This Analysis Will Change The Way You Invest Forever - Part 6

Dec. 31, 2018 8:00 AM ET65 Comments104 Likes

Summary

  • Oversold or overbought technical conditions are not always what they seem.
  • We use technical indicators to help us identify the correct Elliott Wave count.
  • When used together, Elliott Wave and technicals can identify turning points in the market.
  • This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard. Start your free trial today »

Marrying Elliott Wave Analysis And Technical Indicators

This will be the final installment of a six part series I have recently penned on Seeking Alpha about Elliott Wave analysis. In this installment, we will address how to use technical indicators to assist with our wave count.

I often shake my head when I hear an analyst point to a technical indicator which has reached an oversold reading, and then proclaim we are now going to bottom because this indicator has reached a point of being oversold. Anyone who has any experience in the market using technical indicators knows exactly what I am talking about.

In fact, the great majority of the time, you will see the market continue to sell off despite this indicator having already hit a point of being oversold. But, how can that be?

As I have said many times before, I know of no other analysis methodology which provides better context to understanding the market than Elliott Wave analysis. Back in the 1930s, R. N. Elliott theorized that markets move through five waves in a primary trend, and three waves in a corrective trend. So, when a five-wave structure is nearing completion, you have the context within the market to be able to prepare for a reversal of the trend.

Within that five-wave structure, the third wave is, technically, the strongest segment of the five-wave structure when we are dealing with equities and equity markets. (Commodities often present with the fifth wave being the strongest).

That means one must first understand that the chart you are focused upon is in a third wave. When that third wave is pointing down, it means the market not only hits the oversold condition, at which time many analysts will prematurely declare a bottom, it usually means that the technical indicator will become embedded within that oversold state. In other words, just because an indicator strikes an oversold state does not mean the market will turn back up. Rather, it may mean the indicator becomes embedded in this state as price continues lower while in the heart of a third wave decline.

We see embedded technicals most commonly within the third wave of the third wave. Remember, because the market is fractal in nature, waves 1, 3 and 5 within Elliott’s five-wave structure are each comprised of five-wave sub-structures. Therefore, the third wave itself also develops as a five-wave structure.

Within the five-wave structure of the third wave, the third wave of this sub-structure is where we see technicals embed. Once the technicals move out of the embedded status, it often signals that we are seeing a fourth wave within that third wave five-wave structure, which sets up the market to drop again in price to lower lows in a fifth wave, but the technical indicator will only see a positive divergence where price strikes a lower low but the indicator does not. This tells me that the market is completing the fifth wave of that third wave down.

Once the market provides us with a first indication of positive divergence, it often means that the market has now completed the third wave down. Thereafter, I would expect a fourth wave “bounce,” which will develop further potential divergence in the technical indicator. That means that when we drop to complete the fifth wave to the downside, the market will exhibit a second positive divergence, which will then signal we are completing the five-wave structure to the downside.

At the end of the day, it means we need to see two positive divergences in a technical indicator to suggest the market is bottoming in 5 waves to the downside, which should then have us ready for a trend change. This type of structure, supported by the technicals as noted above, is often a very strong indication that the market is nearing the point of a strong trend reversal.

And, of course, the same applies when tracking a market or stock rally, but in the opposite manner.

While I have seen comments through the years regarding how Elliott Wave analysis was akin to tarot card reading, I hope that this six-part series has opened your eyes as to how Elliott Wave analysis, coupled with our Fibonacci Pinball method and supported by technical analysis, provides a very objective perspective into tracking market sentiment, which I believe is the true driver of market pricing.

For those interested, here are Part 1, Part 2, Part 3, Part 4, and Part 5.

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This article was written by

Avi Gilburt profile picture
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The #1 Service For Market and Metals Direction!
Avi Gilburt is founder of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis with over 6000 members and almost 1000 money manager clients. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition.

Avi is an accountant and a lawyer by training. His education background includes his graduating college with dual accounting and economics majors, and he then passed all four parts of the CPA exam at once right after he graduated college. He then earned his Juris Doctorate in an advanced two and a half year program at the St. John’s School of Law in New York, where he graduated cumlaude, and in the top 5% of his class. He then went onto the NYU School of Law for his masters of law in taxation (LL.M.).

Before retiring from his legal career, Avi was a partner and National Director at a major national firm. During his legal career, he spearheaded a number of acquisition transactions worth hundreds of millions to billions of dollars in value. So, clearly, Mr. Gilburt has a detailed understanding how businesses work and are valued.

Yet, when it came to learning how to accurately analyze the financial markets, Avi had to unlearn everything he learned in economics in order to maintain on the correct side of the market the great majority of the time. In fact, once he came to the realization that economics and geopolitics fail to assist in understanding how the market works, it allowed him to view financial markets from a more accurate perspective.

For those interested in how Avi went from a successful lawyer and accountant to become the founder of Elliottwavetrader.net, his detailed story is linked here.
Since Avi began providing his analysis to the public, he has made some spectacular market calls which has earned him the reputation of being one of the best technical analysts in the world.

As an example of some of his most notable astounding market calls, in July of 2011, he called for the USD to begin a multi-year rally from the 74 region to an ideal target of 103.53. In January of 2017, the DXY struck 103.82 and began a pullback expected by Avi.

As another example of one of his astounding calls, Avi called the top in the gold market during its parabolic phase in 2011, with an ideal target of $1,915. As we all know, gold hit a high of $1,921, and pulled back for over 4 years since that time. The night that gold hit its lows in December of 2015, Avi was telling his subscribers that he was on the phone with his broker buying a large order of physical gold, while he had been accumulating individual miner stocks that month, and had just opened the EWT Miners Portfolio to begin buying individual miners stocks due to his expectation of an impending low in the complex.

One of his most shocking calls in the stock market was his call in 2015 for the S&P500 to rally from the 1800SPX region to the 2600SPX region, whereas it would coincide with a “global melt-up” in many other assets. Moreover, he was banging on the table in November of 2016 that we were about to enter the most powerful phase of the rally to 2600SPX, and he strongly noted that it did not matter who won the 2016 election in the US, despite many believing that the market would “crash” if Trump would win the election. This was indeed a testament to the accuracy of the Fibonacci Pinball method that Avi developed.


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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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