All Eyes on the FED
It seems the markets could be setting up for a reversal near or from the FOMC announcement.
Anyone that has watched the markets of late will note the obvious pattern now setting up, and one that I have been tracking as an alternative.
I left last week's article with this statement.
"There is another pattern that I am following as well, which implies a little higher than the target for the ending diagonal, but we will trade that accordingly, if the situation arises and the evidence supports it."
Well that alternative idea now appears to be working and the idea is now a triangle, which may need a bit longer to trace out.
Experienced Elliotticans well no doubt be reading this article, and know full well the pit falls of trying to trade a triangle.
I have a love/hate relationship with them.
There are a nasty pattern to try and trade and should only be traded by the most experienced of traders, and even then they are still tough work, but we have been using some great support and resistance areas & numbers of late.
Notice the vibration around the 75ES#.
The pattern if complete, calls for a gap up on Monday.
As its starts its 5th wave in a 5 wave sequence, the alternative is that the triangle is still ongoing needs a bit more time wasting before it mounts a suspected thrust higher.
Combined with the actual pattern, there still can be trades to make. For the less experienced trader, or when it gets too choppy and the volume is simply not there, the best trade is "no trade".
Knowing when to trade and when to press the trigger, simply can`t be learnt from reading trading books, it comes from years of experience and many failures along the way, the school of hard knocks teaches you a few things as well, but knowing when not to trade is equally as important as when to press the trigger.
Friday just gone was a classic example of when not to press the trigger and "burn tickets" and paying commissions to your broker in a 6 handle range.
So with the markets poised in a triangle pattern, there is still a few ideas of how this can still trace out, but being a triangle, lets Elliotticians know where we are within a sequence, as generally speaking in a 5 wave sequence triangles are seen in the 4th wave position.
So even if you have a little experience of Elliott patterns, knowing where triangles are generally seen in a sequence of waves, will likely get you an edge on the moves over the coming days/weeks.
The Bullishness extremes in sentiment, is generally seen towards the end of a trend, and with the US markets likely in triangle patterns, and in wave 4 of an Elliott 5 wave sequence, we likely still have a bit higher to go before a reversal will likely be seen in the markets. The NDX & COMPQ appear to be tracking a slightly different pattern.
Although you would think with the sentiment and euphoria surrounding what traders think the FED can actually do, the markets are about to launch to Dow 36,000 in the next week.
The one good thing about triangles, from a Elliott Wave perspective is the actual position, knowing that the likely position is a 4th wave, once the expected thrust pushes higher from the apex of the triangle the reversal is where the Bears/shorts can look to start to sell the rally we have seen over the past few months, i.e. at the top of the 5th wave, once a reversal is confirmed.
Of course no one dares to think about looking to sell the market atm, due to that everyone thinks this is "going to the moon".
However, regardless of it appears to be" going to the moon". I don't follow other people's opinions, I only follow price, and let the charts does the talking, we trade price, not opinions.
Remember traders/investors are generally the most bullish at the top of the trend, and just like back at the April 2010 highs, no one was thinking about selling.
But the contrarian trader that was waiting patiently for the moves to trace out, and a completed pattern was highly rewarded, once the trigger and confirmed confirmation kicked in.
Being a contrarian, also takes a special skill to blank your mind from the masses and opinions of many.
It's not easy to go against the grain of the public opinion, but it also requires you to have patience, and believe in your work, and wait for the trigger to confirm the reversal.
There is little point trying to pick bottoms and tops in the markets, you need to wait for a confirmed reversal to the current trend before jumping in.
Too many traders think they can pick a bottom or top, only it tends to lead to a busted account.
Being early is still wrong in my book, how much drawn down do you want to put on a trade?
50 handles? 100 handles?
Are trading, or are you simply gambling with no edge.
Why not wait for a reversal signal 1st?
So where does that leave us on the macro view? If the current trend, appears to be nearing a reversal.
Well I am working a few options on the long term counts but I will let price confirm or negate the ideas, and to be frank, I personally don't think that those long terms charts actually benefit many traders/investors.
