the Quantitative Easing Bubble

Bernanke's Bigger Bubble: QE-3 and the Coming Economic Crash
Why monetarist theory is flawed
October 18, 2012

Federal Reserve Chairman Ben Bernanke really means it this time.
He will rescue the economy.

Ben S. Bernanke for the first time pledged that the Federal Reserve will buy bonds until the economy gets closer to his goals ... . The central bank yesterday announced its third round of large-scale asset purchases since 2008, with the difference that it didn't set any limit on the ultimate amount it would buy or the duration of the program. ... Bernanke is "going to fight and fight until he sees a real improvement in the economy," said a co-head of global economics research at [a major bank]." He believes quantitative easing can help the economy, so he'll just keep at it until there's a real turn in the economy."

Bloomberg, Sept. 14

But we've all heard the definition of insanity: doing the same thing over and over and expecting a different result.
Why should we think QE-3 will work when the previous two failed? (Don't think they failed? Then ask yourself why we need a third one.)
Granted, this round of quantitative easing appears open-ended. And it includes a pledge to purchase $40 billion a month in mortgage-backed securities. But high interest rates don't explain the sluggish residential real estate market. Home purchases are slow for the same reason that many business owners haven't expanded. A Sept. 12 CNNMoney article quotes a former Fed economist:

"Businesses are not hesitant to invest and hire because interest rates are too high - they're hesitant because of the uncertainty surrounding their future prospects."

When the August jobless rate fell to 8.1%, the widely reported reason was because so many people gave up looking for work. U.S. business startups are at record lows. Food stamp rolls recently skyrocketed. Several U.S. municipalities are declaring bankruptcy. Ratings service Moody's just warned of a possible U.S. downgrade. And the national debt just surpassed $16 trillion.
Monetary policy will not fix what ails the economy. Robert Prechter explains:

Monetarist theory holds that each new dollar created can support many new dollars' worth of IOUs throughout the banking system through re-depositing and re-lending, a process known as the "multiplier effect".... Every aspect of this theory is flawed, from the assumption that credit is fundamentally good for the economy and should always expand to the bedrock theoretical assumption that human society is a machine where physics equations apply. Waves of social mood have no place in monetarist theory, but they can play havoc with the monetarists' supposed machine when they reach extremes or undergo unforeseen (what other kind is there?) reversals.

The Elliott Wave Theorist, September 2011

Few people foresee a major economic reversal just ahead. The fact that Fed policy has become "QE Infinity" (it already has a nickname) tells us that something is badly wrong with the economy. And that something is a massive credit bubble
Monetary policy cannot make the global credit bubble simply vanish. Only a deflationary crash can do that. The chart below reveals why.

Look how fast the debt deflation unfolded in 1929-1932.
Learn what EWI expects regarding today's much bigger credit bubble.
See more charts and read insightful commentary that will help you position yourself now for what's to come next.
The herd keeps looking for intervention by government entities to aid their investing decisions. It's time to break away from the herd and start investing independently. EWI is here to help ...

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Learn to Think Independently You'll get some of the most groundbreaking and eye-opening reports ever published in Elliott Wave International's 30-year history; you'll also get new analysis, forecasts and commentary to help you think independently in today's tumultuous market. Download Your Free 50-Page Independent Investor eBook Now

News events do not impact market price

Apple's iPhone, Germany, the Fed: Why It's All Irrelevant to the Market's Trend
R.N. Elliott's other major insight: News events do not impact market price patterns

A lot of people know that R.N. Elliott discovered the Wave Principle.
Yet few are aware that Elliott made another observation during his years of studying the stock market.

As the Wave Principle forecasts the different phases or segments of a cycle, the experienced student will find that current news or happenings, or even decrees or acts of government, seem to have but little effect, if any, upon the course of the cycle. It is true that sometimes unexpected news or sudden events, particularly those of a highly emotional nature, may extend or curtail the length of travel between corrections, but the number of waves or underlying rhythmic regularity of the market remains constant [emphasis added].

