the BIG DROP Scenario for US Markets

The Drop Like a Rock Scenario for U.S. Markets

Third waves are "wonders to behold" 
July 27, 2012

Financial markets always have and always will pose two basic questions that investors seek to answer:

1. What's the direction of the main trend?
2. How far will it go?

Systematic approaches to these questions commonly belong to either fundamental or technical analysis. Let's consider each one briefly.

Fundamental analysis studies how a market behaves in response to external influences such as earnings, sales, competitive outlook, economic outlook and the like.

Technical analysis studies a market's internal behavior -- mainly price, but also internal measures like volume.

Elliott wave analysis is a branch of technical analysis, specifically pattern recognition.

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns...Elliott isolated five such patterns, or "waves," that recur in market price data.

Elliott Wave Principle: Key to Market Behavior (p. 19)

In a five-wave progression, the third wave is the most powerful.

Third waves unfold in bull and bear markets alike. Elliott Wave Principle (p. 80) describes a third wave in a bull market:

Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable...Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence.

Third waves can be more powerful during market declines because fear is a stronger emotion than greed.

Look at the third wave on this S&P 500 chart which published in the January 2009 Elliott Wave Financial Forecast. Notice that prices dropped like a rock, plunging well over 600 points in less than a year. (The third wave starts where the chart shows (2) and ends at (3)):

You can see on the chart that the S&P 500 had rebounded after the third wave had bottomed. Even so, the chart's title states that there was "Room for a New Low." Indeed, after the rebound which was wave (4), wave (5) took prices to a March 6, 2009 intraday low of 666.79.

How about now?

That depends on who you ask.

On July 10, CNBC reported on the sentiment of a chief market strategist of a capital management firm:

Ever the optimist, he is holding to his market call this year for the S&P 500 to hit 1,500.

A principal of a financial advisory firm and guest columnist for Marketwatch wrote a July 10 article titled "Stock charts don't lie: the trend is up." The article says:

Shares continue their winning ways, technically. The averages show a stair-step series of higher highs and higher lows, the definition of an uptrend.

By contrast, the latest Financial Forecast flat out says:

The stock market is nowhere near a lasting low.

Why does the Financial Forecast differ from the two opinions above?

Because Elliott analysts know that during a market downtrend, second waves can convince investors that the rally is a new bull market.

That can be a financially dangerous mind-set.

Optimism precedes third waves lower. Then, seemingly out of nowhere, a third wave can commence with unrelenting violence and speed.

In the chart above, you saw the optimism-driven rebound just before prices plunged.

Do not expect the financial media to provide you with advance warning of a third wave. The crowd is almost always on the wrong side of the market. Third waves arriveunannounced.

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Why is the Australian Dollar Surging

Australian Dollar: "Still Surging" -- Why, Again?
This is a story we've seen repeated in the forex markets again and again. 
July 20, 2012

By Elliott Wave International

Picture this. It's late May. You're in Australia. You have an interest in the currency markets: Maybe you speculate in forex; maybe your business depends on the exchange rates.
Every morning, you scan the headlines. This is what you see regarding the Australian dollar during the last week of May:

• "Aussie dollar sinks to eight-month low"
• "Little long-term support for Australian dollar"
• "Poor data slams Aussie dollar"
• "Aussie dollar drops as investors seek safe-havens"
• "Australian Dollar Down After Retail Sales Slip"
• "Weak China PMI Sinks Euro, Australian Dollar"

Even after a strong rebound the AUD saw on May 28 and 29, you read that "analysts don't see [the] improvement lasting too long unless the global economic backdrop improves." You sit down to make some decisions in preparation for an even weaker Aussie, and...
...and now, six weeks later, the AUD is orbiting the moon. Yes, between June 1 and today, against the U.S. dollar the Aussie dollar shot up from near $0.96 to over $1.04, despite all the "bad fundamentals" from late May.
This is a story we've seen repeated in the forex markets again and again: Right when everyone accepts the trend (bullish or bearish) as "the new normal," the trend reverses.
We are proud to say that we don't follow the herd off the cliff each time they head that way -- because we have the right forecasting tools. On June 1, our Senior Currency Strategist Jim Martens published this bullish AUD/USD forecast (excerpt; some Elliott wave labels have been erased for this article):

Excerpt from the June 1 forecast: "...AUD/USD is forming a corrective setback, either a flat or a triangle...to be followed by another push above [price target]"

This bullish forecast was based strictly on the Elliott wave picture in AUD/USD charts. Jim simply saw that the pair had reached the bottom trendline of the likely "triangle" Elliott wave pattern, so a strong rebound was due in the next wave of the pattern.
Today, after 6 weeks of rally, the AUD is "still surging," as it has become "an attractive investment." But you already know how rapidly this tune will change once the trend reverses.
Jim Martens has the near- and long-term AUD/USD price targets inside his Currency Specialty Service for you right now.
ALSO, don't miss our ongoing July 18-26 "Free FX Trading Event." Details below.

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a Lesson in Spotting Trade Setups

A Four-Chart Lesson in Spotting Trade Setups

July 10, 2012

By Elliott Wave International

You can find low-risk, high-confidence 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 16.

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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.

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World's Biggest Banks get Downgraded!

World's 15 Biggest Banks Get Downgraded -- What This Means for "Safe Banks"
Another one of Robert Prechter's Conquer the Crash forecasts comes true
June 29, 2012

By Elliott Wave International

Today's news that the losses suffered by the biggest U.S. bank, JP Morgan Chase & Co., may be as big as $9b instead of $2b, as previously announced, came on the heels of another noteworthy news report from the world of banking.
On June 21, Moody's Investors Service downgraded 15 of the world's largest banks, including the U.S. second-largest bank, Bank of America. Says Reuters: "...the downgrades reinforce a trend that has seen weaker banks punished for their risk-taking, while stronger banks are rewarded for conservative funding models, ensuring lower costs and higher margins."
And, "The ratings...gave a competitive advantage to 'safe-haven' banks that fund themselves with stable, low-cost customer deposits..."
This seems like a good moment for those "safe-haven" banks to toot their horn a little, as it might just get them more business -- just as this quote from Ch. 19 of Robert Prechter's Conquer the Crash had predicted:

"...relatively safe banks, if they have the sense to inform the public of their safety advantage, are likely to become even safer during difficult times. Why? Because depositors in a developing financial crisis will move funds out of the weakest banks into the strongest ones, making the weak ones weaker and the strong ones stronger."

This year marks the 10th anniversary of Prechter's Conquer the Crash, and to mark the occasion, we have put together a special free report for you: an except with 8 key chapters from this forward-looking book.

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