme of wave B. You draw a parallel of that line off the extreme of wave A. So basically you have a small, slightly angled downward price channel. This will show you the containment region for wave C. It also shows you an area toward the bottom of the lower trend line where you can expect a reversal in price.

Here is another example. Again, you draw the parallel lines off the origin of wave A, the extreme of wave A and the extreme of wave B.

Toward the upper end of the upper trend line, you will usually see a reversal in price.

This example shows how countertrend price action is contained by parallel lines in the British pound, 60-minute, all sessions. Why is it important to know parallel lines contain the corrective or countertrend price action? Number one, it will increase your confidence that you are indeed labeling a countertrend move properly. Number two, it identifies areas where you will likely see prices reverse. For example, we see this reversal up near the top.

This brief trading lesson is just a small example of the opportunities you can find once you learn to identify key market patterns. Learn more in your free 47-page eBook, How to Spot Trading Opportunities. This valuable eBook is regularly $79, but you can get it free through July 6. Download your free copy of How to Spot Trading Opportunities now.

This article was syndicated by Elliott Wave International. 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.

Can the Fed and Economists Forecast the Future?

Can the Fed and Economists Forecast the Future? See This Startling Chart.
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting

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Can the Fed and Economists Forecast the Future? See This Startling Chart.
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting
Elliott Wave International

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Can the Fed and Economists Forecast the Future? See This Startling Chart.
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting
By Elliott Wave International

EWI's Pete Kendall recently spoke with radio host Gabriel Wisdom, and the two discussed a crucial but rarely-asked question about economists and the Federal Reserve. Pete's startling comments flatly contradict conventional wisdom. But what do the facts say? Read more.

Option 3: Full Article

Can the Fed and Economists Forecast the Future? See This Startling Chart.
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting
June 27, 2011

By Elliott Wave International

Business Talk Radio host Gabriel Wisdom recently spoke with Pete Kendall, Co-Editor of EWI's Elliott Wave Financial Forecast. Their discussion included a crucial but rarely asked question about economists and the Federal Reserve. Here's the relevant excerpt:

Gabriel Wisdom: "Ben Bernanke, the chairman of the Federal Reserve, says the economy is slowing but there's faster growth ahead. Is he wrong?"

Pete Kendall: "Economists are extrapolationists. They tend to look at what's happening in the economy and extrapolate that forward. So here we have a situation where not just Bernanke but economists in general are looking at... what they call the 'soft patch' and somehow contorting that into growth later in the year.

Pete's startling reply flatly contradicts conventional wisdom. Most people believe that the Fed really is able to anticipate the economic future. After all, they're the most "qualified." But what do the facts say?

Pete's Elliott Wave Financial Forecast Co-Editor Steve Hochberg recently included this eye-opening chart (from Societe Generale Equity Research) in his new subscriber-exclusive video, "Buy and Hold, or Sell and Fold: Where Are The Markets Headed in 2011?"

The red line in the chart is the S&P earnings, and the black line shows economists' forecasts relative to those earnings. Here's what James Montier, head of equity research for Societe Generale, said about it:

"The chart makes it transparently obvious that analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly." (emphasis added)

That comment is spot-on. In 2002-2003, as you can see, earnings turned up despite economists' forecasts for earning declines. It took them a while to "turn the ship around" and play catch-up with the trend.

Yet in 2007-2008, earnings turned down -- despite the forecast by economists for continued increases. The devastating truth is that earnings did more than fall in the first quarter of 2008: they had their first negative quarter in the history of the S&P. As Steve said in his subscriber video, "Economists were wrong to a record degree" -- and investors felt the pain.

So what's the point? Economists do extrapolate the trend. That approach works fine, until it doesn't­ -- and you're on the hook.

Elliott wave analysis never extrapolates trends -- it anticipates them. The Wave Principle recognizes that markets must rise and fall -- and that they unfold according to changes in investor psychology, in a way that is patterned and recognizable.

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Most people believe that the Fed really is able to anticipate the economic future. Now you know the facts. Uncover other important myths and misconceptions about the economy and the markets by reading Market Myths Exposed.

EWI's free Market Myths Exposed 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. Download your free copy now.

This article was syndicated by Elliott Wave International and was originally published under the headline Can the Fed and Economists Forecast the Future? See This Startling Chart.. 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 to Set Protective Stops Using the Wave Principle

How to Set Protective Stops Using the Wave Principle
The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals
June 20, 2011

By Elliott Wave International

The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals.

EWI's Chief Commodities Analyst Jeffrey Kennedy values the Wave Principle not only as an analytical tool, but also as a real-time trading tool. In this excerpt from Jeffrey's free Best of Trader's Classroom eBook, he shows you how the Wave Principle's built-in rules can help you set your protective stops when trading.