R.N. Elliott, R.N. Elliott's Masterworks, pp. 158-159

What a stunning insight: Even major news does not alter the market's main wave pattern! This seems to defy logic because most people believe that news and events are the very things that drive the stock market.
Yet, it was barely 100 years ago when most people believed that only birds could fly.
And even then, most people would never believe that a steel-encased object weighing nearly a million pounds (Boeing's 747) could get airborne and fly at 500 miles per hour.
Yet, natural law is what governs airplane flight, the buoyancy of metal ships, the incandescent light bulb, radio transmission over the air and, yes, the Wave Principle.
Natural law is inherent in the pattern of stock prices. That's why outside events do not materially influence the pattern's behavior.
This is particularly relevant today: Recent news covered Apple's new iPhone, which is expected to boost U.S. GDP; the European Central Bank's pledge to make "unlimited bond purchases"; Germany's Supreme Court approving the eurozone's permanent bailout facility; and the expected Federal Reserve announcement on whether to initiate more quantitative easing.
None of this will have an effect on the market's overall price pattern.
Charts of the Dow Industrials reveal that changes in interest rates, the deficit, the price of oil, terrorist attacks, Fed announcements and even wars do not change the market's main trend.
How about government bailouts of troubled financial institutions during the 2007-2009 financial crisis?
Please try to pick out on the chart below when those bailouts occurred.

According to the exogenous-cause model, these historic pledges and bailouts should have had immediate results. ... According to the economists' beliefs, the only rational place for them to have taken place would be at the bottom of the market. The minute the authorities began flooding the market with liquidity is the minute it should have turned up.
[The chart below] shows that in fact these actions took place in the early portion of the biggest stock market decline in 76 years. These actions did not push stock prices back up. The market finally bottomed months later, at a time when nothing along these lines happened.

The Elliott Wave Theorist, March 2010

Now, look at this labeled chart to see how you did.

In the 70 years since R.N. Elliott observed that news does not alter the market's wave pattern, his insight has been proven time and again.
It's wise to keep your market eye on what really matters: the Wave Principle.
R.N. Elliott drew a chart by hand 70 years ago and the final label is the year 2012! Amazingly, today's wave analysis confirms that his decades-ago analysis may be precisely on target.
The herd keeps looking to irrelevant outside events to aid their investing decisions. It's time to break away from the herd and start investing independently. EWI is here to help ...

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Technical Analysis of the DOW Industrials

When an Over-Ripe Market is Ready to Spoil
Reliable internal measures tell a story investors need to know
September 7, 2012

By Elliott Wave International

Anyone who enjoys eating fruit knows there's a fine line between ripe and over-ripe.
If it sits in the fruit bowl too long, over-ripe turns rotten.
As experienced investors know, the stock market goes through similar phases. An overbought, or over-ripe, market can spoil quickly.
Take a look at this chart for example (wave labels removed), and ask yourself, is the stock market on the verge of spoiling?

The Aug. 10 Financial Forecast Short Term Update provides commentary to go with the chart.

[An] indicator that has moved to an overbought condition is 10-day NYSE Trin (advance/decline ratio divided by the up/down volume ratio). Wednesday's close [Aug. 8] was .937, which was the most overbought level since March 26, when 10-day Trin closed at .900 (see gray vertical line). That was five days prior to the April 2 S&P top. It's certainly possible that Trin becomes even more overbought prior to a market high, but it doesn't have to. Current levels are the exact opposite of those that attended the August, October and November 2011 lows, as marked on the left side of the chart.

EWI also looks at several other internal measures.
A healthy bull market sports broad participation among different sectors and indexes. Up days are consistently accompanied by high volume; momentum is strong.
The indicators EWI watches suggest this market is indeed overbought and still ripening.

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the U.S. Market will Surge Higher

The Surge Higher in U.S. Markets: "The Stage is Being Set"
The market's main trend stays the same.
August 03, 2012

By Elliott Wave International

Elliott Wave International has long observed that external events do not alter the dominant trend of financial markets -- not even major events like wars, natural disasters, terrorist attacks, political assassinations or any other news that makes headlines.
Now, it is true that news can sometimes have a near-term effect on market prices.
The July 26 opening bell is an example.

Dow Surges 200 Points on Draghi Comments, Jobless Claims

That's from The Wall Street Journal. The text reads:

Europe's top central banker sparked a global rally in stocks after reassuring investors the Continent's central bank would be vigilant about holding together the euro zone.... European Central Bank President Mario Draghi...said the ECB is ready to do whatever it takes to preserve the common-currency union.

