Here’s a series of Elliott Wave Lessons from the recent week or so, all wrapped up into one post with several free offers from Elliott Wave International. As always, would love comments from anyone who has incorporated Elliott Waves into their trading methods or who has experience with the EW program. - Ilene
Learn Elliott Wave Analysis — Free Often, basics is all you need to know.
Courtesy of Elliott Wave International
Understand the basics of the subject matter, break it down to its smallest parts — and you’ve laid a good foundation for proper application of… well, anything, really. That’s what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter’s classic "Elliott Wave Principle — Key to Market Behavior." Here’s an excerpt:
Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. …the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.
The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.
These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one’s present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.
As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.
The following discussions relate to an underlying bull market… These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.
1) First waves — …about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two.
There used to be a saying that markets fall much faster than they rise. Like many things the past year, historical trends such as that truism have been blown out of the water.
The S&P 500 is now up 7% in 3 weeks (the Russell 2000 is doing even better) and continues to steamroll anyone who stands in its way. The 8% correction in late January to mid February? Similary, it took 3 weeks. (Click to enlarge)
Our "ups" now happen as quickly as our "downs"… and yet again (a broken record) with little volume to show for it on the upswing. You can see that on the bars at the bottom of the chart, the only days the liquidity flood can be contained (selloffs) are on heavy volume days. Almost all lighter volume days mean sideways or upside action.
The beat goes on; another V-shaped, light volume rally to mimic those of 2009. Anyone using traditional technical analysis (use of volume) continues to look the fool.
Technical analysis dates back hundreds of years. According to historical records, a great Japanese rice trader named Homma Munehisa (1724-1803) developed a form of TA known as candlestick charting.[1] A candlestick chart is a style of bar-chart used primarily to describe price movements of securities, derivatives, and currencies over time. It combines aspects of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in TA of equity and currency price patterns.
Technical analysis is an art. With focus and diligence, TA can often be learned within a short period. A chartist using TA reads and interprets chart patterns and then attempts to predict the most likely short-term outcome based on his methods. Figure 1 shows a 6 month Diamonds (DIA) candlestick chart and many patterns and studies that traders often use to enhance their trading. Moving averages convergence divergence (MACD) and relative strength index (RSI) are two studies very commonly used by technical analysts. MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices, while RSI is a technical momentum indicator that compares the magnitude of recent gains to recent losses in trying to decide overbought and oversold conditions of an asset. Because candlestick charting is the basis of this handbook, I use these types of charts almost exclusively in my examples.
In the U.S., TA first gained a following from Charles Dow’s Dow Theory in the late 19th century. The six basic tenets of Dow Theory, as summarized by Hamilton, Rhea, and Schaefer, are as follows:
Tenant 1. The market has three movements (Figure 2):
The primary trend, or major trend, may last from less than a year to several years. It is bullish or bearish.
A secondary trend moves in the opposite direction of the primary trend, or as a correction to the primary trend. For example, an upward primary trend will
A non-event day; techs made small gains, small and large caps posted small losses. From a technical perspective there was at least a stochastic ‘buy’ for many of the indices.
The Russell 2000 remained contained by its 50-day MA
Of the market breadth indicators, the Percentage of Nasdaq Stocks above their 50-day MA marked a bottom as it crossed its 5-day MA helped by an Ultimate Oscillator ‘buy’.
Other market breadth indicators are still some way from firming a bottom but buyers are prepared to take a look here.
In the Oxen Group section, David recommends a couple day-trades, usually in the morning, often a stock or ETF to buy, and a stock or ETF to sell short. David selects his trading candidates based on his “fundamental day-trade system,” and his analysis of the technical condition of the market. He attempts to choose stocks and ETFs that are likely to move 3-5% during the day, and also to open and close the positions at optimal times.
David selects trades by first examining five key sources of information to help him find "high probability trades." After selecting the trades, he applies several basic trading rules. He has an excellent track record, which is posted in the Oxen Group section and updated every few weeks. Previously, David wrote about the first two of his fundamental keys. Here, David writes about all five of the most important factors he looks at. – Ilene
The Five Keys to Identifying a Fundamental Day Trade
Stocks move under the influence various factors that we can use to identify stocks that are likely to move 3-5% in a single day. Even the best technicals seldom give you 5% upward (or downward) movements intraday alone, but combined with fundamental factors, we can find stocks that are likely to make these large daily moves.
