Scaling the Mountain of Market Forecasting One Elliott Wave “Rope” at a Time
2 very different Nasdaq stocks with 1 thing in common: Elliott wave analysis foresaw their 2022 freefalls!
by Nico Isaac
Updated: December 01, 2022
A few months ago, I joined a Zoom interview with Full Circle -- the first all-black mountain-climbing team to successfully reach the top of Mount Everest. To me, this is an unimaginable feat. You could add up the total vertical distance I've scaled in my entire life, and I doubt it would equal one-tenth the 29,035-foot ascent of Everest.
When asked the question, "What was the most challenging part of the climb?" members of the Full Circle team didn't hesitate. It wasn't the hypothermic wind chill or trying to sleep on a razor's cliff edge. It wasn't longing for family or fear of failure. It was fighting the deadly urge to "peak chase."
To paraphrase the climbers, peak chasing is the blind-drive to reach the mountain's top with no regard for the "middle miracles," such as sharing meals with the Sherpa's or standing beneath a star-filled sky. At its worst, chasing peaks could be deadly, as the urge to make history causes a climber to push beyond his/her biological limits.
Traders know this feeling all too well; the competitive urge to chase market peaks (and bottoms) at the expense of "lower" opportunities. If I ventured to guess, I'd say this method works for about as many traders a year as the number of people scaling Mount Everest.
Successful trading requires the same discipline: To take slow, measured steps and appreciate the setups that present themselves along a trend's unfolding. Here, technical market analysis, of which the Elliott wave model is one, provide a seismic advantage.
Take, for instance, this year's performance in two leading Nasdaq-listees: Arrowhead Pharmaceuticals (ticker symbol ARWR) and Focus Financial Partners (FOCS).
First, Arrowhead. In January, the pharmaceutical sector was at the frontlines of the effort to fight the Covid pandemic. On January 17, Seeking Alpha wrote:
"Accumulate Arrowhead for its RNAi Pipeline. Arrowhead Pharmaceuticals is near its most attractive price since mid-2020. That makes it a good time to evaluate the company for its future potential."
One day later on January 18, Fool.com listed Arrowhead as the first of "3 Biotech Stocks that Could Go Parabolic in 2022."
The article emphasized Arrow's potential to "generate life-changing returns for shareholders," as "a plethora of major catalysts make it a screaming buy right now."
You can almost sniff the icy, thin air in Arrowhead's anticipatory altitude. But on January 6, our Trader's Classroom showed this chart of ARWR, which identified a long-term head-and-shoulders pattern embarking on its final descent toward a break of the neckline.
This was not a peak-chasing setup. The "head" of ARWR's rally was long since passed. But the opportunity to catch a sizable movement down was very much alive. In the January 6 Trader's Classroom, we outlined the bearish potential:
"Once we fall below the neckline, ideally that will set the stage for something more significant to the downside and we're going to fall all the way back down to the neckline measurement, which comes in around $20 a share."
And this updated chart of ARWR shows how prices followed the bearish script to the letter:
Next let's turn to Focus Financial Partners, a smallish (well, turns out 80 employees and $1.8 billion net worth goes for small these days) independent investment firm. Again, as 2021 came to an end, the wealth management industry seemed to be running on plenty of cylinders amidst continued pandemic-fueled economic uncertainty.
Focus itself even made the December 10, 2021 cover of Barron's for its $4.7 billion merger with a notable Virginia firm:
But again, the message of the mainstream financial pundits versus the patterns on the company's price chart told two very different stories. On January 6, Trader's Classroom also showed this chart of Focus's stock FOCS, which identified two reasons to expect the months'-long weakness to continue.
There, Trader's Classroom editor Jeffrey Kennedy explained:
"My eyes caught this chart of Focus Financial Partners. I'm not sure what they do, but we have the break of the lower boundary line of the corrective price channel... [Also] a double failure swing high.
"It does look like we've put in a significant peak. Things don't look skippy moving forward. So keep in that in mind. Where am I wrong? That's always the most important question you can ask yourself. If we get back above here of 62.24."
And this updated chart of FOCS shows what followed:
When climbers ascend Everest, they go into it knowing that one small misstep can result in a deadly fall to the mountain's bottom. But the technical model of Elliott wave analysis provides an arsenal of safety measures that enable traders to manage risk along the way.
See below to scale new heights in your understanding of market trends today!
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