The article adds that "the number of U.S. workers filing for unemployment benefits fell for the fourth time in five weeks, to a level that was far lower than expected."
EWI expected a near-term bounce in stock prices -- just one day ago.
On July 25, EWI's Financial Forecast Short Term Update said this to subscribers:

Near term, there may be a few more days of bounce. The stock market is setting the stage...

The Update went on to describe what the stock market is setting the stage for. It is not what most investors expect.
The pattern in the major U.S. stock indexes has been 80 years in the making -- which is to say, the pattern is unfolding at a large degree of trend.

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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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Elliott Wave Limited-Time Offer

Risk-Free, Limited-Time Offer Ends June 14. Details below.



In the first four months of 2012, nearly everyone went "all in" stocks and gold – and said "no way" to the dollar. As it turns out, the markets moved contrary to their consensus opinion. This begs the question:

What Were You Reading

about Stocks, Gold

and the Dollar when ...

• The U.S. Dollar Index was at 78.7 on Feb. 9 and the financial news reported, "Experts are forecasting a continuation of soft performance in the U.S. dollar as talk of a likely deal in Greece empowers the euro." – NuWire Investor
  
  Here's what we said (when we said it):
  
  
  
  
• Gold was at $1,728 on Feb. 6 and the financial news reported, "HSBC said it was keeping its 2012 average gold forecast at $1,850 an ounce due to accommodative global monetary policies, financial market uncertainty and renewed central banks' interest." – Reuters
  
  Here's what we said (when we said it):
  
  
  
  
  
• The Dow was at 13,215 on May 1 and the financial news reported, "Greenspan Says US Stocks 'Very Cheap,' Likely to Rise" – Bloomberg
  
  Here's what we said (when we said it):
  
  
  
  
  

Now, we don't share these timely forecasts to imply that we're always right. You and I know that no market forecasting service can make that claim. Yet we want you to know that while volatility does mean uncertainty to many investors, it can often mean opportunity if you're watching the waves.

The most important question for you today is NOT

what were you reading then, but rather ...

What are you going to read NOW?

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the 80/20 Trade

The 80/20 Trade: "Pounce Like a Cat"
Patience Can Be Rewarding
June 04, 2012

By Elliott Wave International

Copy the tiger when stalking and capturing a "pounce-ready" trade.
Tigers know the prey they covet is elusive: they show great patience and care when stalking the target.
I came across this description of the tiger's technique:

"When hunting, this cat...may take twenty minutes to creep over ground which would be covered in under one minute at a normal walk...the tiger will sometimes pause...move closer and so lessen that critical attack distance...before finally raising its body and charging.

"...they wait until a victim comes close and spring up...This ambush method of hunting uses less energy and has a greater chance of success."

You must "ambush" high confidence trades. Long-time professional trader and teacher Dick Diamond says patience is vital before the ambush.
I talked to Diamond about his famous 80/20 trade, which he means literally -- he says it has at least an 80 percent chance of success. It's the only trade set-up Diamond will take.
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Q: Could you tell me about the 80/20 trade?
Diamond: The 80/20 trade is based on indicators that create a specific trading set-up. A trader must act on this set-up immediately. You must wait, and then pounce like a cat when the opportunity presents itself. Then you set stops. In shorter time frames, like trading from a five minute chart, the 80/20 set up may come along a few times a day. If you're trading a longer time frame, like off of a 120 minute or 240 minute chart, the 80/20 will come along less frequently, but when it does, the opportunity will be bigger. The 80/20 trade can be especially rewarding for position traders. Sometimes the indicators reveal what I call 90/10 or even 95/5 trades.
Q: What emotional factors do students need to work on the most?
Diamond: Traders must be calm and confident. You can't be a Nervous Nellie and succeed at trading. Calmness comes from learning the proper trading techniques.
Q: What's different about trading today vs. when you started out in the 1960s?
Diamond: When I started trading, execution took up to five minutes -- now it takes less than a second. Time is money, so computers provide a great advantage to today's trader compared to pre-computer days. At the same time, while computers allow the trader to see multiple indicators on the screen, one must avoid indicator overload. One must learn to narrow down the number of indicators.

