What Is Backing Your Deposits in the Bank?

Understanding Fibonacci

Understanding Fibonacci
Learn to apply Fibonacci ratios to calculate price targets in stocks 
October 06, 2011

By Elliott Wave International

The Fibonacci ratio can be an invaluable tool for calculating price retracements and projections in your analysis and trading. This excerpt from The Best Technical Indicators for Successful Trading explains the origins of the Fibonacci sequence and how you can apply it to the markets.
You can read the entire Fibonacci section -- plus 7 more lessons on how to use technical indicators to improve your trading for FREE -- see below.

Leonardo Fibonacci da Pisa was a thirteenth-century mathematician who posed a question: How many pairs of rabbits placed in an enclosed area can be produced in a single year from one pair of rabbits, if each gives birth to a new pair each month starting with the second month? The answer: 144.

The genius of this simple little question is not found in the answer, but in the pattern of numbers that leads to the answer: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144. This sequence of numbers represents the propagation of rabbits during the 12-month period and is referred to as the Fibonacci sequence.



The ratio between consecutive numbers in this set approaches the popular .618 and 1.618, the Fibonacci ratio and its inverse. (Relating non-consecutive numbers in the set yields other popular ratios - .146, .236, .382, .618, 1.000, 1.618, 2.618, 4.236, 6.854....)



...In addition to recognizing that the stock market undulates in repetitive patterns, R. N. Elliott also realized the importance of the Fibonacci ratio. In Elliott's final book, Nature's Law, he specifically referred to the Fibonacci sequence as the mathematical basis for the Wave Principle. Thanks to his discoveries, we use the Fibonacci ratio in calculating wave retracements and projections today.

How to Identify Fibonacci Retracements
The primary Fibonacci ratios that I use in identifying wave retracements are .236, .382, .500, .618 and .786. Some of you might say that .500 and .786 are not Fibonacci ratios; well, it's all in the math. If you divide the second month of Leonardo's rabbit example by the third month, the answer is .500, 1 divided by 2; .786 is simply the square root of .618.

There are many different Fibonacci ratios used to determine retracement levels. The most common are .382 and .618. However, .472, .764 and .707 are also popular choices. The decision to use a certain level is a personal choice. What you continue to use will be determined by the markets.

...It's worth noting that Fibonacci retracements can be used on any time frame to identify potential reversal points. An important aspect to remember is that a Fibonacci retracement of a previous wave on a weekly chart is more significant than what you would find on a 60-minute chart.

See charts that show the application of Fibonacci ratios, plus 7 other lessons on technical indicators, by accessing your free report now.

Learn the Best Technical Indicators for Successful Trading In this free report, you will learn the tools of the trade directly from the analysts at Elliott Wave International. Using both video lessons and reports, they teach you how to incorporate technical indicators into your analysis to improve your trading decisions. You will learn: How to employ Fibonacci ratios to calculate possible turning points. How to interpret technical indicators such as Moving Average Convergence/Divergence -- MACD. How to exploit trendlines to uncover trading opportunities when stock charting. Technical patterns that can alert you to major moves, and how to know if it�s a legitimate pattern. And more -- 8 lessons in all! Get your Technical Indicators report now>>

The Single Most Reliable Indicator

The Single Most Reliable Indicator

In this video excerpt, Elliott Wave Financial Forecast Editor
Steve Hochberg explains one of the most important things to keep in mind when
assessing a market, "Extreme opinions, shared widely, constitute the single
most reliable indicator of an impending change of direction for a market." Enjoy
your video excerpt.

To find out more about the Wave Principle, be sure to watch the Club EWI video
series: Learn the Why, What and How of Elliott Wave Analysis. This 3-video series
is a great way to get started with the Wave Principle. You can watch these
videos free with a Club EWI Membership.

Watch the Club EWI video series: Learn the Why, What and How of Elliott
Wave Analysis. This 3-video series is a great way to get started with the Wave Principle. You can get these videos free with a Club EWI Membership.

Watch your free video now>>

Credit Crisis in Europe

Credit Crisis in Europe: How the Stability of an Entire Region is Teetering on the Edge of a Major Collapse

 

By EWI's European Financial Forecast editor Brian Whitmer (excerpt)

Panic Now and Avoid the Rush -- July 30, 2010

The market's collective sigh of relief is also reflected in authorities' stress testing of 91 European banks. In case you missed last Friday's results, their message is clear: relax. 