If you get a degree wrong, or your wave count is the wrong count.
How long do you wait for an Elliott wave count to be wrong?
1 year, 5 years?
I simply fail to see the benefits of using Elliott Wave on such a level of scale.
In the author's opinion, the best use of Elliott wave is on shorter term time frames, of 15, 60 & 240 min charts.
This is what I have found over the years, coupled that with a few other techniques, I still do think using Elliott is an extremely useful tool, and it's sad to read others lacking faith in it.
But then if you are calling "wave 3 to hell every week" what do we expect?
Using Elliott Wave theory comes down to the skill of the user and his/her wiliness to admit early that the ideas are wrong.
Not having a perma bear or perma bull bias.
Trading a thesis about the Dow going to 3600 or 36,000, is something I find of no value, you won't read this sort of stuff in these articles, as quiet frankly I think those calls are as worthless as a chocolate teapot.
Get it right, and you milk it for the next few years, get it wrong and it gets forgotten very quickly.
I don't believe Elliott wave has the answers for those sorts of projections, of the Dow going to 3600 or 36,000.
This is one of the flaws of Elliott, and yes whilst there will be others that will profess it's the "be all and end all", I beg to differ.
Like every form of technical analysis it has flaw's and still up to the skill of the user.
It's not Elliott wave theory at fault "it's the end user"; there are plenty of technicians that trade Elliott wave theory extremely well in many different markets.
As traders should be aware. It's not earnings or the economy driving the markets higher, it's all about the US$.
The DX craps out lower, "risk" gets bought, it's as simple as that.
The media can spin it as much as they want, but technicians that are following the FX markets know that when risk gets bought and the carry trades are in sync and getting bought i.e. the AUD/USD & USD/CAD pairs, the US equity markets get a bid and go higher.
You will note the high correlation between the USD/CAD pair and SPX. This chart has done well for me over the past few years and kept me from looking for crashes when the evidence was not been shown in this chart.
So it seems foolish to me to try and pick a top in a market, when a market that trades inverse to it, is not showing any evidence of a reversal yet, nor has been for weeks.
Just using little edges like that help keep traders on the right side of the trend, however I have noted the lack of follow through to the downside recently on this pair, and I think the markets are finally starting to show some divergences and cracks, which is providing clues that a reversal looks more likely.
It was the same at the April 2010 highs, there were a few markets then showing the evidence that the US markets were poised to reverse, traders just need to find those clues.
Whilst traders have been chopped up to pieces over the past week, due to the sideways choppy price action, we at wavepatterntraders.com have been busy looking for other markets to trade.
We found this gem, early at the start of the week, and it was a real gem.
I highlighted a medium term idea over the weekend, and told traders that I was taking this idea to the markets on Monday and thought it offered a good opportunity to watch as this pair had just thrusted out of a triangle pattern and similar to what I think is setting up on the SPX/ES atm.
The expected reversal was going to be sharp, as that is what generally happens from a triangle thrust.
Well early on in the week, we started to see price action start to reverse and get impulsive, and I made it known to members that this looked like a great opportunity to trade on the short side.
By the end of the week it now looks like this.
Just by watching other markets, whilst traders have been getting chopped up to pieces, we got ourselves a trade, whilst most were pulling their hair at the lack of clarity trading the ES or NQ`s.
So what happens now???
Well as it's a 5 wave decline that looks near done, the risk is now to a reversal to the upside, and the short term charts appear to show an ending diagonal, so seeing a near 250 pip drop, it`s a poor risk trade, when the better trade will be to watch for a 3 wave corrective bounce towards the target zone.
As long as it behaves as a correction and shows the wave structure I want to see, and personality, then this would be another good setup to look to sell once the target and right look and structure is in place.
Members will be able to track this as well as the many other markets that I follow.
There are opportunities if you actually go out and find them, you can take Elliott to virtually any market.
If you are struggling for guidance or time, and don't have the time to find gems like this, then this is where we can help.