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Get Ready for the Rest of the Crash

Position Yourself for the Rest of "Conquer the Crash"
The earlier you prepare, the better
May 23, 2012

By Elliott Wave International

To this day, I wonder why Robert Prechter's book Conquer the Crash has not been more widely recognized. It described in advance much of what happened in the 2008 financial crisis.
Published in 2002, the book provided detailed descriptions of then-future economic scenarios. They were detailed vs. general. Prechter was specific in a way that would prove right or wrong; there was no gray.
This is from the book:

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks' debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients' potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Conquer the Crash, second edition, (p. 179)

That's just one excerpt about one topic in a 456-page text. Perhaps you see why I believe the book deserves more credit. Yet even that one paragraph from the book turned out to be a virtual mirror of what came to pass. And much of what he predicted is unfolding today: the JPMorgan trading fiasco, massive withdrawals at Greek banks, downgrades of Italian and Spanish banks and much more. Those are just a few headlines.
The broader point is that Conquer the Crash prepared its readers. Around the time the book's second edition published in 2009, the Chicago Sun-Times remarked
And the credit implosion is still not over. Please take a look at the chart:

In the Conquer the Crash quote in the first part of this article, you'll notice the last three words are "deflation and depression."
The world has yet to completely pass through these economic valleys.

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What to Make of the Stock Market

The Manic-Depressive Stock Market: What to Make of It
The psychology of the market may be teetering on the edge
May 2, 2012

By Elliott Wave International

The stock market: one week it acts like Dr. Jekyll, the next week it's Mr. Hyde.
That shift can even occur in the course of a single session.
These dramatic fluctuations appear to be impulsive; and we know that impulse does not flow from cold reason. Even so, the Efficient Market Hypothesis would have us believe that investors are constantly applying reason and logic to reach some objective market pricing, via the latest news or measure of stock market valuation.
The February 2010 Elliott Wave Theorist provides insight:

The Efficient Market Hypothesis (EMH) and its variants in academic financial modeling...rely at least implicitly but usually quite explicitly upon the bedrock ideas of exogenous cause and rational reaction. Stunningly, as far as I can determine, no evidence supports these premises...
EMH argues that as new information enters the marketplace, investors revalue stocks accordingly. If this were true, then the stock market averages would look something like the illustration shown [below].

We know that the market does not unfold in the way illustrated above. But we do know that the market has unfolded like this:

So in 2000, did a sudden burst of logic lead investors to realize that the NASDAQ was over-valued?
No. Technology stocks had absurd price/earnings ratios long before the NASDAQ top.
The NASDAQ's abrupt switch from Hyde to Jekyll stemmed from investors' collective unconscious. Consider the gazelle that runs in panic because others are: it does not pause to rationally survey the landscape. It explodes in a burst of speed that reaches 90 km/hr within seconds.
Decades ago, multimillionaire stock market operator Bernard Baruch said

...the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.

This psychology of the marketplace unfolds in waves. That is what we study.

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Stock Trading Opportunity

Diagonal: Straight Shot to a Trading Opportunity

April 08, 2012

By Elliott Wave International

Today we sit down with Elliott Wave International's Futures Junctures Editor and Senior Tutorial Instructor Jeffrey Kennedy to discuss his favorite wave pattern of all: the diagonal.
EWI: You say if you had to pick just ONE of all 13 known Elliott wave structures to spend the rest of your technical trading life with, it would be the diagonal. First, tell us what the diagonal is.
Jeffrey Kennedy: The diagonal is a five-wave pattern labeled 1 through 5, in which each leg subdivides into three smaller waves: 3-3-3-3-3. Unlike impulse waves, however, diagonals are the only five-wave structures in the direction of the main trend in which wave 4 almost always moves into the price territory of wave 1. (See illustrations below.)

EWI: So, what makes this pattern so darn special?
JK: As you can see in the above charts, the diagonal is a terminating pattern. They can only occur in waves 5 of impulses or C-waves of corrections. This is why they're so exciting. Diagonals precede a dramatic change in trend. And, when they end, prices tend to retrace the entire pattern, or more, and fast -- in 1/3 to 1/2 the time it took the pattern to form.

Put simply: If you see a diagonal, you know the train of change is coming into the station.
EWI: Well, in your Daily Futures Junctures service, you do, in fact, see a diagonal underway in the recent price action of a major grain market. There, you present the following Elliott wave chart (some Elliott labels have been removed, while I took the liberty to draw a blue circle around the diagonal pattern for clarity):

JK: Yes. This is a classic diagonal unfolding in the final wave of the larger trend. As you can see, prices have put the finishing touches on wave (v) of c (circled). And, if my wave count is correct, this market's prices are about to board the "Exciting Southbound Turn" Railway.
EWI: Thank you so much for taking the time to explain the ins and outs of your favorite structure, the diagonal. And also, for alerting readers to the possible DRAMA in store for this major grain market thanks to this Elliott wave pattern.