The Committee of European Banking Supervisors (CEBS) gave passing grades to nearly every bank on its list. The group, for example, passed both Irish banks and all four UK banks that it evaluated. The CEBS gave clean bills of health to all four Portuguese banks, all five Italian banks, and five out of six Greek banks that it analyzed. 

Even with share prices that sit 29%-66% beneath their 2009 countertrend highs, the CEBS says that the Bank of Ireland, Piraeus Bank, Banco Popolare, and Banco Santander are all in good shape. In fact, just seven of the 91 banks failed to make the grade. Five were in Spain, one in Greece, and one, Germany's Hypo Real Estate, is entirely owned by the German government anyway. Everyone else -- 84 institutions in all -- are supposed to be strong enough to withstand another economic shock.

It's not so much the stellar results that expose the optimism of a Primary degree rally, but rather the Banking Committee's stress tests themselves. They are notable primarily because they failed to test for any real stress in the first place. As the chart shows, the Committee's "adverse scenario" regarding economic performance assumed a mere 3% deviation from the European Commission's GDP forecast. 

Another test looked at banks' resilience to a sovereign risk shock, yet the analysis merely used conditions similar to those of May 2010. In other words, just like the UK budget office, the CEBS is utilizing a woefully diluted version of the economic deterioration that is about to grip the continent.
______________________________

FREE REPORT: Discover what Europe's debt crisis means for the future of the continent and your investments. Get your FREE 6-page report filled with unique analysis on Europe, the PIIGS and the sovereign debt crisis. EWI's European Financial Forecast editor Brian Whitmer gives you the context for what's happening in Europe and gets you up to speed on the reality of the situation. Download your free report now.

How to Find and "Hook" Potential Trade Setups

Here's anothr free lesson on how deploy the Elliott Wave Princple in your trading plan...

 Happy Trading!!

How to Find and "Hook" Potential Trade Setups   

A Free Lesson on How to Combine Technical Indicators with Elliott Wave Analysis
July 11, 2011

By Elliott Wave International

Trading using technical indicators -- such as the MACD, for example, Moving Average Convergence-Divergence -- can do one of two things: help you or hinder you. 

Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend. 

Technical indicators are meant to do exactly what the name implies: "indicate" that a buy or sell signal may be in place. (Don't confuse "indicate" with "guarantee": They are not called "technical guarantors" for a reason.) 

Elliott Wave International's Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook, The Commodity Trader's Classroom:

"Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups."

Jeffrey goes on to describe his favorite indicator, the MACD:

"Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line."

Figure 10-1 gives you an example of the MACD indicator in Coffee futures. 

One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here's another quote from the free eBook:

"A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement."

Figure 10-4 gives you an example of the Hook at work in live cattle futures. 

"A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I'm looking for is a heads-up that the larger trend is possibly resuming." 

Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in the FREE 32-page eBook, The Commodity Trader's Cl

With QE3 back on the table I thought this would be a nice refresher...

A Four-Chart Lesson in Spotting Trade Setups

A Four-Chart Lesson in Spotting Trade Setups

June 29, 2011

By Elliott Wave International

You can find low-risk, high-probability trading opportunities by trading with the trend. The trick is to find the end of market corrections, so you can position yourself for the next move in the direction of the trend. 

This excerpt from Jeffrey Kennedy's free 47-page eBook How to Spot Trading Opportunities explains where to find bullish and bearish trade setups in your charts and how to zero-in on these opportunities. If this lesson interests you, the full 47-page eBook is free through July 6.  

 

On the left-hand side of the illustration below, there are two bullish trade setups. As traders, we want to wait for the wave (2) correction to be complete so we can catch the move up in wave (3) – this is the trade. What we are trying to do in this bullish trade setup is anticipate the potential for profits on the buy-side as prices move up in wave (3). Another bullish trade setup is at the end of wave (4).

As traders, we are looking to buy the pullback and position ourselves within the direction of the larger up-trend. Remember, three-wave moves are corrections, which means that they are countertrend structures. On the other hand, five-wave moves define the larger trend. As traders, we want to determine what the trend is and trade in the direction of the trend. Our buying opportunity to rejoin the trend is whenever the trend pauses and forms a correction.

Now, let’s look at the right-hand side of the illustration where we see two bearish setups. When a five-wave move is complete, it is retraced in three waves as a correction. The end of the five-wave move presents the first trading opportunity that we can take advantage of the short side (or the sell side) as the wave (A) down begins.

