What's the Best Way to Catch a 3rd Wave Early?

Dana: Hi, I'm Dana Weeks and joining me today is Jeff Kennedy, Elliott Wave International's Chief Commodity Analyst and Editor of Commodity Junctures and Trader's Classroom. Good to see you, Jeff.

Jeff: Hello, Dana.

Dana: I want to look a little closer at trading with Elliot Waves today and to begin with, how can you tell if there's a third wave early in formation, or rather another one two sequence forming?

Jeff: That's actually an excellent question, Dana. Typically, if we're working say after a five wave move up and a three wave decline for waves one and two, if we immediately move into wave three, then the angle of that advance, many times, will be much more steep than what was experienced in the initial wave, or wave one. Now, if you were actually working a series of ones and twos, for example one two, one two, and that would give way to a wave three of three price move, which would be very volatile where prices move very, very far in a very short period of time. Typically what we see in both of those wave two corrections will be a similar pattern. For example, wave one up followed by a zigzag and then another wave one up followed by another zigzag. Often times, that's a clue to Elliotticians that you're about to embark on a wave three of three price move.

Dana: Okay, so in a third wave, are there other tools that you use to help confirm that it is actually in fact a third wave?

Jeff: Oh, absolutely. One of the things I look at more from a technical perspective or momentum perspective is I like to see very high RSI values, above 65, 70, 75. Those types of momentum readings provided by RSI are good indication that you are indeed in a third wave price move. Another thing I like to look for would be candlesticks that have very large or very long real bodies. That's also another clue that you're in a wave three price move.

Dana: And finally, Jeff, how do you determine if a fifth wave is likely to extend, which is often the case in commodities?

Jeff: Excellent question, and that's one I often receive. For me, the biggest clue is volume. Many times, when you're working just straight impulsive move to the upside for example, waves one, two, three, four, and five, typically you'll see most volume, or the most volume, in your wave three price move. And then, as prices pull back and begin to advance in wave five, you'll see volume actually diminish. Well, if you're working a five wave move where you may have say, for example, that fifth wave extension that you spoke about, then one of the clues that we can look at is volume, because if volume is greater in that fifth wave move, odds are it will indeed extend.

Dana: Turning to the markets, your call for upside in cotton really seems to be playing out. Is the market close to a top yet?

Jeff: No, it's not.