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Tens of Billions at Significant Risk

Public Pension Funds: Tens of Billions at Significant Risk
Is now the time to gamble with retirement? 
April 04, 2012

By Elliott Wave International

To meet ambitious investment return targets, some public pension funds must now swing for the fences.
But many are down two strikes already, due to their previous big bets with hedge funds.

....the [pension] funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided those assets. They also paid nearly four times as much in fees.

New York Times, April 1

The same article describes how other pension funds have embraced this risky strategy, and how funds generally have their assets at risk. In 2007 pension funds allocated 10.7 percent to "high-growth" investments; by September 2011 they had increased that bet to 19 percent. All the while, hedge funds have underperformed, as this chart from our January 2012 Financial Forecast shows:

The [HFRX Global Hedge Fund Index] hit a new low on December 14, producing a rash of articles about how hedge funds got tripped up in 2011. "Many hedge-fund managers who came into 2011 riding a wave of momentum ended the year scratching their heads and nursing losses, whipsawed by markets that seemed to punish them month after month." "Head scratching" is just right for this still-early stage of the bear. Through the first ten months of 2011, 123 Asian hedge funds shut their doors, the second highest number of closures since 2008, the year world markets collapsed.

Financial Forecast, January 20

The California Public Employees' Retirement System (CalPERS) is the nation's largest public pension fund. It recently lowered its investment return target from 7.75 percent to 7.5 percent. The system's actuary had recommended lowering it to 7.25 percent.>

The CalPERS board members were told by their staff that they had only a 50 percent chance of hitting or surpassing the 7.5 percent target, yet they adopted that assumption. Others say the odds are even worse than that.
If CalPERS loses the bet, as it is likely to, the next generation will pay the shortfall...
....if CalPERS or any other public-pension system banks on higher-investment returns, it must take greater risks to meet the target...Cal-PERS chief investment officer told Pensions and Investments newspaper last year, his system has "a reasonably ambitious return target" and "needs to have a portfolio with a lot of growth exposure."

San Jose Mercury News, March 24

Is now the time to take greater risks? You saw the 2011 performance of hedge funds, and that was a year when the DJIA was up. Imagine the scenario if the market takes a serious tumble.

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Successful Stock Trading Methodology

The Three Phases of a Trader's Education
Learn Jeffrey Kennedy's tips for becoming a consistently successful trader 
March 12, 2012

By Elliott Wave International

You've probably heard talk about "market uncertainty" in the financial news recently. But when are the market trends ever certain? The constant uncertainties contribute to your frustrations as a trader, and you need to have a method for dealing with the ups and downs. Every successful trader has one.
Since 1999, Elliott Wave International's senior analyst and trading instructor Jeffrey Kennedy has produced hundreds of trading lessons exclusively for his subscribers. One of these lessons, "The Three Phases of a Trader's Education," gives you Jeffrey's tips on becoming a consistently successful trader.
Here it is; we hope you'll find it helpful.

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The Three Phases of a Trader's Education:
Psychology, Money Management, Method

Aspiring traders typically go through three phases in this order:

1. Methodology -- The first phase is that all-too-familiar quest for the Holy Grail -- a trading system that never fails. After spending thousands of dollars on books, seminars and trading systems, the aspiring trader eventually realizes that no such system exists.
2. Money Management -- So, after getting frustrated with wasting time and money, the up-and-coming trader begins to understand the need for money management, risking only a small percentage of a portfolio on a given trade versus too large a bet.
3. Psychology -- The third phase is realizing how important psychology is -- not only personal psychology but also the psychology of crowds.

