What Recessions? It's a Wonderful Life

What Recessions? It's a Wonderful Life

By Elliott Wave International

Fund managers see no risk of a U.S. recession. Have they over-indulged on the eggnog?

"I don't have your money. It's in Tom's house...and Fred's house." This is a quote from George Bailey, the fictional bank manager in the 1946 classic movie, It's a Wonderful Life. George was replying to customers of the bank who were demanding their money back. Unfortunately, the deposits had been invested, and the bank did not have enough money to pay everyone out. As I have said to my 14-year-old daughter every year over the past decade when we settle down to watch this feel-good Christmas movie, it's probably the simplest, and therefore best, lesson about understanding the complexities of the fixed-fractional banking system. (As you can imagine, this just exacerbates the fact that, in her now-teenage eyes, I am boring, embarrassing dad.)

George Bailey did not expect all his customers to demand their money back at once. It may be a fictional story, but it accurately reflects the complacent psychology of financial institutions as an economic cycle tops out. The latest example of such complacency comes from the most recent Bank of America Merrill Lynch Fund Manager Survey. Expectations that global growth will improve in the next year jumped to a net 29% of respondents in December, the biggest two-month gain on record, and a big turnaround from the middle of the year when there was intense fear of a global recession. The survey shows that fund managers now see the least risk of a recession since the middle of 2009. That was, of course, when the U.S. was already in recession, despite central banks' machinations to inject liquidity into the financial system. The Fed has again begun pumping billions of dollars into the system since September, but the difference is that the U.S. has not experienced a recession as it did in 2008-2009. Are people just blindly accepting that the Fed will be able to keep the stock market propped up? Perhaps.

Indeed, some investors believe that because the yield curve has turned positive again, then all is well and there's no need to worry. On the contrary, the chart below shows that when the yield curve inverts and then turns positive, it is precisely the time to worry that a recession may be dead ahead.

It's a Wonderful Life ends with George Bailey realizing that there are much more important things in life than business. By this time next year, currently cock-a-hoop (adj.: boastfully, if not defiantly, elated) investors might be feeling the same way.

It's a commonly held misconception that a positive yield curve swing is a good sign for the economy, but the evidence proves otherwise. Want to see EWI's President, Bob Prechter, tackle and disprove other commonly held beliefs that could hinder your investing? Good!

Get instant, free access to Prechter's speech to the International Federation of Technical Analysts. It shows you “What Really Moves the Markets.” Watch Now

High-Confidence Stock Trading Opportunities

How to Spot High-Confidence Trading Opportunities in a "Pinch"!
Why this single moving average chart pattern belongs in your technical toolbox today

By Elliott Wave International

When it comes to the world of technical market analysis, the biggest obstacle isn't a lack of quality, but rather, an abundance of choice. There are literally hundreds of technical tools out there, with digital libraries and chat boards devoted to the many variations of individual components.

If you used them all, your technical pages would look like the motherboard of the Starship Enterprise. And you'd need Spock himself to interpret the massive influx of data.

So, where on planet Earth do you start? How do you curate the right technical tools to support your trading style and maximize your ability to spot high-confidence setups in real-world markets?

Well, that's where our Trader's Classroom editor Jeffrey Kennedy comes in. In his August 9 video lesson titled "Pinch Me! How to Build Your Ideal, Custom Technical Indicator Page," Jeffrey shares one of his top three favorite technical chart patterns: the moving average "pinch.”

Right away, Jeffrey stresses the two main functions of any technical indicator page:

1. Identify the trend
2. Identify areas of oversold and overbought conditions

The moving average (MA) "pinch" accomplishes both, and here's how: First, the pinch occurs when all three MA lines -- green, red and grey -- come together and appear to form one single line. Then ... well, you'll just have to watch this free video to find out.

Jeffrey shows you several real-world examples of MA pinches, including this one in late 2018 price action of Big Board listee Chipotle Mexican Grill (ticker symbol CMG).

In the free video, Jeffrey highlights the area of compression where the pinch occurred and describes it as a "beautiful little bullish set-up," confirmed by the powerful advance that followed.

In fact, during the time of the pinch's formation in Chipotle, Jeffrey featured the market in his January 10, 2019 Trader's Classroom. There, Jeffrey homed in on the narrow and choppy price action in CMG, a six-month long sideways move that barely retraced 50% of the preceding rally, magnified here:

The same period of compression identified as a MA "pinch" was confirmed by all the characteristics of counter-trend price action -- the latter of which led Jeffrey to include Chipotle in his "I Like It!" market list for a strong move higher.

The next chart captures the volatile upside explosion that has seen a doubling in value of CMG prices to new record highs:

The first step to identifying a moving average "pinch" is to understand the mechanisms of the moving average indicator. In his August 9 Trader's Classroom video "Pinch Me!" Jeffrey lays the groundwork with a user-friendly lesson covering all the need-to-know basics.

Jeffrey also shows you how an MA pinch preceded three major buying opportunities in 2013, 2016 and 2019 in the tech-giant Apple.

Plus, you'll see how an MA pinch underway right now in the Healthcare Select Sector SPDR fund (XLV) suggests an "exciting" period of volatility may be ahead.

Free, watch Jeffrey Kennedy's Trader's Classroom “Pinch me!” video lesson now -- and see why the MA pinch is the first step to building a custom technical indicator page.

