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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These are the Best Technical Indicators for Trading

What Are the BEST Technical Indicators for Successful Trading?
8 technical analysis tools that give any trader an edge
November 14, 2011

By Elliott Wave International

You may have seen a TV ad where "traders" describe their strategies, and one says, "I trade on fundamentals." That sounds very reassuring -- except that, on any given day, "fundamentals" are a mixed bag:

• You might have a good U.S. employment report...but bad news from Europe
• A positive Fed statement...but a negative housing number
• Strong earnings...but slowing consumer spending

And so on. Which "fundamental" factor trumps the other? Which one carries more weight in your forecast? Your guess is as good (or bad) as anybody's.
Your alternative is technical analysis, which forecasts the markets' short- and long-term moves based on objective metrics, not guesses.
Here at EWI, we've always strived to help our readers learn to think for themselves. So we've put together for you a free 8-lesson report, "Best Technical Indicators for Successful Trading" that teaches you how to use these technical tools:

1. The Personality of Elliott Waves
2. Head and Shoulders Pattern
3. Fibonacci Retracements
4. Advance-Decline Line
5. Sentiment
6. Volume
7. Trendlines
8. Momentum Analysis Using MACD

Here's a small preview of this free 8-lesson report.

Trendlines

A trendline represents the psychology of the market; specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control.



Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.

Now we're on to the fun part -- drawing trendlines. You can do this several different ways...

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