How Watching Market Psychology Can Help You Time the Market
Elliott wave patterns in price charts reflect the struggle between the bulls and bears
Editor's note: You'll find a text version of this article below the video.
Two economic reports hit the newswires Thursday morning (March 6). Both were important, yet each one had the opposite implication for the trend.
The market chose one report over the other, and the question is, why -- and what can we learn from that?
Both reports came out at the same time, 8:30 Eastern on Thursday morning. One was from Europe, where the European Central Bank said that they, "...decided to keep the key ECB interest rates unchanged." That suggested that the European economy was getting stronger.
The second report was from the United States, where "...the weekly applications for jobless benefits fell to a three month low." That also was a sign of economic improvement.
Immediately after, the euro jumped to a new high for the year against the U.S. dollar. But why did the euro gain, and not the dollar? After all, the news from the US was also positive?
The answer comes down to understanding market psychology. All things being equal, it's the bias of the traders that determines the market's fate. The question is, how do you know what traders are thinking?
That's where Elliott wave analysis comes in. Wave patterns in price charts reflect the struggle between the bulls and the bears. So by tracking wave patterns, you can anticipate which side will ultimately win.
Let's take a look at what the waves were saying before the surge in the euro on Thursday. The day before, our Currency Pro Service told subscribers that the euro was forming a wave pattern called a triangle.
A triangle is pattern that moves against the primary trend, so when it ends, the old trend resumes -- in this case, up. On Wednesday, that allowed us to make a very clear forecast for the euro-dollar:
[Posted On:] March 05, 2014 03:27 PM
From nearby levels further consolidation through waves D and E [of the unfolding triangle] should set the stage for a thrust above 1.3824.
On Thursday morning, not only did the euro hit its Elliott wave target, it actually went as high as 50 points above it.
The lesson here is obvious. In the world of finance, where every day you have multiple news reports competing for your attention, focusing on market psychology goes a long way.
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This article was syndicated by Elliott Wave International and was originally published under the headline How Watching Market Psychology Can Help You Time the Market. 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.