But it would be better to go through these phases in the opposite direction. I actually read of this idea in a magazine a few months ago but, for the life of me, can't find the article. Even so, with a measly 15 years of experience under my belt and an expensive Ph.D. from S.H.K. University (i.e., School of Hard Knocks), I wholeheartedly agree. Aspiring traders should begin their journey at phase three and work backward.
I believe the first step in becoming a consistently successful trader is to understand how psychology plays out in your own make-up and in the way the crowd reacts to changes in the markets. The reason for this is that a trader must realize that once he or she makes a trade, logic no longer applies. This is because the emotions of fear and greed take precedence -- fear of losing money and greed for more money.
Once the aspiring trader understands this psychology, it's easier to understand why it's important to have a defined investment methodology and, more importantly, the discipline to follow it. New traders must realize that once they join a crowd, they lose their individuality. Worse yet, crowd psychology impairs their judgment, because crowds are wrong more often than not, typically selling at market bottoms and buying at market tops.
Moving onto phase two, after the aspiring trader understands a bit of psychology, he or she can focus on money management. Money management is an important subject and deserves much more than just a few sentences. Even so, there are two issues that I believe are critical to grasp: (1) risk in terms of individual trades and (2) risk as a percentage of account size.
When sizing up a trading opportunity, the rule-of-thumb I go by is 3:1. That is, if my risk on a given trading opportunity is $500, then the profit objective for that trade should equal $1,500, or more. With regard to risk as a percentage of account size, I'm more than comfortable utilizing the same guidelines that many professional money managers use -- 1%-3% of the account per position. If your trading account is $100,000, then you should risk no more than $3,000 on a single position. Following this guideline not only helps to contain losses if one's trade decision is incorrect, but it also insures longevity. It's one thing to have a winning quarter; the real trick is to have a winning quarter next year and the year after.
When aspiring traders grasp the importance of psychology and money management, they should then move to phase three -- determining their methodology, a defined and unwavering way of examining price action. I principally use the Wave Principle as my methodology. However, wave analysis certainly isn't the only way to view price action. One can choose candlestick charts, Dow Theory, cycles, etc. My best advice in this realm is that whatever you choose to use, it should be simple. In fact, it should be simple enough to put on the back of a business card, because, like an appliance, the fewer parts it has, the less likely it is to break down.

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14 Critical Lessons Every Trader Should Know Read more of Jeffrey Kennedy's lessons in his 45-page eBook, The Best of Trader's Classroom. Find out why traders fail and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more when you download your FREE eBook today! Don't miss your chance to improve your trading. Download your free eBook here.

FREE Forex Trading Analysis

Forex Market Insight: EUR/USD Rallies...Why?
Elliott wave patterns suggested a bullish reversal a day before the rally
February 23, 2012

By Elliott Wave International

On February 16, EUR/USD, the euro-dollar exchange rate and the most actively traded forex pair, surged over 170 pips, from below $1.30 to above $1.3150.
The explanations for the strong rally boiled down to "hopes" that the Greek bond-swap deal would be reached.
As we've pointed out before, explanations such as these make sense only in retrospect. They tell you nothing about tomorrow's trend.
On February 15, while EUR/USD was still in the downtrend, Elliott Wave International's forex-focused Currency Specialty Service posted the following intraday forecast:

EURUSD (Intraday)
Posted On: Feb 15 2012 1:28PM ET / Feb 15 2012 6:28PM GMT
Last Price: 1.3068
[Approaching a bottom]
The decline from 1.3322 looks mature, though there is no evidence it is complete. Allow for a dip below 1.3027 (to complete a flat correction) but we're focusing on identifying the upcoming reversal. A rally in five waves at small degree would do the trick.

As expected, EUR/USD indeed dropped below $1.3027 before reversing upward on February 16.
The bullish February 15 forecast was based strictly on the Elliott wave pattern you see in the chart above. The converging trendlines labeled (i)-(ii)-(iii)-(iv)-(v) mark an ending diagonal triangle, which only forms when the trend gets exhausted, and a reversal is near.
This Elliott wave pattern warned one day before the EUR/USD rally began that the collective bias of the forex players about the euro would soon shift from bearish to bullish.
See our forex-focused Currency Specialty Service in action for yourself -- FREE -- during EWI's Forex FreeWeek. Details below.

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Applying Fibonacci Retracements to Stock trading

Learn How to Apply Fibonacci Retracements to Your Trading
EWI's new eBook helps you identify trading opportunities
February 8, 2012

By Elliott Wave International

Elliott waves often correct in terms of Fibonacci ratios. The following article, adapted from the eBook How You Can Use Fibonacci to Improve Your Trading, explains what you can expect when a market begins a corrective phase. Learn how you can read the entire 14-page eBook below.

