|The cult of Elliott Wave Theory intimidates the most
experienced traders. But don't let wave voodoo stop you from
adding important elements to your chart analysis. Strong trends
routinely print orderly action-reaction waves. EWT uncovers
these predictive patterns through their repeating count of 3
primary waves and 2 countertrend ones.
||Wave impulses correspond with the crowd's emotional
participation. A surging 1st Wave represents the fresh
enthusiasm of an initial breakout. The new crowd then hesitates
and prices drop into a countertrend 2nd Wave. This coils the
action for the sudden eruption of a runaway 3rd Wave. Then after
another pullback, the manic crowd exhausts itself in a final 5th
|Traders can capitalize on trend waves with very little knowledge
of the underlying theory. Just look for the 5-wave trend
structure in all time frames. Locate smaller waves embedded in
larger ones and place trades at points where two or more time
frames intersect. These cross-verification zones capture major
trend, reversal and breakout points.
For example, the 3rd wave of a primary trend often exhibits
dynamic vertical motion. This single thrust may hide a complete
5-wave rally in the next smaller time frame. With this knowledge
execute a long position at the 3rd Of A 3rd, one of the most
powerful price movements within an entire uptrend. While waves
seem hard to locate, the trained eye can uncover these price
patterns in many strong uptrends.
Many 3rd waves trigger broad Continuation Gaps. These occur just
as emotion replaces reason and frustrate many good traders.
Since common sense dictates the surging stock should retrace,
many exit positions on the bar just prior to the big gap. Use
timely wave analysis (and a strong stomach) to anticipate this
big move just before it occurs.
4th Wave corrections set the sentiment mechanics for the final
5th wave. The crowd experiences its first emotional setback as
this countertrend generates fear through a sharp downturn or
long sideways move. The same momentum signals that carry traders
into positions now roll over and turn against them.
|The greedy crowd ignites a
powerful December rally in AMGN. Note the embedded 5
wave patterns, typical with surging uptrends. The 3rd of
a 3rd identifies the most dynamic momentum expected in a
sharp price move.
As they prepare to exit, the trend suddenly reawakens and
price again surges. During this final 5th wave, the crowd loses
good judgement. Both parabolic moves and aborted rallies occur
here with great frequency. Survival through the last sharp
countertrend adds an unhealthy sense of invulnerability into the
crowd mechanics. Movement becomes unpredictable and the uptrend
ends suddenly just as the last greedy participant jumps in.
When trend finally turns back through old price, skilled traders
then use past action to identify effective momentum and swing
trades. Battles between bulls and bears leave a scarred
landscape of unique charting features. For example, gaps provide
one of the most profitable setups in all of technical analysis.
Continuation gaps rarely fill on the first try, except with
another gap. Use a tight stop and execute your trade in the
direction of support as soon as price enters the gap on high
Past breaks in support identify low risk short sales. The more
violent the break, the more likely it will resist penetration.
Head & Shoulders, Rectangles and Double Tops leave their mark
with strong resistance levels. These patterns often print
multiple doji and hammer lows prior to a final break as insiders
clean out stops at the extremes of the pattern.
Clear Air prints a series of wide range bars as price thrusts
from one stable level to another. Rapid price movement tends to
repeat each time that trading enters its boundaries. Potential
reward spikes sharply through these unique zones. But watch out.
Reversals tend to be sharp and vertical as well. Tight stops are
Pattern Cycles recognize that important features may not be
horizontal. What the eye resolves as uptrend or downtrend
contains multiple impulses shooting out in many directions. The
most common of these is the Parallel Price Channel. Use these
price extremes to enter contrary positions with stop losses just
on the other side of the parallel trendlines.