How Moving Averages Help You to Define the Trend

One way to think of a moving average is that it’s an automated trend line.

By Elliott Wave International

The "moving average" is a technical indicator of market strength which has stood the test of time.
More than 30 years ago, Elliott Wave International President Robert Prechter described this indicator in his essay, "What a Trader Really Needs to be Successful." What he said then remains true today:

... a simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use.

So, what is a moving average?
Elliott Wave International's Jeffrey Kennedy, a more than 25-year veteran of technical analysis, provides an answer:

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.

Kennedy offers examples and insights about moving averages in the instructive guide, "How You Can Find High-Probability Trading Opportunities Using Moving Averages."
Here's an introductory chart from the guide, along with Kennedy's comments:

The chart plots three moving averages on a [past] daily chart for Corn. The red line represents a 10-period weighted moving average, the green line represents a 10-period exponential moving average, and the blue line is a 10-period simple moving average. … The exponential moving average and weighted moving average put more value on the front end, which means that while a 10-period simple moving average assigns the same weight to each period, exponential and weighted moving averages put more weight on the most recent data.

I rely mostly on the simple moving average, because simple things usually work best.

In this guide, Kennedy shows more elaborate charts as he goes into detail about the "dual moving average crossover system" and the "moving average price channel system." Moreover, he informs you how to combine the two.
Yet, also be aware that Kennedy discusses the pitfalls of relying on one "magic" moving average setting.
In the free guide, How You Can Find High-Probability Trading Opportunities Using Moving Averages, you'll also learn how to avoid being "whipsawed" by false signals.
Get instant access to this popular free trading guide now.

This article was syndicated by Elliott Wave International and was originally published under the headline How Moving Averages Help You to Define the Trend. 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.

India's Nifty 50: Does the Bad Jobs Outlook Spell Trouble for Stocks?

India's "employment outlook" just reached its lowest level in 14 years.

By Elliott Wave International

There are a lot of mouths to feed in India -- north of 1.3 billion.
That means a lot of jobs are required to put food on the table for a lot of people. But there's a problem: the jobs picture in the world's second most populous nation isn't pretty.
As far back as a year ago, the Washington Post said (Feb. 1, 2019):
**India's jobs crisis is worse than people thought ...
At the time, a private survey had shown that the number of people working had contracted by 11 million in 2018.
Here in February 2020, the jobs outlook remains bleak.
So, what should investors make of this?
Well, a chart and commentary from Elliott Wave International's February 2020 Global Market Perspective provides insight:

**ManpowerGroup India reported the results of its Q1 2020 Employment Outlook Survey, which showed that only 10% of managers planned to increase staff -- the lowest level in the survey's 14-year history.
**For the past few years we have interpreted apparent troughs in the survey results as bullish for stocks, as prior troughs were in Q1 2009 and Q4 2012. So far, that interpretation has been correct.
"Bullish for stocks"? How's it possible for bad employment data to be bullish for stocks?
Helping you understand seeming paradoxes like these is a unique feature of Elliott wave analysis. It's not that bad news is bullish for stocks. It's more nuanced than that. Our research shows that bad news often coincides with the end of a downtrend in a market's Elliott wave pattern.
That's why EWI's Global Market Perspective rightfully interpreted two prior employment troughs as bullish signals for Indian stocks -- you can see those moments marked on the chart with the first two red arrows.
Unfortunately for them, most investors continue to make a big mistake when they invest with the news, bullish or bearish. As EWI President Robert Prechter stated in a classic Elliott Wave Theorist:
**One of the most important things to understand about the stock market is its relationship to news. Aside from emotional reactions lasting just minutes, news does not cause the market to move in any meaningful sense.
Get important insights into what really drives markets from Robert Prechter in a free 12-minute video, "Learn What REALLY Moves the Markets," a presentation that Robert Prechter made to The International Federation of Technical Analysts.

Junk Bonds: 2 "Golden" Junctures

A recent low in the "CCC yield minus AAA yield" chart occurred very near a key Fibonacci level

By Elliott Wave International

The Golden Ratio -- 1.618 or .618 -- is ubiquitous throughout nature.
You'll find this mathematical proportion in the shapes of galaxies, sea horses, pine cones, the arrangement of seeds on a sunflower head, and numerous other natural phenomena... including the chart patterns of financial markets.
Yes, chart patterns of financial markets are also parts of nature, because they're created by the interactions of human beings.
Moreover, the Golden Ratio is highly useful in setting price targets and forecasting key junctures in those price charts.
Indeed, Murray Gunn, Head of Global Research at Elliott Wave International, mentioned the Golden Ratio in his analysis of the junk bond market in our February Global Market Perspective. Here's a chart and commentary:

