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Elliott Wave, along with Gann analysis occupies a relatively unique position compared to other forms of analysis. Based upon price action and reaction (upward and downward movements) and the time it takes for those price movements to occur, both Gann’s and Elliott’s theories attempt to pick future turning points in the markets. Of course, there are many other elements of analysis, both technical and fundamental which can support those predictions and it is the application of these supporting arguments that is often the difference between successful and unsuccessful traders.
Students of the TradingKey learn how to discriminate between likely winners and losers by having a firm grasp of what makes up a ‘good Elliott Wave trade’ from a 20 point checklist and also which additional indicators are best in confirming those patterns. One of those indicators is On Balance Volume (or OBV).
There are many articles about OBV which you can search for and read through your HUBB software. Just go to the ‘news’ icon on your tool bar and select articles:
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From there, it’s easy to search by expanding the Technical Analysis filter (use the little ‘+’ button) and select the sub section marked On Balance Volume. The same can be done to find articles by your favourite author, your favourite subjects or even your favourite stocks and indices. This is a very useful tool and one which will undoubtedly speed your education and competency.
A recent example of how powerful OBV can be for filtering Elliott Wave trades can be seen by looking at Macquarie Group on the ASX (MQG:ASX). Between July and August, a Wave 4 formed, subsequent to the Wave 3 sell off which began in mid April. Interestingly, this Wave 4 took the form of a relatively ‘complex pattern’, something students are advised to consider when filtering the actual, overall Elliott Wave structure. In July and August, despite the obvious resistance level (delineated by the horizontal blue line), price is making higher lows. This insinuates some underlying strength, as the bulls dominant the bears, preventing price from dropping. This alone could cause a potential opportunity to be dismissed by a novice trader – why would you go short as the Elliott Wave predicts, when the bulls appear to be in the driving seat?
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Well, by using OBV, a different story comes to light. As an indicator of the flux (or momentum) behind the bullish and the bearish days, it’s pretty evident that on balance volume is dropping even when price was moving sideways with an upward bias. At this point in time Elliott is pointing to a drop in price, a valid set up exists to go short and OBV supports this argument.
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As can be seen from a more recent screen shot – MQG has fallen some 13% in price and looks likely to drop further today (Wednesday 8th), already showing a reward of 2.5 times the risk (risk/ reward ratio).
Stay sharp,
John Jeffery
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