Notice the second bearish trade setup gives us another shorting opportunity as wave (B) tops.

So, within the classic wave pattern of five waves up and three waves down, we have four high-probability trading opportunities in which we are either positioning ourselves in the direction of the trend or identifying termination points of a trend. I want to share with you some tricks I have picked up over the years about how to analyze corrective waves and their termination points. The single most important thing I’ve learned from analyzing corrections is that corrective or countertrend price action is usually contained by parallel lines.

As shown above, draw the parallel lines by beginning at the origin of wave A and going to the extreme of wave B. You draw a parallel of that line off the extreme of wave A. So basically you have a small, slightly angled downward price channel. This will show you the containment region for wave C. It also shows you an area toward the bottom of the lower trend line where you can expect a reversal in price.

Here is another example. Again, you draw the parallel lines off the origin of wave A, the extreme of wave A and the extreme of wave B.

Toward the upper end of the upper trend line, you will usually see a reversal in price.

This example shows how countertrend price action is contained by parallel lines in the British pound, 60-minute, all sessions. Why is it important to know parallel lines contain the corrective or countertrend price action? Number one, it will increase your confidence that you are indeed labeling a countertrend move properly. Number two, it identifies areas where you will likely see prices reverse. For example, we see this reversal up near the top.

This brief trading lesson is just a small example of the opportunities you can find once you learn to identify key market patterns. Learn more in your free 47-page eBook, How to Spot Trading Opportunities. This valuable eBook is regularly $79, but you can get it free through July 6. Download your free copy of How to Spot Trading Opportunities now.

What Will Happen to the Stock Market When QE2 Ends?

What Will Happen to the Stock Market When QE2 Ends?

Club EWI's free "Independent Investor eBook, 2011 Edition" offers you an unorthodox view of the Fed's quantitative easing program  

June 28, 2011

By Elliott Wave International

The second round of the Federal Reserve's quantitative easing program, better known as QE2, will expire this week.

The QE2 policy was officially announced on November 4, 2010, and has been widely credited with subsequent stock market gains. And now, according to rumors, the end of this "experimental" program will kill the stock rally -- with potential impact across all markets.

Let's think about that.

For starters, there is little "experimental" about QE2. As EWI's November 2010 Elliott Wave Financial Forecast pointed out to subscribers, "In Japan, the very same remedy the U.S. is applying today -- rate cuts followed by quantitative easing -- finds its stock market still down more than 75% from its December 1989 peak."

Also, this chart, from EWI president Robert Prechter's January 2011 Elliott Wave Theorist, shows "the effect" the first round of quantitative easing (QE1) had on the market:

But investors have short memories. And even many of those who remember how powerless the Fed was during the 2007-2009 crash are convinced that "it's different this time."

What do the facts and the evidence say? Read the expanded, 2011 edition of our popular free Club EWI resource, The Independent Investor eBook. 

From the very first pages, the charts and graphs will show you that the Fed’s QE programs are far less powerful than is commonly presumed.

All you need to read this important 118-page eBook online now is to create a free Club EWI profile. Here's what else you'll learn:

• Why QE2 was a major tactical error
• Why interest rates don't drive stock prices.
• Why rising oil prices are not bearish for stocks.                      
• Why earnings don't drive stock prices.
• What inflation has to do with the prices of gold and silver
• Why the problem with the Fed is its very existence.
• Why central banks don't control the markets.
• MUCH MORE

Keep reading this free report now -- all you need is a free Club EWI membership.

Can the Fed and Economists Forecast the Future? See This Startling Chart.

Can the Fed and Economists Forecast the Future? See This Startling Chart.
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting
June 27, 2011

By Elliott Wave International

Business Talk Radio host Gabriel Wisdom recently spoke with Pete Kendall, Co-Editor of EWI's Elliott Wave Financial Forecast. Their discussion included a crucial but rarely asked question about economists and the Federal Reserve. Here's the relevant excerpt: 

Gabriel Wisdom: "Ben Bernanke, the chairman of the Federal Reserve, says the economy is slowing but there's faster growth ahead. Is he wrong?"
Pete Kendall: "Economists are extrapolationists. They tend to look at what's happening in the economy and extrapolate that forward. So here we have a situation where not just Bernanke but economists in general are looking at... what they call the 'soft patch' and somehow contorting that into growth later in the year.  

