Trader’s Narrative

The following article is adapted from a brand-new 50-page ebook from Elliott Wave International. Learn more about The Ultimate Technical Analysis Handbook, and download your free copy here.

By Jeffrey Kennedy

When I began my career as an analyst, I was lucky enough to have some time with a few old pros.

One in particular that I will always remember told me that a kid with a ruler could make a million dollars in the markets. He was talking about trendlines. I was sold.

I spent nearly three years drawing trendlines and all sorts of geometric shapes on price charts. And you know, that grizzled old trader was only half right.

Trendlines are one the most simple and dynamic tools an analyst can employ… but I have yet to make my million dollars, so he was wrong — or at least early — on that point.

Despite being extremely useful, trendlines are often overlooked. I guess it’s just human nature to discard the simple in favor of the complicated.

(Heaven knows, if they don’t understand it, it must work, right?)

In the chart above, I have drawn a trendline using two lows that occurred in early August and September of 2003.

As you can see, each time prices approached this line, they reversed course and advanced.

Sometimes, soybeans only fell to near this line before turning up.

Other times, prices broke through momentarily before resuming the larger uptrend.

What still amazes me is that two seemingly insignificant lows in 2002 pointed the direction of soybeans — and identified several potential buying opportunities — for the next six months!

Get more lessons like the one above in the free 50-page Ultimate Technical Analysis Handbook. Learn more and download your free copy here.

Jeffrey Kennedy is the Chief Commodity Analyst at Elliott Wave International (EWI). With more than 15 years of experience as a technical analyst, he writes and edits Futures Junctures, EWI’s premier commodity forecasting service.

By Nico Isaac

In recent months, Elliott Wave International President Bob Prechter has become something of a household name. In the final two days of August 2009 alone, Bob was mentioned by several news outlets from MarketWatch to the New York Times. The claim to his “fame” –

EWI was one of the only technical analysis firms to anticipate a sharp rally in U.S. stocks as they circled the drain of a 12-year low this spring, a feat made ever more exceptional considering the widespread image of Bob as being the ultimate “Big, Bad Bear.”

The lesson? Believe in the facts, not in the “widespread image.”

Bob Prechter has always said that successful forecasting should look to the current wave count (and various other technical measures) for direction. He has never permanently tied himself to the mast of definition — i.e. “bull” or “bear.”

For this reason, EWI’s team of analysts have been able to stay one step ahead of the biggest turning points in the Dow Jones Industrial Average, from the very start of the index’s historic 2007 reversal.

To wit: This two-year chart of the Dow incorporates several calls from our past publications as they coincided with the market’s most memorable peaks and troughs:

For more analysis from Robert Prechter, download a free 10-page July issue of Prechter’s Elliott Wave Theorist.

The chart above presents the abstract details of our past analysis. Here is the expanded version of those insights as they appeared in real-time:

July 17, 2007 The Elliott Wave Theorist:

“Aggressive speculators should return to a fully leveraged short position now. We may be early by a couple of weeks, but the market has traced out the minimum expected rise, and that’s enough to act on.”

Soon after, as the DJIA neared its own historic Oct. 11, 2007 apex, the Oct. 9 and 10 Short Term Update amped up the urgency of its analysis and wrote:

“Odds have increased that a market high is in place. The structure, coupled with turns in the other markets, suggests a top is in place. The potential, at the least, is four a large selloff… Watch Out! The market faces a stout correction.”

Before landing at its March 10, 2008 bottom, the March 5 Short Term Update afforded respect to a bullish alternate count and wrote: “Prices should carry above the wave a high before it ends.”

At its four-month high, the March 16 2008 Elliott Wave Theorist went on high, bearish alert and wrote: The DJIA is entering “Free Fall territory.”

One week before the U.S. stock market landed at its 12-year low of March 9, our Feb. 27, 2009 Short Term Update utilized a traditional turning pattern to outline a specific time window for the onset of a major upside reversal. In STU’s own words:

“By all indication, this pattern is back on track… the turn will come on or near March 10, 2009. Anywhere in this time period may mark a turn, which will obviously be a market low.”

Once the bullish winds of change had turned, the March 16 Short Term Update wrote:

“When the market speaks, it behooves us to listen. The implications of this are that the… major stock indexes are in the initial stages of a multi-month advance.”

Finally, the April 2009 Elliott Wave Financial Forecast calculated a specific target range for the Dow’s rally: the 9,000-10,000 level.

So, now that the upside objective is met, where are prices set to go next? For more analysis from Robert Prechter, download a free 10-page July issue of Prechter’s Elliott Wave Theorist.

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

If you’re not familiar with Bullish Percent charts or how they are calculated, check out my previous post on How To Time the Market With Bullish Percent Charts. I use them to find inflection points, which is different than their creator’s intention.

The Nasdaq Bullish Percent Index reached a recent high of 51.36% and more importantly, it has hovered at or above the 50% level for 5 consecutive trading days:

Even more alarming, this is the corresponding level that we last saw in October 2007, just as the brutal bear market was about to descend into Wall St. In the past 10+ years, the Nasdaq Bullish Percent Index has had a tough time going higher than 50-60%. The only exception was in 2003 when we saw BPI pushed to 78% by the powerful new bull market.

So not only are we back to Bullish Percent levels where the bear market started, we are at levels which have historically marked tops in the equity market. The only justification for new long positions here, or continuing to hold on to existing long positions, is the expectation that we are going to see yet another powerful non-stop rocket ride as in 2003.

Anything is possible but considering everything, I think that scenario is highly improbable.

Free Access to EWI
By the way, don’t miss the chance to download the FREE 120 page report from Elliott Wave covering the US, European and Asian markets as well as interest rates, commodities, currencies and much more. This is the most recent edition of their comprehensive Global Market Perspective and is exactly what their regular paying clients receive. But it is only available free for just a few days. There’s no obligation to purchase anything and you only need your email. I’ll go over it shortly on the blog but get your copy while you still can.