The Elliott wave principle is a powerful tool used to forecast financial markets. I have been using Elliott wave analysis since 1995, first in the FX market, then on the T-bond and later on stocks and stock indexes. I knew right from the beginning that was the right tool to predict the market. I was not as confident in my analysis as I am today but I could see the market moving in cycles of five waves up and three waves down.
Take the stock market, the basic pattern is five waves up followed by three waves down (in a bull market or in an uptrend). In a bear market we have the opposite situation, five waves down followed by three waves up. What actually happens is not always like the basic pattern. There are extensions, triangles, wedges… all sort of variations which makes Elliott wave analysis not as simple as one would think.
Recognizing the pattern is one thing, timing is the other. You see a five-wave rally but where will it end? There is also the scenario where an extension occurs in one of the waves, this results in a longer five-wave move. As you can see just counting the waves does not always tell us when the move will end. I need other tools to help me time the end of a move so I created three types of indicators, a sentiment indicator, a timing indicator and trend reversal indicator (34-day BTI).
e-Yield sentiment indicator
The e-Yield sentiment indicator is a directional indicator (indicating the short term trend), I use this indicator to confirm the wave count. There are times when it’s not clear if the FTSE 100 is in a five-wave rally or in a five-wave decline. When the sentiment indicator is rising, it’s bullish therefore the wave count is likely to be five-waves up. And when sentiment is bearish we have the other situation, the trend is probably down and the decline will be in five waves. Statistics show that trading in the direction of the sentiment indicator increases the odds of making a profit, the indicator has a good track record at finding the short term trend.
e-Yield timing indicators
I developed two timing indicators, they both warn of a short term change of trend. What I mean is that when the timing indicator flashes a signal the FTSE 100 will change direction and the move will last more than a day and less than a week. For example in an uptrend the FTSE 100 does not move up in a straight line, when the largest companies by market capitalisation move up too fast, the pace of their advance will slow and they will pullback for a few days before moving higher. They become overbought and the timing indicator measures how overbought / oversold the top twenty stocks by market capitalisation are. When the blue chips pullback, the FTSE will pullback.
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