Pete's startling reply flatly contradicts conventional wisdom. Most people believe that the Fed really is able to anticipate the economic future. After all, they're the most "qualified." But what do the facts say? 

Pete's Elliott Wave Financial Forecast Co-Editor Steve Hochberg recently included this eye-opening chart (from Societe Generale Equity Research) in his new subscriber-exclusive video, "Buy and Hold, or Sell and Fold: Where Are The Markets Headed in 2011?"

The red line in the chart is the S&P earnings, and the black line shows economists' forecasts relative to those earnings. Here's what James Montier, head of equity research for Societe Generale, said about it:

"The chart makes it transparently obvious that analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly." (emphasis added)

That comment is spot-on. In 2002-2003, as you can see, earnings turned up despite economists' forecasts for earning declines. It took them a while to "turn the ship around" and play catch-up with the trend. 

Yet in 2007-2008, earnings turned down -- despite the forecast by economists for continued increases. The devastating truth is that earnings did more than fall in the first quarter of 2008: they had their first negative quarter in the history of the S&P. As Steve said in his subscriber video, "Economists were wrong to a record degree" -- and investors felt the pain.

So what's the point? Economists do extrapolate the trend. That approach works fine, until it doesn't­ -- and you're on the hook.

Elliott wave analysis never extrapolates trends -- it anticipates them. The Wave Principle recognizes that markets must rise and fall -- and that they unfold according to changes in investor psychology, in a way that is patterned and recognizable.

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Most people believe that the Fed really is able to anticipate the economic future. Now you know the facts. Uncover other important myths and misconceptions about the economy and the markets by reading Market Myths Exposed.

EWI's free Market Myths Exposed 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. Download your free copy now.

Learn to Spot High-Confidence Trading Opportunities

Dear Trader,


What if you could look at a chart and see the potential trading opportunities?


Elliott Wave International (EWI), the world’s largest market forecasting firm, has just released a free eBook to teach you exactly that. How to Spot Trading Opportunities features 47 pages of easy-to-understand trading techniques that help you identify high-confidence trade setups. Senior EWI Analyst Jeffrey Kennedy will show you how some of the simplest rules and guidelines have some of the most powerful applications for trading.


Created from the $129 two-volume set of the same name, this valuable eBook is offered free until July 6.


Don’t miss out on this rare opportunity to learn how to find opportunities in the markets you follow.


Download How to Spot Trading Opportunities now.


Happy Trading!!

How to Set Protective Stops Using the Wave Principle

How to Set Protective Stops Using the Wave Principle
The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals  

June 20, 2011

By Elliott Wave International

The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals.

EWI's Chief Commodities Analyst Jeffrey Kennedy values the Wave Principle not only as an analytical tool, but also as a real-time trading tool. In this excerpt from Jeffrey's free Best of Trader's Classroom eBook, he shows you how the Wave Principle's built-in rules can help you set your protective stops when trading.

---

Over the years that I've worked with Elliott wave analysis, I've learned that you can glean much of the information you require as a trader - such as where to place protective or trailing stops - from the three cardinal rules of the Wave Principle:

1. Wave two can never retrace more than 100% of wave one.
2. Wave four may never end in the price territory of wave one.
3. Wave three may never be the shortest impulse wave of waves one, three and five.

Let's begin with rule No. 1: Wave two will never retrace more than 100% of wave one. In Figure 4-1, we have a five wave advance followed by a three-wave decline, which we will call waves (1) and (2). An important thing to remember about second waves is that they usually retrace more than half of wave one, most often making a .618 Fibonacci retracement of wave one. So in anticipation of a third-wave rally - which is where prices normally travel the farthest in the shortest amount of time - you should look to buy at or near the .618 retracement of wave one.

Where to place the stop: Once a long position is initiated, a protective stop can be placed one tick below the origin of wave (1). If wave two retraces more than 100% of wave one, the move can no longer be labeled wave two.

Now let's examine rule No. 2: Wave four will never end in the price territory of wave one. This rule is useful because it can help you set protective stops in anticipation of catching a fifth-wave move to new highs. The most common Fibonacci retracement for fourth waves is .382 retracement of wave three.

Where to place the stop: As shown in Figure 4-2, the protective stop should go one tick below the extreme of wave (1). Something is wrong with the wave count if what you have labeled as wave four heads into the price territory of wave one.  

