Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Elliott Wave and the Stocastic Momentum Indicator

|Includes: SPDR S&P 500 Trust ETF (SPY)
How to Trade the Elliott Wave Patterns using the Stocastic Indicator. Ensign software offers an amazing set of studies that can be added to any chart. I was watching a daily chart of the SPY which is the ETF (Exchange Traded Fund) for the index called the S&P 500 which is a commonly followed US Stock Index. Let’s take a look at this chart. Below the SPY is the double Stocastic below that a single Ergotic and below that is the volume.

A divergence is when the market makes a new high and you can draw an upward sloping line from one peak to the other. On the same dates of the peaks on the price action charts you draw a line from peak to peak on the stocastic and the ergotic indicator and the slope of that line is down. Obviously this is true in a down market when the peaks are lower but the ergotic and stocastic peaks are higher.

Like driving a car, when you take your foot off the gas, the car continues forward and can even gain speed. But the gas is not on. The stocastic and ergotic show the momentum while the price action shows the direction. After you take your foot off the gas you might apply the break and come to a stop. Or.. you might push on the gas again and take off. In the same way the indicator will show the foot coming off the gas, but no indicator works all the time. However, coupled with a five wave impulse move the odds are pretty good and this can be a good setup.

The market made a wave 3 high on May 12 retraced  then made a lower high on May 12 as part of wave 4 and then made a wave 5 high on May 26. This is the interesting part. Look at the divergence on the stocastic chart. Each time the market rallied you could see it doing so on less and less momentum. A classic topping pattern leading to a huge selloff including the flash day.

This kind of Elliott Wave price action confirmed by literally watching the market run out of gas is a great trade setup.

By the way, look at the February low. The market came down and made a low, then rallied and then came down and made another low. But on the stocastic and the ergotic there was a higher reading (divergence).

Disclosure: none