Not long ago, while browsing a popular trading website, one of our analysts happened upon an article showing how stock markets might be approaching a top. This drew critics seemingly out of the woodwork. Judging by the tone of some of the responses, it was as if the author had described killer bees amassing on the southern border, or predicted that California would soon fall into the sea. The commenters didn't address the technical merits of the analysis. They just dismissed it as a "doom and gloom" Elliott Wave piece. Then we looked at some more articles from different authors who drew similar conclusions, and we saw the same kind of responses from certain readers. It's too bad, as the critics are overlooking ways to protect and possibly increase their own capital.
We at Trading On The Mark have been saying for several months that markets are showing "topping behavior," so clearly we're receptive to technical analysis that explores that. However the nature of the comments got us wondering -- was the reaction so strong because people are dismissive of bearish forecasts, or was it because people had some bad trading experiences with Elliott Wave? If you have an opinion on that, we'd actually appreciate your feedback in the comments here. Just keep the discussion polite, please.
Are equities nearing a top? Probably. After all, what do you expect to happen when all the available investor money has already gone into the market, and nearly everybody is long stocks? However, let's set that question aside, and instead address the reason readers are here -- they want to learn how to earn money in the markets. For those readers, we offer some general rules and some specific cases below.
Sometimes Elliott Wave methods can give you a working guide that helps you follow what the market is doing. If you trade that correctly, you profit. The thing that some traders might see as a drawback is that, at any given time, Elliott usually gives you multiple, incompatible answers. Often, the same market allows Elliott counts that appeal to the bulls and others that appeal to the bears. If you are trading with Elliott in isolation, and you have latched onto a particular scenario (i.e., if you are biased and trying to force the market), then most of your trades just earn you pain.
Similarly, even if your Elliott picture is basically correct, you can still lose money by trying to catch the tops and bottoms. Sometimes Elliott makes it fairly easy to find the turn, and we'll show some recent examples of that below. However, more often Elliott gives you a variety of places where the expected turn could happen. It's your job as a trader to watch those price levels and times closely and to find a good entry. The profitable trader usually employs one of two strategies: (1) enter a position near a "line in the sand" price level that, if crossed, will tell the trader that he/she is wrong, or (2) wait for confirmation of a turn based on moving averages, higher highs, higher lows, etc. and give the trade a wider stop.
Did you notice what we wrote there? It's the same thing you've heard countless times elsewhere. In general, you want to trade with the trend on whatever timeframe you're using. If you aren't doing that, then you aren't using Elliott methods well, and most of your trades are probably losing ones. Likewise, if you're trading like a "perma-bear," Elliott isn't helping you.
Let's look at a couple of recent trades where Elliott (used correctly) made some money for those who took them. Some readers might remember the following chart, which we posted in an article last December. The implication was that a trader could jump on a short trade, hopefully near one of the higher resistance levels shown, and would know to put a stop just above the prior high labeled as "c". Price went up after this chart was posted, but it stayed below the critical line. Then it went down, approaching some of our lower targets. Any trader who went short with just one copper futures contract, say around the 3.75 price area, is about $11,000 in the black right now and can probably expect that to increase substantially before the trade is complete. Hopefully you are one of those who took advantage of the setup. Of course, you need pockets that are deep enough to handle the fluctuations the market gives you along the way, and you need to choose a trading instrument that fits the size of your account.
As expected, copper has moved downward out of the triangle. In fact, it is approaching some of our new target areas.
Did the copper trade follow the trend? Mainly, yes. The trade was responding in part to a series of lower highs, and it would have been invalidated by a higher high. That's where the stop was placed.
Was the trade based exclusively on Elliott? Absolutely not. We had several additional reasons to believe that copper prices would decline, and we mentioned some of them in the December article.
Could a person really make money on trades like that? Yes! If you choose your Elliott setups carefully, watch for confirming signals, and set stops appropriately for the timeframe you are trading, then your risk and your potential reward are defined almost every time.
Let's look at a more recent example on a smaller timeframe. The following chart was posted for our intraday subscribers at 11 am on Thursday, August 8. It showed what looked like five clean waves down in the S&P 100 Index (symbol OEX), which should have been followed by a corrective set of three waves up. We were looking for a long trade on the expected wave "c".
At the end of the day, the chart looked like the one below, and we happily took profits before the closing bell. Note, we were actually trading the S&P 500 contract (symbol ES), even though we were charting OEX. Members who took the long trade came away with anywhere from 3 to 6 ES points ($150 to $300 per contract). You can see a report of our ES trades for the entire week in the next section of this article.
Was our Elliott Wave count of OEX correct? On the bigger timeframe, who cares? A good setup presented itself on the timeframe we actually trade (intraday), and it came with defined risk and defined targets. Elliott Wave, along with good trading practices and position management, turned that into a successful trade.
Technical analysis and trading both require a lot of practice to master, and there are many different approaches that work. We try to make use of several of them. We hope that any readers who are not familiar with Elliott Wave methods might be inspired to learn more about them.
Our daytrading week was reasonably successful, although not spectacular. By our estimate, a trader taking the relatively conservative trades we suggested would have come away with about $2,000 per ES contract at the end of the week. There were periods when we were uncertain of market direction, so we mostly stayed out of the market during those times. We tried to emphasize the safer trades, and the real-time comments we made for our subscribers are summarized in the chart below. Some of the trades were guided by Elliott Wave, and some were not.
Are you ready to move beyond bias and trade these volatile markets with confidence and objectivity? Do you want to learn how to trade multiple markets with a toolkit that has something for every market condition? At TOTM, we offer a subscription that's tailored to the needs of swing traders and another subscription that gives intraday traders a real edge in ES and other highly-traded futures contracts. Find the service that matches your trading style, and try it out for a month. Just watch how your perspective on the markets changes during that time.