ELLIOTT WAVE

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Fibonacci studies: arcs, fans, retracements, and time

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Indicator

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Basic Technicals

MACD technical analysis MACD technical analysis stands for moving average convergence/divergence analysis of stocks.

Fundamental Analysis

Doubling Stocks Review: Is this a scam? If you are looking for the truth about doubling stocks this is a necessity. One always thought there was something wrong with a doubling of stocks.

Wednesday, February 3, 2010

Elliott Wave Theory_Trends

The cult of Elliott Wave Theory intimidates the most experienced traders. But don’t let wave voodoo stop you from adding importantelements to your chart analysis. Strong trends routinely print orderly action-reaction waves. EWT uncovers these predictive patterns through their repeating count of 3 primary waves and 2 countertrend ones.
Wave impulses correspond with the crowd’s emotional participation. A surging 1st Wave represents the fresh enthusiasm of an initial breakout. The new crowd then hesitates and prices drop into a countertrend 2nd Wave.This coils the action for the sudden eruption of a runaway
3rd Wave.Then after another pullback, the manic crowd exhausts itself in a final 5th Wave blowoff.
Traders can capitalize on trend waves with very little knowledge of the underlying theory. Just look for the 5-wave trend structure in all time frames. Locate smaller waves embedded in larger ones and place trades at points where two or more time frames intersect. These cross-verification zones capture major trend, reversal and breakout points.
For example, the 3rd wave of a primary trend often exhibits dynamic vertical motion. This single thrust may hide a complete 5-wave rally in the next smaller time frame. With this knowledge execute a long position at the 3rd Of A 3rd,one of the most powerful price movements within an entire uptrend. While waves seem hard to locate, the trained eye can uncover these price patterns in many strong uptrends.
Many 3rd waves trigger broad Continuation Gaps. These occur just as emotion replaces reason and frustrate many good traders. Since common sense dictates the surging stock should retrace, many exit positions on the bar just prior to the big gap. Use timely wave analysis (and a strong stomach) to anticipate this big move just before it occurs.
4th Wave corrections set the sentiment mecanics for the final 5th wave. The crowd experiences its first emotional setback as this countertrend generates fear through a sharp downturn or long sideways move. The samemomentum signals that carry traders into positions now roll over and turn against them. The greedy crowd ignites a powerful December rally in AMGN.

Note the embedded 5 wave patterns, typical with surging up trends. The 3rd of a 3rd identifies the most dynamic momentum expected in a sharp price move.
As they prepare to exit, the trend suddenly reawakens and price again surges. During this final 5th wave, the crowd loses good judgment. Both parabolic moves and aborted rallies occur here with great frequency. Survival through the last sharp counter trend adds an unhealthy sense of invulnerability into the crowd mechanics. Movement becomes unpredictable and the uptrend ends suddenly just as the last greedy participant jumps in.
When trend finally turns back through old price, skilled traders then use past action to identify effective momentum and swing trades. Battles between bulls and bears leave a scarred landscape of unique charting features. For example, gaps provide one of the most
profitable setups in all of technical analysis. Continuation gaps rarely fill on the first try, except with another gap. Use a tight stop and execute your trade in the direction of support as soon as price enters the gap on high volatility.
Past breaks in support identify low risk short sales. The more violent the break, the more likely it will resist penetration. Head and Shoulders, Rectangles and Double Tops leave their mark with strong resistance levels. These patterns often print multiple doji and hammer lows prior to a final break as insiders clean out stops at the extremes of the pattern.
Clear Air prints a series of wide range bars as price thrusts from one stable level to another. Rapid price movement tends to repeat each time that trading enters its boundaries. Potential reward spikes sharply through these unique zones. But watch out. Reversals tend to be sharp and vertical as well. Tight stops are advised.
Pattern Cycles recognize that important features may not be horizontal. What the eye resolves as uptrend or downtrend contains multiple impulses shooting out in many directions. The most common of these is the Parallel Price Channel.
Use these price extremes to enter contrary positions with stop losses just on the other side of the parallel trendlines.
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Pattern Cycles_Tops