We do the homework for you, if a particular market is looking like a poor trading set up; we make it known to members that the odds are not in your favour, or we don't think it presents a good reward/risk trade setup.
Knowing when to trade the opportunities, requires the trader to trade the markets at the right time, when they are ripe for trading. Sometimes there is no trade when price action is choppy.
Traders that follow many markets get plenty of opportunities to trade whilst others get chopped up as we saw this week in the US markets.
The yellow metal has declined in 5 waves and we started out early this week looking for a potential 3 wave retrace towards the $1360 area.
We now think this is entering a setup for the sell side, if price action remains like this, although this can easily be broken and invalidate this idea, the key to this and every trading setup a trader takes, is to respect price action, and enter the trade at the lowest possible odds you can make.
No one knows the future, and whilst this looks valid today, it could easily be invalidated in the few hours or days.
Things do and will go wrong in the markets, sadly the easiest way to lose a lot of your money, is to hold on to an idea and failure to admit your were simply wrong.
With this idea going into next week, we know where the idea is wrong and also where it starts to look wrong, now whilst a wave count needs a complete 100% retracement of the prior move to invalidate it.
Being above a 78.6% retracement is pretty much where the Elliott count is likely starting to say the idea is looking wrong, a caution area is above the 61.8% retracement.
So this is where we use the caution area to limits losses.
We see no point in staying with a wave count if the idea starts to look wrong because the price action personality has changed, and the idea that you once thought has now changed.
Traders that realize this, get to stay in the game.
The biased trader that does not respect this gets burnt.
Such as we have seen, the bears trying to sell the US stock markets, over the past few months when the FX markets and the US$/DX were staying no to that idea.
The start of the week I made it known to members that I did not have a high level of confidence at the time, so suggested to wait a while and see how the markets setup a while later once I had some further price action to work with.
"As you can see its gone into a chop zone, and frankly I don't have anything I can pinpoint yet with a high level of confidence, so it's a case of sitting back and waiting for this pair to show its hand, and using the 13850-13830 support band as guidance in the near term.
When markets go into periods like this and you don't have any clear ideas, the best trade is "not to trade".
Well like the US equity markets, traders that follow both FX & equity markets, will note the high correlation to the DX and what is happening in the US equity and the FX markets.
Just by waiting for a little clarity we now have a better idea where the DX and this pair is likely going to go, and with the FOMC next week, I am sure there is likely to be fireworks, although I don't actually care for what Bernanke does, I only care for the reaction from traders and their reaction to the actual to the news, it's not the news that matters.
We are working 2 ideas here, as long as price stays above the 138 handle here, I am looking higher going into next week, the DX virtually mirrors this pair, so at this stage it appears the EUR/USD pair has higher to go. (Of course that could change and will we adapt, if price action confirms a reversal to the downside and breaks our key support areas).
Going forward we think the markets in many FX and equities are shaping up to see a reversal, and it's been an idea that shortly after on around the middle of this coming week will see that take place, although it is subject to a valid confirmation and other markets agreeing with that idea.
Using other markets to make a uniform view of the markets in general is what we do. Using that information we try to keep members on the right side of the trends.
It's not easy staying with the trend, and being a contrarian too early. Can also cause more harm than good.
Confirmation of a reversal is paramount to give the best odds of a trend change and a successful trade
Here are just a few ideas of what we did last week, and every weekend generally throws up a few setups, and whilst I can never be sure the markets will presents themselves opportunities as we saw last week.
By looking at a number of markets gives the active trader/investor opportunities not to get dragged into trading chop, as I am sure most traders who were trading the US markets the past week were.
At wavepatterntraders.com we make it our business to go and find patterns and setups, so members are not stuck twiddling their thumbs whilst waiting for patterns like the triangle seen in many US markets currently.
Currently new members can sign up for a 2 week trial to test drive the site, and see if my work can help in your trading and if it meets your requirements.
If you don't like what you see, then drop me an email within the 1st 2 weeks from when you join, and ask for a no questions refund.
You simply have nothing to lose.
Until next time.
Have a profitable week ahead.