The chart shows the yield of CCC-rated corporate bonds minus the yield of AAA-rated bonds, each denominated in U.S. dollars. Junk bonds (the CCCs) underperformed in the second half of 2018 and the subsequent retracement in the yield spread reversed around the [Fibonacci] 0.618 (inverse of 1.618) retracement in May 2019.
Another period of junk underperformance ensued into the beginning of December 2019 from where the spread contracted into last week's low. That low, curiously, was within 4 basis points (0.04%) of the 0.618 retracement of the rally from May to December.
In our February Global Market Perspective Murray also indicates what he expects next for high-yield bonds.
And, while mentioning Murray, you may be interested in knowing that before joining EWI, Murray had worked as a fund manager in global bonds, currencies and stocks. He held long posts at Standard Life Investments and the Abu Dhabi Investment Authority. He then joined HSBC Bank as Head of Technical Analysis.
The bottom line is that Murray brings Global Market Perspective subscribers a wealth of valuable experience beyond his stellar Elliott wave analysis.
And, as you may know, Elliott Wave International President Robert Prechter co-authored a well-known book on Elliott wave analysis, which is titled Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter.
You can now access the digital version of this Wall Street classic 100% free.
Get access now.

The Shanghai Composite and Coronavirus: A Revealing Perspective

By Elliott Wave International

China's Shanghai Composite has been in a large-scale downtrend for about 13 years.
So, when the news of the coronavirus outbreak hit, it came as less of a shock to Elliott Wave International's global analysts.
You may ask, "What in the world does one have to do with the other?"
Our just-published February Global Market Perspective provides insight:

When a major infectious disease breaks out, we find that a stock market correction has usually preceded it. That observation is germane right now because China's Shanghai Composite has been tracing out a large-degree correction since its peak in 2007 and, not coincidentally, China has experienced numerous outbreaks of highly lethal infectious diseases over the 13-years-and-counting period.

One of the most lethal was the H7N9 bird flu epidemic that broke out in March 2013, which had a mortality rate of about 39%.
Here's another thing that's notable: The bird flu epidemic broke out a few months ahead of last decade's low in the Shanghai Composite, after which the index soared 180% over the next two years. The December 2019 novel coronavirus -- which Chinese researchers have since determined was present in the human population months earlier -- similarly broke out in the wake of another low, this time the 2019 low in the Shanghai Composite, as EWI's Asian-Pacific editor notes.
The takeaway is that many investors who view the coronavirus as bad news for Chinese stocks may be mistaken. In other words, negative news often reflects the past, not the future.
Indeed, Elliott Wave International's monthly Global Market Perspective showed this chart [Elliott wave labels available to subscribers] and said:

The coronavirus outbreak in China has dominated news headlines in recent weeks. But one story the popular press has failed to pick up on is that outbreaks of infectious disease go hand-in-hand with bear markets, as the chart [shows].

As early as 1994, The Elliott Wave Theorist observed that "disease sometimes plays a prominent role in major corrective periods." Not every stock market correction coincides with an outbreak of infectious disease; conversely, though, when a major infectious disease breaks out, we find that a stock market correction has usually preceded it. That observation is germane right now because China's Shanghai Composite has been tracing out a large-degree correction since its peak in 2007 and, not coincidentally, China has experienced numerous outbreaks of highly lethal infectious diseases over the 13-years-and-counting period.

The chart pattern of the Shanghai Composite is not the result of news -- i.e., the series of infectious diseases -- instead, Elliott waves often predict the news. In other words, the corrections occurred before each outbreak of infectious disease.
Elliott Wave International's research also reveals that other major events do not determine the trend of stock markets either -- even an occurrence as dramatic as war.
Yet, most financial experts hold the belief that external factors regulate the financial markets.
Get the eye-opening evidence which refutes that idea in a free 12-minute video titled "Learn What REALLY Moves the Markets."

Central Banks Load Up on Gold: A Revealing Perspective

Government is the "ultimate crowd" and usually the final group to act on a trend

By Elliott Wave International

If financial history teaches anything, it's that the most intense buying happens near a top. Likewise, climatic selling happens near a bottom.
In other words: The crowd is usually on the wrong side of major financial turns.
Government is the "ultimate crowd," because every decision is made by committee. By the time a government is ready to act, it's almost always too late. So, they're typically the last to act on a trend.
Consider gold. This chart is from our June 2011 Global Market Perspective, which noted:

Central banks are now expanding their gold reserves for the first time in a generation. This behavior is the exact opposite of their action at gold's low in 1999-2001. Back then, the Bank of England was selling its gold reserves, as were 14 other European central banks. At the 1999-2001 gold low, prices had already declined for 20 years, so government officials felt confident enough in the trend to dump gold reserves. Now that gold has risen for ten straight years, central banks again feel comfortable in extrapolating the trend forward and are buying gold. Their purchases became particularly pronounced as gold was meeting the upper channel of the five-wave rally from the 1999 low. Our view remains that gold is forming a major top.

Just three months later (Sept. 2011), the price of gold did indeed top at $1921.50, an all-time high.
World central banks bought more gold in 2012 (Bloomberg, April 24, 2013):

The World Gold Council says [world central banks] added 534.6 metric tons to reserves in 2012, the most in almost a half century.

