S&P Traders: How "Simple" Trend-Following Can Get You Into Trouble

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S&P Traders: How "Simple" Trend-Following Can Get You Into Trouble
And a real-life example of how Elliott wave analysis can indeed "improve your trading"

By Vadim Pokhlebkin
Wed, 30 May 2012 17:00:00 ET

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In the report, EWI's senior analyst Jeffrey Kennedy shows 5 ways that Elliott wave analysis can help traders make better decisions. Here's point #3:

…3. As R.N. Elliott observed back in the 1930s, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal. How is this information useful? It helps you 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 that this is not the time to add to long positions. Instead, depending on one's trading style and objectives, it may be time to close an existing position, or even reverse to the short side.

What brought this to mind was the price action in the S&P 500 on May 29 and 30. If you remember, on Tuesday the 29th the S&P 500 closed trading about 15 points higher. For some S&P and E-Mini S&P trend-followers unfamiliar with Elliott wave analysis, a day of solid gains might have looked like a start of a new trend to "befriend."

But here is what Elliott wave traders saw as the S&P was booking the May 29 gains -- especially the subscribers to our U.S. Intraday Stocks Specialty Service. This chart went live at 2:48 PM (some Elliott wave labels removed for this article):

S&P 500 (Intraday)

Posted On: May 29 2012 2:48PM ET / May 29 2012 6:48PM GMT

Last Price: 1326.57

Here's what this chart told you in late trading on May 29:

The rally off the low labeled wave (iii) has been choppy and overlapping -- which is the definiton of an Elliott wave correction (either a wave II or wave iv -- same trend implications). Corrections go against the larger trend, so the next move was likely to be down. On May 30, the market indeed went south, disappointing trend-followers who thought the May 29 rally was their "friend."

That's a real-life example of Elliott wave analysis in action. Our U.S. Intraday Stocks Specialty Service has the latest updates online now.

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Tags: Elliott wave, Elliott Wave trading, S&P 500, technical analysis, trade targets, Traders, trading lessons

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The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.