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How do you choose one lesson from a basic tutorial that is chock-full of excellent information about Elliott wave analysis? You could browse through all 50 sections distributed over 10 lessons. Or you could do what some people do when they open a dictionary: let the book fall open and point your finger at a word. Sometimes you learn more from a random search than a deliberate one.

That’s exactly how I chose this excerpt from EWI’s Basic Tutorial to show how clear the writing and illustrations are. The one best place to start learning about wave analysis is this online tutorial, which is available to all Club EWI members — a membership that is free and that brings you many resources about the kind of technical analysis and forecasting that we do here at Elliott Wave International.

The topic that my electronic finger pointed to online when I opened the online Basic Tutorial was Lesson 6.2: Channeling Technique. These four graphs and the accompanying explanation give a tantalizing taste of what you can learn when you take The EWI Basic Tutorial.

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Excerpted from The EWI Basic Tutorial

Chapter 6.2: Channeling Technique

R.N. Elliott noted that parallel trend channels typically mark the upper and lower boundaries of impulse waves, often with dramatic precision. The analyst should draw them in advance to assist in determining wave targets and provide clues to the future development of trends.

The initial channeling technique for an impulse requires at least three reference points. When wave three ends, connect the points labeled “1″ and “3,” then draw a parallel line touching the point labeled “2,” as shown in Figure 2-8. This construction provides an estimated boundary for wave four. (In most cases, third waves travel far enough that the starting point is excluded from the final channel’s touch points.)

Figure 2-8

If the fourth wave ends at a point not touching the parallel, you must reconstruct the channel in order to estimate the boundary for wave five. First connect the ends of waves two and four. If waves one and three are normal, the upper parallel most accurately forecasts the end of wave five when drawn touching the peak of wave three, as in Figure 2-9. If wave three is abnormally strong, almost vertical, then a parallel drawn from its top may be too high. Experience has shown that a parallel to the baseline that touches the top of wave one is then more useful, as in the illustration of the rise in the price of gold bullion from August 1976 to March 1977 (see Figure 6-12). In some cases, it may be useful to draw both potential upper boundary lines to alert you to be especially attentive to the wave count and volume characteristics at those levels and then take appropriate action as the wave count warrants.

Figure 2-9

Figure 6-12

Throw-over

Within parallel channels and the converging lines of diagonal triangles, if a fifth wave approaches its upper trendline on declining volume, it is an indication that the end of the wave will meet or fall short of it. If volume is heavy as the fifth wave approaches its upper trendline, it indicates a possible penetration of the upper line, which Elliott called “throw-over.” Near the point of throw-over, a fourth wave of small degree may trend sideways immediately below the parallel, allowing the fifth then to break it in a final gust of volume.

Throw-overs are occasionally telegraphed by a preceding “throw-under,” either by wave 4 or by wave two of 5, as suggested by the drawing shown as Figure 2-10, from Elliott’s book, The Wave Principle. They are confirmed by an immediate reversal back below the line. Throw-overs also occur, with the same characteristics, in declining markets. Elliott correctly warned that throw-overs at large degrees cause difficulty in identifying the waves of smaller degree during the throw-over, as smaller degree channels are sometimes penetrated on the upside by the final fifth wave. Examples of throw-overs shown earlier in this course can be found in Figures 1-17 and 1-19.

Figure 2-10

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How a 3-in-1 formation in cotton “triggered” the January selloff
April 16, 2010

By Nico Isaac

For Elliott Wave International’s chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE– and no, we’re not talking business casual versus sporty chic. Trading “style,” as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is (and always has been) a “trend” trader, meaning: he uses the Wave Principle as his primary tool, with a few secondary means of select technical studies. Such as: Bar Patterns. And Jeffrey counts one bar pattern in particular as his favorite: the 3-in-1.

Here’s the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the “set-up” bar) engulfs the highs and lows of the last three bars. When prices penetrate above the high — or — below the low of the set-up bar, it often signals the resumption of the larger trend. Where this breach occurs is called the “trigger bar.” On this, the following diagram offers a clear illustration:

Now, how about a real world example of the 3-1 formation in the recent history of a major commodity market? Well, that’s where the picture below comes in. It’s a close-up of Cotton from the February 5, 2010 Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the New Year. Within a few day the trigger bar closed below the low of the set-up bar, signaling the market’s return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

February arrived, and with it the end of cotton’s decline. In the same chart you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a reliable for impulse patterns. Since then a winning streak in cotton has carried prices to new contract highs.