Yet, the price of gold continued to decline, reaching a low of $1046.20 in December 2015.
As you probably know, gold's price has risen substantially since then.
And, now, with the precious metal near multi-year highs, the "ultimate crowd" is jumping in with both feet again.
Here's a chart and commentary from our January 2020 Global Market Perspective:

This chart shows that the world's central banks are at a 50-year high in annual net gold purchases, nearing 700 tons. Central banks were net gold sellers for nearly the entire rally, from the 1999 low until 2010; then they suddenly reversed course and became net buyers shortly before the peak at $1921 in 2011. They've been buying ever since, even though gold remains below its 2011 peak. Central banks are committing even more to gold now.

Some observers may view all this buying as a bullish sign for gold. However, as we've learned, central bank buying does not determine the price of gold. If anything, central banks buy or sell at precisely the wrong times.
The real driver of gold's price is investor psychology, which is reflected in the Elliott waves of gold's price chart.
Learn how you can apply the Wave Principle to your own trading in any financial market, including gold, via the free resource titled "Introduction to the Wave Principle Applied." Get access now.

How to Shrink Market "Maybes" Down to a Minimum

By Elliott Wave International

No analytical method can offer 100% clarity about the market's future.
Yet critics of technical analysis, particularly Elliott waves, say that popular technical methods fail if they don't do just that. Of course, that's unreasonable. Perhaps you've noticed that the critics don't hold other analytical methods -- not least of all fundamental analysis -- to such an impossible standard.
However, as the Wall Street classic Elliott Wave Principle explains, Elliott wave analysis does offer what other market assessment methods do not:

What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum.

Do you know of another analytical approach that does this? Elliott Wave International's analysts don't.
Even so, the Elliott wave method of analyzing and forecasting financial markets has its critics. Some of them erroneously assert that two or more wave interpretations of the market's price pattern can be equally valid.
Yet, Robert Prechter's book, Prechter's Perspective, refutes this claim:

One shouldn't confuse the fact that the practical application of the Wave Principle is an exercise in ranking probabilities with the idea that different opinions are equally valid. Two possible paths for the market are almost never equally likely. So, two opinions are almost never equally valid. ... Occasionally, the less probable scenario works out, of course; that is what the word "probable" means. [emphasis added]

Determining the probabilities of a market's direction often requires patience. And it's during these times that critical voices are often loudest. But, as most experienced traders will tell you, patience has its rewards. Let's return to the book Elliott Wave Principle:

There are often times when, despite a rigorous analysis, there is no clearly preferred interpretation. At such times, you must wait until the count resolves itself. When after a while the apparent jumble gels into a clear picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.

Elliott wave practitioners know their discipline requires work. Yet that work can yield timely opportunities.
The basic Elliott wave pattern is five waves in the direction of the main trend followed by three corrective waves, as shown by this diagram:

When initial eight-wave cycles such as the ones above end, similar cycles ensue, which are followed by other five-wave movements.
Do realize that there are a number of specific variations on the basic design of five-and-three.
You can learn all about them with free access to the digital version of the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior by Frost & Prechter.
Get your free copy now.

New High in TSLA: Riding an Electric 200+% Move

By Elliott Wave International

Excerpted from the March 2019 Asian-Pacific Financial Forecast (published March 1, 2019):

The electric vehicle revolution approaches critical mass

The CEO of Tesla Inc., Elon Musk, held a ground-breaking ceremony outside Shanghai in January 2019 for his company’s first Gigafactory in China, which will be the first factory in the nation wholly owned by a foreign automobile manufacturer. Looking out over barren fields in the rain, the CEO promised that the factory would begin producing its first cars for the China market by late 2019.

(Wave labels removed to protect paying subscribers.)

Tesla was the leading producer of EVs globally in 2018—the company sold about 138,000 units of its Model 3 Sedan, which represented about 10% of the global market, compared to 92,000 units sold by the second-largest producer, China’s BAIC Group. The company sports a market cap of about $50 billion, which looks set to get even bigger in coming years, as the stock price appears to be [heading higher] since its IPO in 2010.

Excerpted from the January 2020 Asian-Pacific Financial Forecast (published January 10, 2020):

Tesla makes its first cars in China

Electric vehicle maker Tesla Motors delivered its first cars made in China during the final week of 2019. China is key for all automobile manufacturers because the nation is the largest market for electric vehicles and it should remain so for decades, according to Bloomberg New Energy Finance (see chart). The research institute expects demand for electric vehicles to soar after 2024, when it estimates that the declining cost of batteries will make electric vehicles more competitive with gasoline-powered vehicles in terms of price.

Our March 2019 issue said that Tesla stock was [heading higher] since its IPO in 2010. Its recent surge to record highs is consistent with that outlook.

Here's an updated chart of Tesla through Tuesday morning (Feb 4):

(Wave labels removed to protect paying subscribers.)

Free, Read Our New Asian-Pacific Forecasts
(Now Thru Feb. 6)
Asian-Pacific markets have been extremely volatile lately -- and you want to capitalize on it.
Let us help, free. Through February 6, read our latest Asian-Pacific forecasts as part of our FreeWeek event.
Join FreeWeek Now.