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.

It’s not too late to prepare yourself for what’s ahead

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This article was syndicated by Elliott Wave International and was originally published under the headline Position Yourself for the Rest of "Conquer the Crash". EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Elliott Wave International’s Jeffrey Kennedy explains many ways to use this basic tool

May 21, 2012

By Elliott Wave International

The following trading lesson has been adapted from Jeffrey Kennedy’s eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. You can download the 14-page eBook here.

"How to draw a trendline" is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.

Yet you’d be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of the new Elliott Wave Junctures service, puts it:

"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 or extremely pessimistic."

In other words, a trendline can help you identify the market’s trend. Consider this example in the price chart of Google.

That one trendline — drawn between the lows in 2004 and the lows in 2005 — provided support for a number of retracements over the next two years.

That’s pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that often "contains" the corrective price action. When price breaks out of this channel, there’s a good chance the correction is over and the main trend has resumed. Here’s an example in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.

For more free trading lessons on trendlines, download Jeffrey Kennedy’s free 14-page eBook, Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed.

Download your free eBook >>

This article was syndicated by Elliott Wave International and was originally published under the headline How a Simple Line Can Improve Your Trading Success. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Triangles offer an important piece of forecasting information

May 14, 2012

By Elliott Wave International

There’s no shortage of books about trading these days, and you could read for months before you come across one that might apply to your trading style.

The free 45-page eBook The Best of Trader’s Classroom is specifically for Elliott wave traders and saves you time in getting the knowledge you want.

It’s written by Elliott wave trader Jeffrey Kennedy: he had individuals like you in mind when he said

I began my career as a small trader, so I know firsthand how hard it can be to get simple explanations of methods that consistently work. In more than 15 years as an analyst since my early trading days, I’ve learned many lessons, and I don’t think that they should have to be learned the hard way.

The Best of Trader’s Classroom offers 14 trading insights that you can use now.

Consider these examples of what you’ll learn:

• Use bar patterns to spot trading setups
• Use the Wave Principle to set protective stops
• Identify Fibonacci retracements
• Apply Fibonacci ratios to real-world trading

Jeffrey also discusses corrective patterns which includes the triangle formation. Here’s an edited eBook excerpt:

Triangles are probably the easiest corrective wave pattern to identify, because prices simply trade sideways during these periods. [The graphic below] shows the different shapes triangles can take.

….triangles offer an important piece of forecasting information — they only occur just prior to the final wave of a sequence. This is why triangles are strictly limited to the wave four, B or X positions. In other words, if you run into a triangle, you know the train is coming into the station.

Jeffrey goes on to provide three real world examples of the triangle price pattern. Here’s one of them with his accompanying commentary.

[The chart above] shows a slight variation of a contracting triangle, called a running triangle. A running triangle occurs when wave B makes a new extreme beyond the origin of wave A. This type of corrective wave pattern occurs frequently in commodities.

Learn more about the 14 trading insights that Jeffrey Kennedy presents in The Best of Trader’s Classroom.

This chart-packed 45-page eBook has a $59 value — but you’ll get FREE instant access by simply joining Club EWI. Membership is also free and it just takes a minute or two to sign up. There’s no obligation after you join.

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This article was syndicated by Elliott Wave International and was originally published under the headline 14 Elliott Wave Trading Insights You Can Use Now. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

The price range from the Feb 5, 2011 high in the SP500 to the April 10, 2011 low is 295.81 points. I used the Look Ahead function in the software to determine that this price range (when converted to degrees of a circle) would Square at 125 (points or days). It took only a second to see that the Feb 4, 2012 high at 1422.38 occurred 124 trading days from the April low. Only 1 degree from an exact Square.

That information, combined with the bearish breakout from the Roadmap Channels, leads me to believe that a major top has occurred in the US Stock Market. The Roadmap Channels themselves are derived mathematically and could have been drawn exactly as shown on April 10, 2011.

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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This article was syndicated by Elliott Wave International and was originally published under the headline The Manic-Depressive Stock Market: What to Make of It. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Bernanke comments raise questions about banks

April 25, 2012

By Elliott Wave International

Four years after we brushed up against "financial Armageddon," did you think you’d be reading this?

Federal Reserve Chairman Ben Bernanke said…banks need to have more capital at hand in order to ensure the financial system is stable. Bernanke said regulators were taking steps to force financial institutions to hold higher capital buffers…

- Reuters, April 9

It appears our financial system is still not as stable as it needs to be. But guess who relaxed the banking system’s "capital buffers" in the first place?

The Fed increased the credit in the system in the 1990s by the de facto removal of reserve requirements for banks.

- Robert Prechter, Elliott Wave Theorist, November 2011

Prechter’s September 2011 Theorist provides this additional insight:

In the late 1990s and mid 2000s, the loan-to-deposit ratio for U.S. banks was nearly 1.00, meaning that almost all deposits were lent out. That shortfall alone was a serious problem, because if even 5% of depositors had decided to withdraw their money, banks would have been unable to pay. Some of the banks’ loans were quickly callable, but by 2006, the credit-fueled real estate boom had claimed a large percentage of outstanding loans, both inside and outside the banking system. These loans are not quickly callable. The problem was serious in 2002 and enormous in 2006. Now it has become acute, because many loans are becoming fossilized, as the market for mortgage investing has dried up while foreclosures on the "collateral" have been slowed by court actions and politics.

The specter of a banking panic has become far darker since the collateral for bank deposits — land and buildings — has fallen globally in value at the steepest rate since the Great Depression. One day this shortfall in collateral value will impress itself on people’s minds, and there will be an unprecedented run on banks around the globe as panicked depositors try to become the first ones out the door. Banks are designed so that the first depositors to withdraw get 100%; the losers wait in a long, slow line to split the proceeds that come from selling the deeds. Yes, I know about the FDIC, but I don’t believe it will be able to fulfill its promises when most banks go bust.

We believe that you should plan ahead for a run on bank deposits. Let me share with you another excerpt from that Reuters article. These are direct quotes from Bernanke (emphasis added):

Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration…

The risk of runs … remains a concern, particularly since some of the tools that policymakers employed to stem the runs during the crisis are no longer available…

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This article was syndicated by Elliott Wave International and was originally published under the headline U.S. Financial System: Is It Finally Stable?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.