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.

---

What does the true state of the economy mean for your investments? EWI's free report, The Economic Rot Beneath, reveals important economic numbers that you are not currently reading in the mainstream headlines - but you should be. For instance, did you know stocks priced in real money (gold) are down 87%? Or that U.S. manufacturing jobs are half of what they were in 1979? Or that housing starts per capita are back to 1922 levels? Learn what's really going on in the U.S. economy. Download your free report now >>

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.

---

Learn More about Diagonals and Other Elliott Wave Patterns Get a better understanding of Elliott wave analysis with our Elliott Wave Patterns educational feature. You'll have access to basic lessons on Elliott wave patterns, along with video clips from our online courses which will explain the pattern, the rules and the guidelines. Plus, you'll see real-life examples that show you how each pattern fits into the overall wave structure. Some patterns will even offer a brief quiz to test your knowledge and ensure that you understand the material. Access the free Elliott Wave Patterns feature now.

Technicals vs. Fundamentals

Technicals vs. Fundamentals: Which are Best When Trading Crude Oil and Natural Gas?

July 26, 2010

If "fundamentals" drive trend changes in financial markets, then shouldn't the same factors have consistent effects on prices?

For example: Positive economic data should ignite a rally, while negative news should initiate decline. In the real world, though, this is hardly the case.

On a regular basis, markets go up on bad news, down on good news, and both directions on the same news -- almost as if to say, "Talk to the hand cuz the chart ain't listening."

Unable to deny this fly in the fundamental ointment, the mainstream experts often attempt to reconcile the inconsistencies with phrases like "shrugged off," "defied" or "in spite of."

That begs the next question: How do you know when a market is going to cooperate with fundamental logic and when it won't? ANSWER: You don't.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.

Take, for instance, the first three news items below regarding the July 22 performance in crude oil, versus the fourth headline, which occurred on July 23:

1. Crude prices surge nearly 4% in their sharpest one-day percentage gain since May. The rally was "aided by fears that Tropical Storm Bonnie will enter the Gulf of Mexico over the weekend and disrupt oil production." (Wall Street Journal)
2. "Oil Prices Soar As Gulf Storm Threat Looms" (Associated Press)
3. "The storm should keep oil prices bubbling if it continues to strengthen and remain on track." (Bloomberg)

vs.

4. "Oil Slips From Surge Despite Storm Threats" (Commodity Online)

Unlike fundamental analysis, technical analysis methods don't rely on the news to explain or predict market moves. They look at the markets' internals instead.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.

Lessons in Technical Indicators

Lessons in Technical Indicators: Part 3
How to use technical indicators to complement your wave analysis

By Nathaniel Williams Tue, 23 Mar 2010 11:30:00 ET	Email |  Print  |  RSS |  My Updates	Bookmark and share It!

Want to Learn More? Read Part 1 and Part 2 of this series.

The MSCI Asia Apex Index combines 50 of the largest stocks in Hong Kong, Taiwan and Korea. The index also provided Elliott Wave International's Asian-Pacific Short Term Update editor Chris Carolan an opportunity to teach his subscribers how to use three of his favorite technical indicators to anticipate and capitalize on trend changes.

 

Enjoy this free lesson that comes from Chris Carolan's on-demand, online trading course "3 Technical Indicators to Help You Ride the Elliott Wave Trend." 

---

You can order "3 Technical Indicators to Help You Ride the Elliott Wave Trend" for $49, or you can subscribe risk-free to The Asian-Pacific Short Term Update, The European Short Term Update, or Global Market Perspective for the same price and get the trading course FREE!

---

Chris's primary tool for spotting trend reversals is the Wave Principle. Through wave analysis, he saw an impulsive "wave five of five." In other words, prices appeared to be at both a short-term and long-term high. One of the Wave Principle's rules is that a correction -- or a trend reversal -- occurs after the completion of a five-wave impulse, so Chris's wave count suggested that the index's next move would be down.

 

Chris then used his favorite three technical indicators to verify his forecast, as he demonstrates in the trading course.

 

First, the Relative Strength Index (RSI) noted a divergence, symbolized by the red dot, at the top of wave five. A divergence occurs when prices make consecutive highs or lows while losing momentum, and it means that a given market might be overbought or oversold. After divergences, trend reversals often ensue.

