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European Stocks: Putting Elliott to Work
A good example of how stocks transition from sideways to impulsive trends.
Chris Carolan, editor of EWI's Monday-Wednesday-Friday European Short Term Update is no spring chicken when it comes to market forecasting and trading. Below are his thoughts on the latest action in two of Europe's major stock indexes, the DAX and Dow Jones Euro Stoxx 50.
Putting Elliott to Work
Posted: Wednesday, June 17, 2009
People who build trading systems for a living will tell you that systems that work well in trending markets will break down when sideways moves occur. Likewise, non-trending systems that perform well in oscillating markets will get beat up when persistent trends set in.
The fact that markets alternate between trending and non-trending periods was, of course, observed by R.N. Elliott in the first half of the last century. Elliott’s model for market movements precisely identifies which type of market is in effect -- trending or non-trending; Elliott called these impulsive and corrective waves. One strength of Elliott wave analysis is its ability to pinpoint which type of move is underway -- information that system-builders will agree is very important.
My experience is that when people are first exposed to the Wave Principle, they want to know when fifth waves are about to end. But after some experience, the information that becomes most useful is "show me when a wave 2 is ending" -- because that’s the point right before strong and trending third waves start. More precisely, because wave patterns are fractal -- that is, self-repeating on all degrees of trend -- if you can find the "one-two, one-two" wave junctures, then you know that a "third of a third" wave is imminent. Those are the steepest and sharpest portions of a five-wave Elliott impulse wave, something you don't want to miss.
"Bottom Line: The sharp price break in European equity indices confirms that the corrective ... rally is over." Learn more now in EWI's European Short Term Update, risk-free.
The transition from a corrective, non-trending market environment to a "one-two, one-two" wave set-up isn't always easy to identify. But the past week has provided an excellent, real-time example of how markets transition from a corrective to a trending environment. On Monday [June 15], we wrote:
“Look for the equity markets to make it very difficult for bears to find reasonable entry points. This result is consistent with our wave counts which have many markets making one-two, one-two counts to the downside.”
Today [June 17], we’ve taken our wave labeling a few steps further, showing intraday charts for the DJ Euro Stoxx futures and the DAX index showing how the sharp recent breaks in prices are likely a third wave of a third wave... of a third wave of a third wave. The European equity markets have transitioned to the downside, and once again Elliott proved to be a useful guide in that process.