And, finally, rule No. 3: Wave three will never be the shortest impulse wave of waves one, three and five. Typically, wave three is the wave that travels the farthest in an impulse wave or five-wave move, but not always. In certain situations (such as within a Diagonal Triangle), wave one travels farther than wave three.

Where to place the stop: When this happens, you consider a short position with a protective stop one tick above the point where wave (5) becomes longer than wave (3) (see Figure 4-3). 

Why? If you have labeled price action correctly, wave five will not surpass wave three in length; when wave three is already shorter than wave one, it cannot also be shorter than wave five. So if wave five does cover more distance in terms of price than wave three - thus breaking Elliott's third cardinal rule - then it's time to re-think your wave count.

The Best of Trader's Classroom presents the 14 most critical lessons that every trader should know. You can download the entire 45-page eBook with a free Club EWI Membership. Download the free Best of Trader's Classroom now.

Think Lower Trade Deficit is Bullish for the Stock Market?

Think Lower Trade Deficit Is Bullish For the Stock Market? Now See This Chart
U.S. trade gap narrowed in April, and many will see that as a bullish sign
June 10, 2011

By Elliott Wave International

"The Dow rose nearly 1 percent Thursday... Investors were encouraged by a report that the United States trade deficit had narrowed, one positive point in a recent string of weak economic data." (June 9, 2011, Reuters)

Before you join the crowd in thinking that shrinking trade gap is bullish for stocks, read this excerpt from the 2011 edition of our popular free Club EWI resource, The Independent Investor eBook.

*****

Over the past 30 years, hundreds of articles -- you can find them on the web -- have featured comments from economists about the worrisome nature of the U.S. trade deficit. It seems to be a reasonable thing to worry about. But has it been correct to assume throughout this time that an expanding trade deficit impacts the economy negatively? Figure 8 answers this question in the negative. 

 

In fact, had these economists reversed their statements and expressed relief whenever the trade deficit began to expand and concern whenever it began to shrink, they would have accurately negotiated the ups and downs of the stock market and the economy over the past 35 years. The relationship, if there is one, is precisely the opposite of the one they believe is there. Over the span of these data, there in fact has been a positive -- not negative -- correlation between the stock market and the trade deficit.

It is no good saying, “Well, it will bring on a problem eventually.” Anyone who can see the relationship shown in the data would be far more successful saying that once the trade deficit starts shrinking, it will bring on a problem. Whether or not you assume that these data indicate a causal relationship between economic health and the trade deficit, it is clear that the “reasonable” assumption upon which most economists have relied throughout this time is 100% wrong.

Around 1998, articles began quoting a minority of economists who -- probably after looking at a graph such as Figure 8 -- started arguing the opposite claim. Fitting all our examples so far, they were easily able to reverse the exogenous-cause argument and have it still sound sensible. It goes like this: In the past 30 years, when the U.S. economy has expanded, consumers have used their money and debt to purchase goods from overseas in greater quantity than foreigners were purchasing goods from U.S. producers. Prosperity brings more spending, and recession brings less. So a rising U.S. economy coincides with a rising trade deficit, and vice versa. Sounds reasonable!

But once again there is a subtle problem. If you examine the graph closely, you will see that peaks in the trade deficit preceded recessions in every case, sometimes by years, so one cannot blame recessions for a decline in the deficit. Something is still wrong with the conventional style of reasoning. 

*****

Read the expanded, 2011 edition of our popular free Club EWI resource, The Independent Investor eBook. All you need is to create a free Club EWI profile. Here's what else you'll learn:

• Why QE2 was a major tactical error
• Why interest rates don't drive stock prices.
• Why rising oil prices are not bearish for stocks.            
• Why earnings don't drive stock prices.
• What inflation has to do with the prices of gold and silver
• Why central banks don't control the markets.
• Much more -- 51 pages in all

Keep reading the free Independent Investor eBook now -- all you need is a free Club EWI membership.

The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis

The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis

June 06, 2011

By Elliott Wave International

Many traders and investors use technical indicators to support their analysis. One of the most popular and reliable also happens to be an indicator that has been around for years and years -- moving averages.

A moving average is simply the average value of data over a specific time period. Analysts use it to figure out whether the price of a stock or a commodity is trending up or down. It effectively "smooths out" the daily fluctuations to provide a more objective way to view a market.

Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, from tick data to monthly price data or longer.

Moving Averages can help you identify the trend in a market, which is important since we all know that the trend is your friend. Yet certain moving averages can serve as support or resistance, and also alert you to trading opportunities.