 

Second, the Digital Signal Filter (Jurik RSX), an enhanced RSI, also suggested that the index was overbought. The blue line on the chart hadn't yet started to retreat, but it was clearly reaching a topping point. This was another signal that the trend was nearing its end.

 

Third, the interaction between the index and the Keltner Channel provided a clear indication that a reversal was imminent. When prices breach the channel wall and appear to be reacting contrary to the channel's trend, you can expect a corrective price reversal. 

As you can see from the chart above, Chris's wave analysis was correct. The index had reached the top of a five-wave impulse, and prices responded by initiating a steep downward correction. What's more, all three of Chris's indicators supported his forecast. Using the Wave Principle and technical indicators isn't like looking into a crystal ball, but you can see how helpful they can be to help you spot the end of a trend -- or the beginning of a new one.

 

This is just one of Chris's many lessons about using technical indicators to complement your wave analysis. You can learn more today in his on-demand, online trading course "3 Technical Indicators to Help You Ride the Elliott Wave Trend." In this 42-minute video, Chris shows you how to get the most out of each of these indicators, using detailed charts, real-world examples and practical insights.

 

You can purchase "3 Technical Indicators to Help You Ride the Elliott Wave Trend" for just $49 here -- but please don't! Get it FREE when you start your risk-free subscription for the same price to one of the following services:

• The Asian-Pacific Short Term Update
• The European Short Term Update.
• Global Market Perspective

(Already a subscriber to Global Market Perspective, European Short Term Update or Asian-Pacific Short Term Update? View the trading course here.)

Stocks: The "Loss" Decade

If You Think the Past Decade Was Bad For Stocks, Wait Till You See This
The major stock indexes are the wrong place to look
December 4, 2009

By Robert Folsom

A well-known business magazine recently published a story with this headline:

Stocks: The "Loss" Decade
A disastrous ten years for the stock market ends in just a month. Will the turning of a new decade change investors' luck?

One sentence from the story itself tells you most of what you need to know: "The ten years since Y2K are on track to produce the worst total returns for investors since the 1930s."
Of course, no one should really be surprised by a story that says the stock indexes did poorly over the past decade. That's not news. The facts in the article more or less repeat what our own Elliott Wave Financial Forecast reported last March, complete with this chart:

The proof of the market is in its charts. Professional market technicians know something you don't. A solid grasp of the most successful technical analysis methods can help you cut through the hype and give you the big-picture, unbiased perspective you need now more than ever. You can now download a FREE 50-page Technical Analysis Handbook from the largest independent technical analysis provider in the world. Learn more about technical analysis, and download your free 50-page ebook here.

It's safe to say that this business magazine article is the first of many the media will run before the year's end, as part of their "decade wrap-up" stories. And like this story, most or all those like will share the same basic assumption: stock investors did poorly because the stock indexes did poorly.
And that assumption, dear reader, is erroneous. The truth is far uglier.
Here's what I mean. If you want to know how real stock investors really behave, the major stock indexes are the wrong place to look. Published results from firms like Dalbar and Vanguard consistently show that, over the past 25 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
So, for example, in 20 years from Jan. 1, 1989 through Dec. 31, 2008, the S&P 500 showed a 8.35% gain (Dalbar). Over that same period, equity investors showed a 1.87% gain. And if you include the 2.89% inflation rate in those years, investors show a 1.02% loss.
You can shift to a timeframe which excludes the bear market that started in 2007, but it doesn't change the basic story. From January 1984 though December 2002, the Dalbar data shows that equity investors earned an annual average of 2.6%, vs. the S&P 500's 12.2% annual average. The annual inflation rate for period was 3.14%.
What's more, similar studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.
It can be different for you. Market prices move in recognizable patterns: Those patterns can also reveal specific price levels that help confirm the direction of the trend, or identify the time to step aside. Respecting the price, pattern and trend is the first step toward discipline, instead of yielding to emotions.

The proof of the market is in its charts. Professional market technicians know something you don't. A solid grasp of the most successful technical analysis methods can help you cut through the hype and give you the big-picture, unbiased perspective you need now more than ever. You can now download a FREE 50-page Technical Analysis Handbook from the largest independent technical analysis provider in the world. Learn more about technical analysis, and download your free 50-page ebook here.

---

Robert Folsom is a financial writer and editor for Elliott Wave International. He has covered politics, popular culture, economics and the financial markets for two decades, via print, radio and the Internet. Robert earned his degree in political science from Columbia University in 1985.