How Elliott Waves Simplify Your Technical Analysis

Here's a key insight into Elliott waves and classic technical chart patterns

By Elliott Wave International

First, before we explore a key insight into Elliott waves and technical chart patterns, expect to see a growing number of comments about technical analysis in the financial press.

That is, if a bear market in stocks has started. (The rally over the past few days notwithstanding -- after all, stocks are still well off their highs for the year.)

As a classic Elliott Wave Theorist, a monthly publication which provides analysis of financial markets and social trends, says:

Technical analysis becomes popular in bear markets and loses popularity in bull markets.

For example, the country's first major books on technical analysis -- Technical Analysis and Stock Market Profits (Richard Schabacker) and The Dow Theory (Robert Rhea), were published in 1932. Of course, during that year, the nation was in the depths of a historic bear market.

Now, here in the closing weeks of 2020, some technical analysis references are already being made by some high-profile investment pros.

For example, on Oct. 27, a long-time and well-known global money manager was quoted in a CNBC headline:

Looks like a 'double top' in the S&P 500, [veteran] investor warns

On Oct. 30, Barron's warned:

A double top is bad news. It's a pattern in stock charts that forms after a security or index hits two highs close to one another with a dip in between. It looks like a capital letter M.

Of course, there are many other classic technical chart patterns, both bullish and bearish.

And, the key insight into how Elliott waves relate to these technical chart patterns is this: Elliott waves subsume all of them. This includes the head and shoulders top and bottom, rounding tops and bottoms, triangles, rectangle, double and triple tops and bottoms, diamond, falling and rising wedge, pennant, flag and any other valid technical chart pattern.

Let's pick out just one of them -- the head and shoulders top -- to show an example of how the Wave Principle accommodates classic technical patterns. The commentary is from an Elliott Wave Theorist:

In a normal wave development, wave five of 3 and wave 4 form the "left shoulder" of the pattern, wave 5 and wave A form the "head," and wave B and wave one of C form the "right shoulder." Wave two of C creates the return to the neckline that is typical of the pattern.

In another issue of the Theorist, Robert Prechter approached the subject this way:

Traditional technical-analysis stock patterns, Dow Theory and other descriptions of market form fall within the compass of the Elliott wave model. I think this is an important point, because the Wave Principle can consolidate technical analysis under a single model.

Now, even though the Wave Principle subsumes well-known patterns -- that doesn't mean a technically inclined investor should stop being on the lookout for these patterns.

As the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:

The Elliott Wave Principle not only supports the validity of chart analysis, but it can help the technician decide which formations are most likely of real significance.

If you want to learn more about the Wave Principle, you can read the online version of Elliott Wave Principle: Key to Market Behavior -- free.

That's right -- this Wall Street classic can be on your computer screen in moments right after you sign up for a Club EWI membership. Club EWI is the world's largest Elliott wave educational community with about 350,000 members and it's free to join. Members get free access to a wealth of Elliott wave insights into financial markets, trading and investing.

Simply follow this link to get started: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline How Elliott Waves Simplify Your Technical 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.

 

Why the Market's "Faith in the Fed" May Be Dwindling Fast

A chart that could be "a proxy for the market's faith in the Fed" shows "a classic loss of momentum"

By Elliott Wave International

Legendary financier John Pierpont Morgan was -- for all practical purposes -- a one-man central bank before the Fed came into existence in 1913.

During the financial panic of 1907, the banking titan used his influence to provide bailouts for faltering financial institutions. And, back in 1895, he had actually loaned the federal government money during another crisis.

As the October Global Market Perspective, an Elliott Wave International monthly publication which covers 50-plus markets worldwide, noted:

The creation of the Fed had J.P. Morgan at its heart and, since then, the relationship has been very cozy (witness the Fed gifting J.P. Morgan Bear Stearns for a tenth of its value in 2008).

All of what's been said relates to this chart and commentary -- also from the October Global Market Perspective:

[The chart] shows the relative performance of J.P. Morgan to the U.S. banking sector. A very clear five-wave advance can be seen from 2002 with the fifth wave being shallower than the third, a classic loss of momentum as the impulse fades. This chart could be a proxy for the market's faith in the Fed. If that is so, the Fed's zenith is being crested right now.

Of course, the conventional wisdom has been that the Fed holds a lot of power over the economy and even the stock market.

The 2020 edition of Robert Prechter's Conquer the Crash calls this the "potent directors" fallacy. Here's a quote from the book:

It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control the credit supply, interest rates, the rate of inflation and the economy. Many people believe that it also possesses immense power to manipulate the stock market.

The very idea that it can do these things is false. ...

Real economic growth in the U.S. was greater in the nineteenth century without a central bank than it [had] been in the twentieth century with one.

The U.S. has experienced numerous financial crises in its history.

Here in the waning weeks of 2020, the evidence suggests that the next one may be one of the most severe. This financial earthquake will likely shake the entire globe.

Prepare now.

Let's return to the 2020 edition of Conquer the Crash:

The discrepancy between the value of total debt outstanding and the value of its real underlying collateral is huge. It is anyone's guess how much of that gap ultimately will have to close to satisfy the credit markets in a deflationary depression. For our purposes, it is enough to say that the gap itself, and therefore the deflationary potential, has never been larger.

Now is the time to read Elliott Wave International's special free report: "What You Need to Know Now About Protecting Yourself from Deflation."

This article was syndicated by Elliott Wave International and was originally published under the headline Why the Market's "Faith in the Fed" May Be Dwindling Fast. 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 Stay Ahead of Price Turns in the U.S. Long Bond

This method of analysis applies to any widely traded financial market

By Elliott Wave International

Back in August, the volatility index for Treasury debt was at an all-time low, indicating record commitment to the idea the markets would continue to calmly rise.

Indeed, here's a July 27 Bloomberg headline:

Bond Investors Are Getting Fresh Reasons to Stay Record Bullish

Bloomberg mentioned U.S.-China tensions as a reason that investors would seek a safe haven in bonds, hence, pushing prices higher.

Then, a week later (Aug. 3), Reuters quoted the co-head of global bonds for an asset management group:

"I think the downward pressure on yields will continue for the foreseeable future."

Of course, as you probably know, a "downward pressure on yields" correlates with higher bond prices. Yields and prices move inversely to each other.

But, it's best to look beyond "fundamentals," such as the chilly relationship between the U.S. and China, and focus on the price pattern of bonds.

That's what Elliott Wave International's Aug. 5 U.S. Short Term Update did (the U.S. Short Term Update is a thrice weekly publication which provides near-term analysis and forecasts for major U.S. financial markets). Here's a chart and commentary:

Last night, [U.S. Treasury long bond futures] met the wave ... high from April 21, with a rally to 183^00.0. Prices could modestly exceed this high, but the pattern does not require it.

In other words, the wave pattern suggested that the next move would be down, as indicated by the red arrow at the end of the price line.

Well, the long-bond high was reached the very next day (Aug. 6), and prices have been trending downward since.

Here's a chart from the Oct. 26 U.S. Short Term Update:

You can see that high notated on the chart and the subsequent slide. Since that slide began, prices have tumbled by about 5.5% (as of Oct. 26) -- and yields, they've been rising.

So, the way that investors can stay ahead of turns in the bond market is by using the Elliott wave model. This method works with any widely traded financial market.

Here's a glimpse into the Wave Principle from Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter:

The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

Would you like to learn more about the Wave Principle?

If your answer is "yes," then you may be interested in knowing that the online version of Elliott Wave Principle: Key to Market Behavioris available to you free when you become a member of Club EWI, the world's largest Elliott wave educational community. Membership is free -- and you'll gain instant access to a wealth of valuable resources on investing and trading from an Elliott wave perspective once you join. Club EWI has about 350,000 members.

Gain instant, unlimited and free access to the Wall Street classic book by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline How to Stay Ahead of Price Turns in the U.S. Long Bond. 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.