This excerpt from EWI Senior Analyst Jeffrey Kennedy's free eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages, shows how a popular moving average setting identified trading opportunities in the stock of Johnson & Johnson.  

Download the full 10-page eBook here.

A popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem. The figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. Obviously, the number 26 is two times 13.

 

During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buyside and sellside trading opportunities.

Learn to apply Moving Averages to your trading and investing by downloading Jeffrey Kennedy's free 10-page eBook. Here's what you'll learn:

• How to apply the three most popular moving average techniques.
• How to decide which moving average parameters are best for the markets and time frames you trade.
• How to avoid several common but dangerous myths about moving averages.

Download How You Can Find High-Probability Trading Opportunities Using Moving Averages now.

What Does a Fractal Look Like?

What Does a Fractal Look Like?
And What Does It Have to Do with the Stock Market?
May 26, 2011

By Elliott Wave International

If the word 'fractal' comes up at all in conversation, that conversation is probably being held in a mathematics department. However, anyone who is interested in the Wave Principle and how it applies to the stock market may have stumbled across the phrase "robust fractal."

If you want to know more about what it means in that context, here's an excerpt from Elliott Wave International's primer on fractals that explains the connection.

* * * * *

Excerpted from The Human Social Experience Forms a Fractal
by Robert R. Prechter

In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. In a series of books and articles published from 1938 to 1946, he described the stock market as a fractal. A fractal is an object that is similarly shaped at different scales.

Although Elliott came to his conclusions fifty years before the new science of fractals blossomed, he took a step that current observers of natural processes have yet to take. He explained not only that the progress of the market was fractal in nature but discovered and described the component patterns. The patterns that Elliott discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated and defined a number of patterns, or "waves," that recur in market price data. He named and illustrated the patterns.

He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle….

The Stock Market as a Robust Fractal

A classic example of a self-identical fractal is nested squares. One square is surrounded by eight squares of the same size, which forms a larger square, which is surrounded by eight squares of that larger size, and so on.

A classic example of an indefinite fractal is the line that delineates a seacoast. When viewed from space, a seacoast has a certain irregularity of contour. If we were to drop to ten miles above the earth, we would see only a portion of the seacoast, but the irregularity of contour of that portion would resemble that of the whole. From a hundred feet up in a balloon, the same thing would be true.

Scientists today recognize financial markets' price records as fractals, but they presume them to be of the indefinite variety. Elliott undertook a meticulous investigation of financial market behavior and found something different. He described the record of stock market prices as a specifically patterned fractal yet with variations in its quantitative expression.

I call this type of fractal, which has properties of both self-identical and indefinite fractals, a robust fractal. Robust fractals permeate life forms. Trees, for example, are branching robust fractals, as are animals, circulatory systems, bronchial systems and nervous systems. The stock market record belongs in the category of life forms since it is a product of human social interaction.

How Is the Stock Market Patterned?

Figure 1 shows Elliott's idea of how the stock market is patterned. If you study this depiction, you will see that each component, or "wave," within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves.

If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation). These are called motive and corrective waves, respectively. Each of these waves adheres to specific traits and tendencies of construction, as described in Elliott Wave Principle (1978).

Waves subdivide this way down to the smallest observable scale, and the entire process continues to develop larger and larger waves as time progresses. Each wave's degree may be identified numerically by relative size on a sort of social Richter scale. 

Want to Know More About Fractals and the Stock Market? Then read the whole special report, called "The Human Social Experience Forms a Fractal." It's free of charge, so long as you are a member of Club EWI, which gives you access to many free reports that explain Elliott wave analysis and the Wave Principle.

How to Put the Wave Principal to Work

How to Put the Wave Principle to Work

In the video below, EWI Senior Commodity Analyst Jeffrey Kennedy walks you
through a basic checklist of how to put the Wave Principle to work. This clip
was taken from The Wave Principle Applied webinar, originally recorded for Futures
Junctures subscribers.

Get 45 pages of FREE practical lessons in Elliott Wave International's Best
of Trader's Classroom eBook

Would you like to learn more about trading with the Wave Principle? Get 45
pages of FREE practical lessons in Elliott Wave International's Best of Trader's
Classroom eBook .
Taken from Jeffrey Kennedy's renowned Trader's Classroom series, this
FREE 45-page collection offers 14 actionable lessons that will help you determine
entry points, stop levels and price targets for the markets you trade.
Download The Best of Trader's Classroom now

Stocks Rally On the News of Bin Laden's Death, You Say? It's Not That Simple

Stocks Rally On the News of Bin Laden's Death, You Say? It's Not That Simple

Interest rates, oil prices, trade balances, corporate earnings and GDP: None of them seem to be important, or even relevant, to explaining stock price changes
May 3, 2011

By Elliott Wave International

On the morning of May 2, the financial headlines were abuzz with the news of Osama Bin Laden's death and its positive impact on the stock market:

"Stock Market Celebrates Killing of Bin Laden" (The Wall Street Journal)

But despite a positive open, stocks closed lower on May 2. Undoubtedly, in the days ahead we'll hear analysts explaining how Bin Laden's death is not that "bullish" of an event, after all.

On that same note, MarketWatch.com ran an interesting story on May 2 that quoted from a research paper which found "little evidence that non-economics events have a big effect on the stock market."

Here at EWI, we go one step further and say the following: Economic events have little impact on the stock market, too.

Don't believe us? Read this excerpt from a free Club EWI resource, the 50-page 2011 Independent Investor eBook, and judge for yourself.

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The Independent Investor eBook, 2011 Edition
(Excerpt; full report here)

...Economists' Claim #5: “GDP drives stock prices.”

Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?

If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.

Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?

Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter. But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP.

Figure 10 shows these two events.

 

It seems that there is something wrong with the idea that investors rationally value stocks according to growth or contraction in GDP. ...
Claim #6: “Wars are bullish/bearish for stock prices.” ... (continued)

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Keep reading the 50-page Independent Investor eBook now, free -- all you need is a free Club EWI password.

EUR/USD: Falling on "Risk Aversion"? Let's Look at the Timeline First

EUR/USD: Falling on "Risk Aversion"? Let's Look at the Timeline First
 

It's not the "bad news" from Europe that has been pushing the euro lower
May 19, 2011

By Elliott Wave International

From the May 4 top near $1.4950, the EUR/USD (the euro-dollar exchange rate and the most actively-traded forex pair) has fallen as low as $1.4050 on May 16. 

In other words, the dollar has gained 9 full cents on the euro in less than two weeks. That's a huge move, and people want explanations. And what the media offers boils down to "risk aversion," in light of "the bad news from Greece." And that sounds good -- until you check the timeline. 

The latest wave of trouble in Europe started on May 3, when Portugal asked for a bailout. If you think that event is what pushed forex traders towards "risk aversion" -- think again. The euro happily gained against the U.S. dollar the following day, May 4, pushing the exchange rate to that high near $1.50. 

And if you think the trouble in Greece pushed the EUR/USD lower -- again, please reconsider. Greece made a splash in the news on May 9, when its credit rating was downgraded. But by then the EUR/USD had already fallen some 700 pips, to the mid $1.42 range. 

So, as good and logical as all the mainstream stories sound about "risk aversion" and "bad news from Europe," the timing of events doesn't fit. What then gave the dollar the strength -- and at a time when almost everyone expected it to only fall further? 

Believe it or not (and it's easy to believe it, because, as this example shows, there's no better explanation) the news doesn't set broad trends in forex. Collective emotions of forex traders do. In early May, the majority was betting against the dollar. When everyone places their bets and there is no new money left to push the price further, it has no choice but to reverse. 

That's why it pays to be extra cautious in the financial markets when everyone takes the same side of a trade. True, markets can stay overbought or oversold for a while, but the reversal inevitably comes -- and the stronger the one-sided conviction, the bigger the reversal. 

The advantage Elliott wave analysis gives you is this: Wave patterns in forex charts track the collective mindset of the market players. By anticipating the price points where the Elliott wave pattern should end, you get a pretty good idea of where the trend should stop and reverse.
See for yourself how it works -- FREE -- during EWI's Forex FreeWeek now through May 26. Learn more >>

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Don’t Miss Forex FreeWeek! Now through Thursday, May 26 you'll have full and free access to our Intraday Currency Specialty Service. Dig deeper into the forex action with 24-hour-a-day forecasts, charts and analysis for dollar, euro, yen and more. All you need to access FreeWeek is a FREE Club EWI profile. Set yours up today and don’t miss a moment of FreeWeek. Learn more>>

5 Ways the Wave Principle Can Improve Your Trading

5 Ways the Wave Principle Can Improve Your Trading

May 12, 2011

By Elliott Wave International

Jeffrey Kennedy brings more than 15 years of experience to his position as Elliott Wave International’s Senior Analyst and trading instructor. He knows firsthand how hard it can be to get simple explanations of a trading method that works -- so he shares his knowledge with his subscribers each month in the Trader's Classroom lessons.

Here's an excerpt from The Best of Trader's Classroom, a free 45-page eBook that gives you the 14 most critical lessons every trader should know. Download the full eBook free here.

Every trader, every analyst and every technician has favorite techniques to use when trading. But where traditional technical studies fall short, the Wave Principle kicks in to show high-probability price targets. Just as important, it can distinguish high-probability trade setups from the ones that traders should ignore.

Where Technical Studies Fall Short
There are three categories of technical studies: trend-following indicators, oscillators and sentiment indicators. Trend-following indicators include moving averages, Moving Average Convergence-Divergence (MACD) and Directional Movement Index (ADX). A few of the more popular oscillators many traders use today are Stochastics, Rate-of-Change and the Commodity Channel Index (CCI). Sentiment indicators include Put-Call ratios and Commitment of Traders report data.

Technical studies like these do a good job of illuminating the way for traders, yet they each fall short for one major reason: they limit the scope of a trader's understanding of current price action and how it relates to the overall picture of a market. For example, let's say the MACD reading in XYZ stock is positive, indicating the trend is up. That's useful information, but wouldn't it be more useful if it could also help to answer these questions: Is this a new trend or an old trend? If the trend is up, how far will it go? Most technical studies simply don't reveal pertinent information such as the maturity of a trend and a definable price target -- but the Wave Principle does.

How Does the Wave Principle Improve Trading?
Here are five ways the Wave Principle improves trading:

1. Identifies Trend
The Wave Principle identifies the direction of the dominant trend. A five-wave advance identifies the overall trend as up. Conversely, a five-wave decline determines that the larger trend is down. Why is this information important? Because it is easier to trade in the direction of the dominant trend, since it is the path of least resistance and undoubtedly explains the saying, "the trend is your friend."

2. Identifies Countertrend
The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective response to the preceding impulse wave. Knowing that a recent move in price is merely a correction within a larger trending market is especially important for traders because corrections are opportunities for traders to position themselves in the direction of the larger trend of a market.

3. Determines Maturity of a Trend
As Elliott observed, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal, as illustrated in Figure 2-1. Wave (1) subdivides into five small waves, yet is part of a larger five-wave pattern. How is this information useful? It helps traders recognize the maturity of a trend. If prices are advancing in wave 5 of a five-wave advance for example, and wave 5 has already completed three or four smaller waves, a trader knows this is not the time to add long positions. Instead, it may be time to take profits or at least to raise protective stops.

4. Provides Price Targets
What traditional technical studies simply don't offer -- high-probability price targets -- the Wave Principle again provides. When R.N. Elliott wrote about the Wave Principle in Nature's Law, he stated that the Fibonacci sequence was the mathematical basis for the Wave Principle.

Elliott waves, both impulsive and corrective, adhere to specific Fibonacci proportions, as illustrated in Figure 2-2. For example, common objectives for wave 3 are 1.618 and 2.618 multiples of wave 1. In corrections, wave 2 typically ends near the .618 retracement of wave 1, and wave 4 often tests the .382 retracement of wave 3. These high-probability price targets allow traders to set profit-taking objectives or identify regions where the next turn in prices will occur.

5. Provides Specific Points of Ruin
At what point does a trade fail? Many traders use money management rules to determine the answer to this question, because technical studies simply don't offer one. Yet the Wave Principle does -- in the form of Elliott wave rules.

Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves -- 1, 3 and 5 -- wave 3 can never be the shortest.

A violation of one or more of these rules implies that the operative wave count is incorrect. How can traders use this information? If a technical study warns of an upturn in prices, and the wave pattern is a second wave pullback, the trader knows specifically at what point the trade will fail -- a move beyond the origin of wave 1. That kind of guidance is difficult to come by without a framework like the Wave Principle.

Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful. This is because the Wave Principle is the framework that provides history, current information and a peek at the future. When traders place their technical studies within this strong framework, they have a better basis for understanding current price action.

Don't miss the rest of the 14 most critical lessons that every trader should know. Download the free 45-page eBook The Best of Trader's Classroom.