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Retracements -- Corrective Waves

If we look on the left side of this chart, we see a diagram of wave 1 followed by wave 2. It is common for second waves to retrace .618 of wave 1 -- thereby making a deep retracement. We will also be looking for .786. We might often see .5, 50%, but .618 is common. On the right side, fourth waves will commonly retrace a smaller percentage or .382 of wave 3. We might also see something like .236.
Examples
I have put the wave count on this chart of the S&P 500. We have waves 1, 2, 3, 4 and 5. Wave 2 is an expanded flat. Wave 4 is a zigzag. Let's look at the retracements that waves 2 and 4 make.

We see that wave 2 makes a deep retracement. It comes close to .618. Look at this Fibonacci table that I put up; notice that I put .382, .5, .618, and .786. .618 is 1087.75, and the S&P low is 1090.19.

We see that wave 4 makes a shallow retracement of wave 3. It goes just beyond the .382 retracement. .382 is 1169.1, and wave 4 actually bottoms at 1163.75.
In a nutshell, this is what we mean when we say that Elliott waves often correct in terms of Fibonacci ratios.

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the Credit Crisis and the U.S. Dollar

How Does the Value of the U.S. Dollar Fit Into the Big Picture for the Economy?
Robert Prechter discusses his views on the credit crisis and the U.S. dollar
January 31, 2012

By Elliott Wave International

More credit is denominated in U.S. dollars than any other currency. What does this mean for the value of the dollar as the credit crisis continues its strangle-hold on the world economies?
Enjoy this video clip of Bob Prechter from an October interview with The Mind of Money host Douglass Lodmell, in which Bob discusses the debt implosion and the value of the U.S. dollar.
You can watch Prechter's full 45-minute interview here -- no sign up required!

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New Year, New High Hopes for Stocks

January 11, 2012

By Elliott Wave International

You can probably relate: Every year, come January 1, I just can't help but feel that "every little thing is gonna be all right," as Bob Marley sang.
This year, the mainstream financial community is sharing the same sentiment. Here's how EWI's Steve Hochberg summarized it [emphasis added]:

At its conclusion, 2011 was marked by back-and-forth stock swings that resulted in essentially a flat market. My Bloomberg screen shows that the DJIA ended up 5.53% for the year, the S&P was flat...while the NASDAQ was down 1.80%. The broadest aggregate measure of stock market performance, the DJ Wilshire 5000, which includes nearly all stocks that trade, ended 2011 down 1%.
The Dow's action masks a strongly negative stock market performance overseas. For instance, in U.S. dollar terms, the Euro Stoxx 50 Index was down nearly 20% in 2011, with the FTSE down almost 6%, the French CAC off almost 20% and the German DAX down over 17%. Asian markets were also hit hard. The S&P Asia 50 lost over 15%, the Nikkei declined 13%, the Hang Seng was off 20%, the Shanghai Composite ended 2011 down over 18%, while Australia was lower by 14%. All were down in euro terms, too.
But not to worry: a recent USA Today article notes that a "quick survey of New Year's prognostications from investment strategists suggests stocks might deliver the double-digit gains that they have put up, on average, over the long term. A snapshot of 2012 year-end-price targets from five firms shows an average gain of 10.5% for stocks."

Very optimistic, indeed!
Except, when have we heard that kind of talk before?
Hochberg continues:

The "10.5%" forecasted gains for the coming year is interesting because it is almost exactly the average forecasted gains for stocks for 2011, as the subheading in the following Barron's cover story from December 2010 shows.

That's right. A year ago, forecasts for stocks in 2011 were just as optimistic as they are now for 2012 -- and largely for the same reasons: improving economy, recovering real estate and jobs markets, and a host of other "better fundamentals."
From an Elliott wave perspective, the reason 2011 mainstream financial forecasts fell flat was simple: Stocks don't follow the economy. It's the other way around: The economy follows stocks.
What's Really Ahead for 2012? There is a lot of optimism building around the stock market, but is it based on sound analysis or hope created by recent economic news reports? Elliott Wave International has released a free report to help you navigate the markets and prepare for what's ahead. You'll get hard facts, 25 eye-opening charts and 14 pages of straightforward commentary that will help you see the "big picture" so you can position yourself for the years to come.
Download The Most Important Investment Report You'll Read for 2012 now.