To begin to seek that perfect stock or ETF, we first need to look for something that can propel a stock or, in the case ETFs, the represented sector. This 3-5% movement is not from the previous day’s close, but between the market’s open and close. We want to identify a stock that can be bought sometime in the morning to give us that significant movement by the end of the day. The first type of information that is prone to easily move stocks is earnings.
1. Earnings
There are multiple ways to play a company’s earnings. One of the most effective ways to invest based on earnings is after a company has already announced their earnings. We are looking for earnings that were surprising, especially ones that say something about a sector.
For example, if one company announces positive earnings because it had a large profit from a lawsuit, this information does not tell us much about
The following is the technical outlook from Decision Point:
Since this will be our last article for 2009, I thought it would be appropriate to do an analysis of the short-, medium-, and long-term charts and synthesize a broad outlook for the market.
In my December 4 article I said we should expect an upside breakout, but the market has continued to consolidate in a very narrow range, still testing the long-term overhead resistance which is drawn across the declining tops beginning with the 2007 top. In the short term, we are looking at several weeks of consolidation, which is also known as a continuation pattern. This means that the most likely resolution will be an upside breakout that will continue the rally that began from the November lows.
There is also the issue of the ascending wedge pattern, which normally breaks to the downside. Should that happen, there is support at about 1050, on the botom of the slightly rising trend channel. Because the two prominent short-term set ups are in opposition, I would have to say that the short-term (days to weeks) picture is neutral.
With two opposing possible short-term outcomes, let’s look at the weekly chart, which gives us a medium-term (weeks to months) view of the market. This chart looks bearish. We can see price stalling at resistance, and the PMO is overbought and trying to roll over. The strongest message from this chart is that a medium-term correction is about to begin.
Finally, the monthly chart looks very bullish for the long term (months to years). I say that primarily because the PMO has turned up from a deeply oversold reading and has passed up through its 10-EMA. This is about as bullish a picture as you are likely to see on a monthly chart. Keep in mind that this doesn’t override the medium-term or short-term picture. If you study the chart carefully, you will see that quite violent price swings can occur without causing the monthly PMO to change direction. Nevertheless, the overriding message is that the long-term direction of the market is most likely to be up.
Bottom Line: The short-term chart presents two opposite possible outcomes,
This is an interesting analysis by Rob Hanna who has studied and quantified the gap activity Phil mentioned in his double week review. He came to a similar conclusion – very odd market behavior. – Ilene
A trader I know pointed out the unusually large gap activity lately. I track the 10-day absolute average gap over the 100-day absolute average gap on the charts page in the members section of the site. Meanwhile I observed the average true range is still below normal. I’ve copied the two charts from the website to illustrate.
The real odd behavior here is with the average gap size. Such gappy behavior is unusual with the market near new highs. It’s also unusual when there isn’t also a substantial increase in the intraday range. I looked at this a number of different ways last night. The 10/100 Absolute Avg Gap is 1.38 (meaning the 10ma is 38% larger than the 100ma of the overnight gap size). I looked at other instances where similar levels were approached and the market was near a new high. It’s been fairly unusual over the last 15 years and results were inconclusive.
I then look at comparing the size of the average gap to the size of the average intraday range (not the true range as shown above). Here again I found we are at very high levels but past history was choppy and inconclusive.
Lastly I looked at times where the 10-day average gap was well above normal and the 10-day average intraday range was well below normal. Again I could find nothing suggesting a significant directional edge.
So is this activity suggestive of anything? Perhaps. While the readings themselves don’t seem to help greatly in predicting direction, they do indicate some unusual behavior. My take is that the market is being influenced more by outside forces than is customary. It’s been noted by many that the dollar has been leading everything by the nose lately. Outside influences like Dubai debt have also had an overnight influence lately. This would seem to explain why such a large percentage of action is occurring overnight.
So what should we do about it as traders? Two things come to mind – 1) Be more cognizant
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
By Robert Folsom, courtesy of Elliott Wave International
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:
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%.
Recovery rallies are almost always led by the high beta sectors of a market. In the case of this economic recovery, think China and global small caps. With China recently topping out and weak action in the small cap Russell 2000 index we are sitting in much the same camp that TPC currently sits in – wait and see mode. For now, the potential double top in the Russell and the overhead resistance at the 50 day moving average serve to validate the underlying fundamental outlook of a stalling economic recovery.