No, this isn't a dream; the power of the pinch is very real!

Using Moving Averages with Elliott Wave Analysis

Moving Averages and the Wave Principle
Improve your Elliott wave pattern identification skills with this lesson from Jeffrey Kennedy 

By Elliott Wave International

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Among Elliott wave traders, you will likely find an especially high percentage of investors and traders who incorporate moving averages into their Wave analysis.

Here's why: you can use moving averages to identify Elliott waves.

Senior Analyst Jeffrey Kennedy knows how to take complex trading methods and teach them in a way you can immediately understand and apply -- his step-by-step tutorials are beneficial to traders at any level of experience. Jeffrey is also well-known for combining ancillary technical tools to strengthen his Elliott wave analysis.

The following lesson provides a powerful example of how moving averages can strengthen your ability to identify Elliott Patterns. It is excerpted from Jeffrey's free 10-page eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages. (Click here to get your copy of this free eBook now.)

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If you're new to the Wave Principle, I recommend using a moving average to get you started, and the reason why is that a moving average overlaid on a price chart will help train your eye to see developing Elliott wave patterns.
For an example of a schematic Elliott wave, look at the figure below:

If you've read The Elliott Wave Principle by Robert Prechter and A.J. Frost, you know that wave patterns are illustrated as line diagrams.
When you look at a real price chart rather than a schematic, the basic chart is typically an open-high-low-close price chart. Each price bar represents a single period and is illustrated by a vertical line with a small mark to the left and a small mark to the right as seen in the next figure:

The little lower line on the left-hand side of the vertical bar is the open; the little upper line on the right-hand side of the vertical line is the close; the top of the line is the day's high or that trading period's extreme; and the bottom of the line is that trading period's low.
Here's the thing: Whenever you're making the transition from looking at a textbook diagram to actually counting Elliott waves on a real price chart, it can be confusing to the eye. If you use a moving average, it will help you to see the wave pattern more easily.
Let me prove my case more thoroughly with this chart of Corn:

The blue line is an 8-period simple moving average of the close, which clearly shows that a five-wave decline has unfolded from the upper left-hand side of this price chart. With the aid of a moving average, the subdivisions within this selloff are more easily discernible than with the untrained naked eye.
Also, notice that the slope of the move up in wave 4 is shallow. This detail is important because one of the key characteristics of countertrend price action is that it moves slowly, thus its slope will be inherently more shallow than what one can expect to encounter when a motive wave is in force.

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Learn How to Trade the Highest Probability Opportunities: Moving Averages No matter what your level of experience in the markets, you'll be amazed at how quickly you can benefit when you include moving averages in your Elliott wave analysis. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-probability trading opportunities. Begin to improve your trading and investing with Moving Averages today! Download Your Free eBook Now >>

Why you should Choose the Wave Principle

Why Choose the Wave Principle?
Robert Prechter reveals why he embraced the Wave Principle.
January 4, 2012

By Elliott Wave International

Robert Prechter is the widely recognized authority on the Elliott Wave Principle.
Read how he learned about the Wave Principle and why he embraced it in the edited excerpt from his book Prechter's Perspective below (Q&A format):

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Question: What was it about Elliott that captured your attention?
Robert Prechter: I had seen some mentions of the Wave Principle in a few market newsletters and a couple of obscure books, and I decided that either this was someone's elaborate fantasy or it was an amazing discovery. I wanted to reject it from what evidence I could find or include it as part of my growing arsenal of technical analytical methods.
Q: How long did it take you to develop your "eye" for discerning these waves?
RP: About 30 minutes -- when I plotted my first hourly chart covering a few months. Apparently, there is such a thing as an eye for patterns. One person told me he had trouble finding the fives and threes. The key is to keep a chart. Most people have no trouble seeing the Principle at work. Q: You accepted it just like that?
RP: When you begin to see the five-wave impulses and the three-wave corrections unfold over and over, it does not take long for you to say either "I see, but I refuse to believe it," or "This is obviously what's happening; let's see how far it continues." It took about a year and a half of applying it until I knew that Elliott was absolutely right. I'm pretty hard-headed, and it takes substantial reason for me to accept a new idea. By that time, I decided I had seen what amounted to proof. I then said to myself, "This is unbelievable. How come no one is commenting on this? The market is pulling back to points he said it should pull back to in the patterns. It is rising up to levels he said it should, in ways he said it should."
Q: What was it that convinced you?
RP: The Wave Principle proves itself when you merely keep a chart. Once I did that, I recognized what was going on rather quickly. The wave patterns are repetitive and at times, over protracted periods, they are easily discernible.

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The basic Elliott wave pattern consists of impulsive waves (denoted by numbers) and corrective waves (denoted by letters). An impulsive wave is composed of five subwaves and moves in the same direction as the trend of the next larger size. A corrective wave consists of three subwaves and moves against the trend of the next larger size.
As the chart below shows, these basic patterns link to form five- and three-wave structures of increasingly larger size.

The Elliott Wave Principle helps to identify turning points in the trends of financial markets.
It does not provide certainty, yet the Wave Principle does provide a way to assess the probabilities of possible future paths of a given financial market.

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Learn more in the free Elliott Wave Basic Tutorial The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like! Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever