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.