This example shows the power of a fully-equipped technical analysis “toolbox.” By using the Wave Principle with Bar Patterns, one has a solid, objective chance of anticipating the trend in volatile markets.

And in a 15-page report titled “How To Use Bar Patterns To Spot Trade Set-ups,” Jeffrey Kennedy identifies the top SIX Bar Patterns included in his personal repertoire. They are Double Inside Days, Arrows, Popguns, 3-in-1, Reverse 3-in-1, and Outside-Inside Reversal.

In this comprehensive collection, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Best of all is, you can read the entire, 15-page report today at absolutely no cost. You read that right. The limited “How To Use Bar Patterns To Spot Trade Setups” is available with any free, Club EWI membership.

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By Elliott Wave International

How much do you know about Bernard Baruch?

He’s mentioned in the foreword of The Elliott Wave Principle – Key To Market Behavior, A.J. Frost’s and Robert Prechter’s definitive book on wave analysis (emphasis added):

“Baruch, a multimillionaire through stock market operation and adviser to American presidents, hit the nail on the head in just a few words: ‘But what actually registers in the stock market’s fluctuations,’ he said, ‘are not the events themselves, but the human reactions to these events. In short, how millions of individual men and women feel these happenings may affect their future.’ Baruch added, ‘Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgments, their hopes and fears, strengths and weaknesses, greeds and ideals.’”

Prechter, the founder and president of market forecasting company Elliott Wave International, quotes Baruch again in his book The Wave Principle of Human Social Behavior:

Download 10 FREE Lessons on Understanding Crowd Behavior Using the Elliott Wave Principle here. Bernard Baruch knew the same thing about the markets as Robert Prechter: If you can understand the herding impulse driving the markets, you can understand the markets and even probabilistically anticipate future market moves. Get on the fast track to understanding market psychology — learn more about the FREE 10-Lesson Elliott Wave Tutorial here.

“All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking … our theories of economics leave much to be desired. It has always seemed to me that the periodic madnesses which afflict mankind must reflect some deeply rooted trait in human nature — a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea. It is a force wholly impalpable… yet, knowledge of it is necessary to right judgments on passing events.“

Baruch lived a long life (1870-1965). Baruch, My Own Story is a great read. He reminisces about J.P. Morgan, E.H. Harriman, “Diamond” Jim Brady, “Bet a Million” Gates and others; his was an interesting story to tell. Prechter shares Baruch’s viewpoint about how mass psychology relates to the market:

“As I see it, markets are people, and people never change.”
– Prechter’s Perspective

Bob Prechter is the world’s foremost practitioner of the Elliott Wave Principle. The Principle describes how the markets reflect changes in mass psychology — and how that psychology shapes market trends. Despite a common belief to the contrary, markets are not random. It’s been discovered, by repeated observation, that changes in mass psychology and therefore the markets are actually patterned. Let me repeat — changes in mass psychology and the markets are actually patterned.

Now, here’s the key to probabilistic forecasting: These patterns repeat themselves. That’s what makes markets predictable. Once you know what part of the pattern the market is in, you can make a probabilistic forecast as to where the market should go next.

“The mechanics of the patterns appear to reflect mathematical characteristics of a family of patterns found throughout nature.”
– Bob Prechter, Pioneering Studies in Socionomics

If a man who made multiple millions in the market believed in the power of mass psychology, you too may find it rewarding to discover the patterns of mass psychology which are developing this very moment.

Download 10 FREE Lessons on Understanding Crowd Behavior Using the Elliott Wave Principle here. Bernard Baruch knew the same thing about the markets as Robert Prechter: If you can understand the herding impulse driving the markets, you can understand the markets and even probabilistically anticipate future market moves. Get on the fast track to understanding market psychology — learn more about the FREE 10-Lesson Elliott Wave Tutorial here.

This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

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Dear reader,

What if you could look at a chart and instead of seeing what happened, you could see the potential trading opportunities that could happen.

Elliott Wave International (EWI), the world’s largest market forecasting firm, has just released a free eBook to teach you exactly that.

The How to Spot Trading Opportunities eBook features 47-pages of easy-to-understand trading techniques that help you identify high-confidence trade setups. Senior EWI Analyst Jeffrey Kennedy will show you how some of the simplest rules and guidelines have some of the most powerful applications for trading.

Created from the $129 two-volume set of the same name, this valuable eBook is offered free until April 23, 2010

Don’t miss out on this rare opportunity to change the way you trade forever.

Go here to download it now.

Warmest regards,
Aidil Azhar

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About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

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