Tops
No trend lasts forever. Inevitably, crowd enthusiasm outpaces a stock’s fundamentals and rallies stall. But topping formations do not end up trends all by themselves. These stopping points may only signal short pauses that lead to higher prices. Then again, they could be long-term highs just before a major breakdown.
What hidden patterns can you use to identify and trade reversals before your competition sees them? Successful short-term traders get in the reversal door early and allow the herd to trigger sharp price movement. Familiar trend-change formations, such as the Head and Shoulders and
Double Tops, take so long to develop that many profitable entries pass before they finally signal an impending break to the waiting crowd.
First Rise/First Failure offers traders an early method to identify reversals following new highs or lows in any time frame. FR/FF identifies the first 100% retracement of a dynamic trend move within the time frame of interest. In order for any trend to continue,
price movement should find support near a 62% retracement, measured from the starting point of the last thrust that pushed price to the new high or low. From this pullback, trend must base and test its extension before it can break out to further continuation highs or lows.
Cross-verification rings a loud bell. Note how the uptrend line broke on the same bar as the violation of the 62% fib retracement following
this late 1998 AMZN explosion. The familiar triangular shape of First Rise-First Failure makes identification easy when flipping through many price charts.
100% retracement violates the major price direction and terminates the trend it corrects. Completion also provides significant support/resistance, where bounce trades can be initiated with low risk. From this point, continuation trends may reawaken in the next larger time frame by a new break through the 38% (prior 62%) S/R and continued push past the 62% retracement, toward a test of the high/low extension.
Bounce reversals represent superb entry points when the 100% violation coincides with a 38% or 62% retracement of the next higher dynamic time frame. However risk: reward requires careful measurement, as the trade may develop more slowly than expected. In other words, a successful position must be held through expected congestion at the 38%-62% zone before it can access a profitable retest of the double top/double bottom extreme.
Allow minor testing violations for all major Fibonacci retracements before taking positions. Specialists and Market Makers know these hidden turning points and conduct stop-gunning exercises to take out volume just beyond the breaks. And watch out for trend relativity errors.Bull and bear markets exist simultaneously through different time frames. Limit FR/FF trades to the time frame for which the retracement occurs unless cross-verification supports other setups.Every popular topping formation has its own unique pattern features.But all tell a common tale of crowd disillusionment. Whether printed in the manic highs and lows of the Head & Shoulders or the slow capitulation of the Rising Wedge, the final result remains the same. Price breaks sharply to lower levels while unhappy shareholders unload positions as quickly as they can.
Early in a rally, value and improving fundam entals attract knowledgeable holders. But as an uptrend develops, the motivation for new participants becomes vastly different. News of a stock’s rise generates excitement and attracts a greedier crowd. These momentum players slowly outnumber the value investors and stock movement becomes more volatile. The issue continues upward as this frantic buying crowd feedson itself well beyond most reasonable price targets.
Both fire and ice will kill uptrends. As long as the greater fool mechanism holds, each new long allows the previous one to turn a profit. Eventually changing conditions force a final end to the upside action. A shock event can suddenly kill the buying enthusiasm, forcing a sharp and immediate reversal. Or the trend’s fuel just runs outas the last interested buyer enters one last position.
Many traders mistakenly assume bulls turn into bears immediately following a dramatic, high volume reversal. They enter short sales well before the physics of topping and decline rob the crowd of its momentum.In fact, these early shorts provide fuel for the sharp covering rallies seen in most topping formations.
Skilled traders wait and measure the process of crowd disillusionment before they enter large short sales. Decline characteristics can be predicted with great accuracy using pattern analysis. While they wait, the repeating character of the topping event provides a natural playground for swing positions.
Courtesy Copyright The trade@hardrightedge.com.This content copyrights protected by Alan Farley