In addition, the recent sell-off that took us below resistance was on substantial volume compared to the recent rally which has been on very low volume. Small caps and high beta names are now exhibiting weakness compared to high quality names in what we view as a sign of a shift in risk tolerance. This could be a sign that the rally is finally beginning to taper off. For now, keep your powder dry. The market will tell us how to plan our next move.
The key to success in today’s market is having a game plan and sticking to it. And we hate to sound like a broken record, but you’ve heard us say repeatedly, the game plan for success today is:
"Buy trend channel support and sell trend channel resistance." OR "Buy the dips and sell the rips."
In our article last week, we said: "As we’ve been saying the last few weeks, it’s all about buying trend channel support and selling trend channel resistance.
A pullback to trend channel support may be just what’s needed to get a running start. Should that occur then we want to be buyers of stocks that fit a similar pattern that trade in tandem with the market."
And that is exactly what we did Wednesday when the market came crashing down to support. We covered our shorts that needed covering and went long when we saw issues approaching trend channel support.
Last week we heard everyone saying you have got to buy which is a classic herd mentality after we’ve already run. But the fact is, despite Friday’s sell-off, the uptrend remains intact and we simply followed the plan we laid out for you last weekend — that being ride our shorts down to support in the charts of the indexes, cover them there and look to buy stocks that are at support.
THIS WEEK’S GAME PLAN
Last week, the market was at resistance, so the game plan was to stay in our existing short-sell positions until the market hit support where we would cover and go long on stocks that were also at support. And this week, the game plan is exactly the opposite. Why’s that? Because the market is right at support — yes, it’s only been 5 trading sessions and that’s all it took to take the market from resistance to support.
So as long as support holds, the game plan for this week is to stay in our existing long positions as the market attempts to stage a snap back rally. When that occurs, we’ll take our profits on the long side and look to go short again as the rally set-ups stocks on the short side.
Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.
Initial Unemployment Claims Chart- Click to enlarge
Here’s why it’s mind blowing. I’ve plotted it below on an inverse scale with the S&P 500 overlaid.
Unemployemt Claims and Stock Prices - Click to enlarge
Major US Markets including (NYSEARCA:DIA), (NYSEARCA:SPY), (NASDAQ:QQQ), and (NYSEARCA:IWM) dropped over 3% each on Italian bond fears and an increased worry that Europe will not be able to bail out its 4th largest economy. Furthermore, the iShares MCSI Italy Fund (NYSEARCA:EWI) wiped out over 9% today, further illustrating the dire situation in Italy and the European Union: ...
The second economic disappointment of the day comes from the Dallas Fed, which dropped from -2.0 to -11.4 on expectations of -9.0- this was the 4th consecutive negative print month. The report was, in a word, horrible, with just 2 of the 15 constituent indices posting an increase, and the bulk solidly in the red, led by Unfilled and New Orders which dropped 16.8 and 11.2, respectively: not good for economic growth. On the employment side there was nothing good either, with both employment and hours worked declining by -...
Bloomberg reports that Diana Containerships (NASDAQ: DCIX) files to offer stock up to $172.5M. Diana Containerships says that Diana shipping will also buy $20M of stock.
Top 5 RisersStockRatingAnalysisVLOSTRONGBUYAn increasingly positive growth rate of past earnings, along with improving expectations for long term growth, make Valero a good prospect for high returns.KROSTRONGBUYKronos Worldwide has been gaining recognition from analysts as a good canditate for achieving higher than expected earnings along with higher overall projected valuation.SFIBUYiStar is one of the top candidates projected to achieve both higher than previously projected earnings in the short run and a higher earnings growth rate in the long run.AMATSTRONGBUYApplied Materials has been...
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February is now past, and the Biotech Porfolio is loaded with winners and a miss (PLX). MRK is down a bit, but I expect that trade to recover, and one could be more agressive and double down on it, or play another round at the Jan13 $30 options for roughly the same price. Below is the summary, and note the grey boxes are ones that did not fill. I am still a fan of BMRN, and like DEPO as well. Now let's look at a few others.
Table 1. PSW Biotech Plays Since January 2011
 
Our newest play is Momenta Pharmaceuticals (MNTA), who is pursuing a three-part business model which includes complex generic equivalents in partnership with the Sandoz division of Novartis, proprietary compounds, and follow-on- biologics (FOB). It seems that this company is tied up in competition/litigation wit...
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(