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The current market conditions and volatility are causing a huge amount of consternation amongst investors and traders around the globe. Although those more advanced clients are continuing to thrive in the market action, many novices are confused into inaction and have been missing out on some of the opportunities available. Not that this is surprising, more the result of a lack of confidence stemming from a lack of knowledge. The confusion around resource taxes, default risks in Europe and monetary tightening in China, is contributing to an increase in the fear and uncertainty reported regularly on the evening news. Although I believe that analysis that integrates macro economic factors, fundamental analysis and well established technical indicators is the best approach for all traders, it is certainly worth investigating other techniques and theories. If you wish to pursue a learning methodology, a good place to start is to view the market through the eyes of an Elliott Wave theorist.
Fibonacci is absolutely vital in understanding the principles of Elliott Wave and there have been written many articles in past editions of the Trading Tutors Newsletter which look at this. Remember, searching for old articles is very easy through your software. Just click on the ‘news’ tab, go to articles and use the search and filter functions. This week we revisit some basic Elliott theory and where the Dow is likely to be in the cycle.
During the 1930’s, Ralph Nelson Elliott, the father of Elliott Wave Theory, observed that stock markets move in a series of rhythmic patterns which are based on a natural progression of shifts in mass investor psychology. As market participants vacillate between greed and fear, price patterns develop. These price patterns are called "waves”.
Elliott discovered that there were two basic types of wave patterns:
Impulse waves, consisting of five waves, which collectively move in the direction of the main trend of the market.
Correction waves, consisting of three smaller waves, follow the impulse wave series and move counter to the market's main direction.
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Elliott further discovered that each wave, whether impulsive or corrective, subdivides into smaller waves and/or comprises a part of a larger wave. Waves can, therefore, be analysed in time periods ranging from a matter of minutes to many centuries.
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After the Impulse wave, a pattern of correction in the opposite direction from the impulse wave occurs. This corrective phase is characterized by a 3 wave pattern. Again, rules regarding the relationships between the volume, momentum, and oscillation characteristics of these waves provide the basis for their identification as correction waves by ProfitSource.
The ends of these corrective waves are identified by the letters ABC on the price chart. They in turn, will set the stage for the next group of Impulse waves. To me, it looks like the current correction may well have run its course.
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With these simple rules in mind, it is easy to start looking for Elliott counts in the current market. Below is a possible count which is congruent with the current economic conditions being faced in the US and also with other elements of technical analysis.
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Remember, that Elliott Wave is an extra indicator which should be used in conjunction with a broader integrated approach..
Stay Sharp,
John Jeffery
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