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Over the years that I've worked with Elliott wave analysis, I've learned that you can glean much of the information you require as a trader - such as where to place protective or trailing stops - from the three cardinal rules of the Wave Principle:

1. Wave two can never retrace more than 100% of wave one.
2. Wave four may never end in the price territory of wave one.
3. Wave three may never be the shortest impulse wave of waves one, three and five.

Let's begin with rule No. 1: Wave two will never retrace more than 100% of wave one. In Figure 4-1, we have a five wave advance followed by a three-wave decline, which we will call waves (1) and (2). An important thing to remember about second waves is that they usually retrace more than half of wave one, most often making a .618 Fibonacci retracement of wave one. So in anticipation of a third-wave rally - which is where prices normally travel the farthest in the shortest amount of time - you should look to buy at or near the .618 retracement of wave one.

Where to place the stop: Once a long position is initiated, a protective stop can be placed one tick below the origin of wave (1). If wave two retraces more than 100% of wave one, the move can no longer be labeled wave two.

Now let's examine rule No. 2: Wave four will never end in the price territory of wave one. This rule is useful because it can help you set protective stops in anticipation of catching a fifth-wave move to new highs. The most common Fibonacci retracement for fourth waves is .382 retracement of wave three.

Where to place the stop: As shown in Figure 4-2, the protective stop should go one tick below the extreme of wave (1). Something is wrong with the wave count if what you have labeled as wave four heads into the price territory of wave one. 

And, finally, rule No. 3: Wave three will never be the shortest impulse wave of waves one, three and five. Typically, wave three is the wave that travels the farthest in an impulse wave or five-wave move, but not always. In certain situations (such as within a Diagonal Triangle), wave one travels farther than wave three.

Where to place the stop: When this happens, you consider a short position with a protective stop one tick above the point where wave (5) becomes longer than wave (3) (see Figure 4-3). Why? If you have labeled price action correctly, wave five will not surpass wave three in length; when wave three is already shorter than wave one, it cannot also be shorter than wave five. So if wave five does cover more distance in terms of price than wave three - thus breaking Elliott's third cardinal rule - then it's time to re-think your wave count.

The Best of Trader's Classroom presents the 14 most critical lessons that every trader should know. You can download the entire 45-page eBook with a free Club EWI Membership. Download the free Best of Trader's Classroom now.

This article was syndicated by Elliott Wave International and was originally published under the headline How to Set Protective Stops Using the Wave Principle. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis

June 06, 2011

By Elliott Wave International

Many traders and investors use technical indicators to support their analysis. One of the most popular and reliable also happens to be an indicator that has been around for years and years -- moving averages.

A moving average is simply the average value of data over a specific time period. Analysts use it to figure out whether the price of a stock or a commodity is trending up or down. It effectively "smooths out" the daily fluctuations to provide a more objective way to view a market.

Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, from tick data to monthly price data or longer.

Moving Averages can help you identify the trend in a market, which is important since we all know that the trend is your friend. Yet certain moving averages can serve as support or resistance, and also alert you to trading opportunities.

This excerpt from EWI Senior Analyst Jeffrey Kennedy's free eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages, shows how a popular moving average setting identified trading opportunities in the stock of Johnson & Johnson. Download the full 10-page eBook here.

A 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.
Learn to apply Moving Averages to your trading and investing by downloading Jeffrey Kennedy's free 10-page eBook. Here's what you'll learn:

• How to apply the three most popular moving average techniques.
• How to decide which moving average parameters are best for the markets and time frames you trade.
• How to avoid several common but dangerous myths about moving averages.

Download How You Can Find High-Probability Trading Opportunities Using Moving Averages now.

This article was syndicated by Elliott Wave International and was originally published under the headline The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis. 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.

Complimentary eBook teaches you how to apply Moving Averages to your trading or investing

Elliott Wave International (EWI) has just released a free 10-page trading eBook: How You Can Find High-Probability Trading Opportunities Using Moving Averages, by Senior Analyst Jeffrey Kennedy.

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 eBook. Let EWI's Jeffrey Kennedy teach you step-by-step how moving averages can help you find high-probability trading opportunities.

Jeffrey's trading eBooks have been downloaded thousands of times because he knows how to take complex trading methods and teach them in a way you can immediately understand and apply. You'll be amazed at how quickly you can benefit from Moving Averages with just this quick, 10-page lesson.

Improve your trading and investing with Moving Averages!

Download Your Free eBook Now.

(Don't miss out. It's only available until June 13.)