"When you have eliminated the impossible, whatever remains, however improbable, must be the truth." Thus eloquently spoke Sherlock Holmes to his constant companion, Dr. Watson, in Arthur Conan Doyle's The Sign of Four. This advice is a capsule summary of what you need to know to be successful with Elliott. The best approach is deductive reasoning. By knowing what Elliott rules will not allow, you can deduce that whatever remains is the proper perspective, no matter how improbable it may seem otherwise. Unfortunately for many, this provides thought and work and rarely provides a mechanical signal.
The practical goal of any analytical method is to identify market lows suitable for buying (or covering shorts) and market highs suitable for selling (or selling short). When developing a system of trading or investing, you should adopt certain patterns of thought that will help you remain both flexible and decisive, both defensive and aggressive, depending upon the demands of the situation. The Elliott Wave Principle is not such a system, but it is unparalleled as a basis for creating one.
(Source Elliott Wave Principle)
If you do not believe what you see, you are likely to read into your analysis what you think should be there for some other reason. The logic in forming a system around different forms of technical analysis is for one simple reason "to remain objective in a world of uncertainty."
The solution is to focus on the degrees that are the clearest. If the hourly chart is confusing, step back and look at the daily or weekly chart. Conversely, if the weekly chart offers to many possibilities, concentrate on the shorter term movements until the bigger picture clarifies.
This chart below is in 4 different time frames. The company NCX
NOVA Chemicals Corporation produces commodity plastics and chemicals worldwide. It operates in two segments, Olefins/Polyolefins and Styrenics. The Olefins/Polyolefins segment produces ethylene, which is used in the manufacture of polyethylene, styrene, polystyrene, and polyvinyl chloride; and polyethylene, which include high-density polyethylene, low-density polyethylene, and linear low-density polyethylene. It also offers energy co-products, such as benzene, propylene, crude C4 hydrocarbons, C5 dienes, dicyclopentadiene, aromatics, C9 resin oils, and hydrogen; and chemical co-products, including diesel fuel, gasoline components, home heating oils, and industrial fuels. The Styrenics segment produces styrene monomer and styrenic polymer resins. NOVA Chemicals serves customers that produce consumer, industrial, and packaging products. The company markets its products through its sales force; and distributors, agents, and traders. NOVA Chemicals was founded in 1954 and is based in Calgary, Canada.
Friday, February 19th 2007
Weekend Update - How to Pick a Swing Trade According to the Trending123 Method - NCX Charts
In this particular update I want to go over how I choose a stock for the portfolio and discuss the criteria for stock picking in general. I will also discuss how I define risk reward, what patterns are deemed to be the most reliable, how to set stop losses, and how to determine which sectors money is flowing into. This will be explained as I discuss the various charts of NCX.
The benefits of Using Technical Analysis for selecting Stocks
To start off, I will discuss some of the principles of Elliott Wave Theory and how to pick a good stock. The benefit of using technical analysis is that it has rules and criteria to follow which enforces objectivity in stock selection. Technical analysis give you a specific system to follow in selecting good stocks. Charts never lie and they will always tell you the real story in a constantly fluctuating and often confusing / conflicting market environment. The benefit here is that it gives you clarity in stock selection.
Elliot Wave Theory - Impulse Waves and Corrective Waves
According to Elliot Wave theory there are two types of waves they are Impulsive and Corrective waves.
Impulse Waves - are always identified by numbered waves. There are always 5 waves to an impulse move, for example wave 1 to wave 2, wave 3 to wave 4, wave 4 to wave 5. A stock is always in an impulse wave move up, or an impulse wave move down. Within each impulse wave move, a corrective lettered wave will always occur. When a stock is at all time lows you will know that it is in an impulse wave move down. When a stock is at all time highs you know the stock is in an impulse wave move up. The basic tenant to Elliot Wave theory, is that each impulse wave can never overlap a previous impulse wave. Impulse Wave 1 and impulse Wave 4 can never overlap each other. Furthermore, impulse wave 2 to impulse wave 3 is always the strongest, longest and fastest impulse wave out the 5 waves. The 3rd wave will typically give you the quickest and most profitable gains. Therefore, it is helpful to select the stocks that are in an impulse 3 wave move. In addition, the strength in the RSI and PPO will always match each impulse wave. The highs in the RSIand the PPO will always occurs in the 3rd impulse wave.
Corrective waves - these waves are always identified by letters and they always occur within an impulse wave move up or down. Typically the corrective waves occur in an ABC zig zag or and ABCDE contraction into a geometrical shape such as a triangle. When stocks are not at all time highs or lows it is then it is in a corrective wave.
Trending123 Trading Method
My Trending123 trading method employs the use of trends, waves and patterns in addition to the basic tenants of technical analysis and combines them all together in order to identify which stocks to trade. My goal in creating this method is to simplify technical analysis into something that easy for you to understand. I like to use all three methods of technical analysis because I do not believe that using just one method of technical analysis alone is objective enough. Being able to identify the primary trend, the current wave structure as well as the pattern gives you a much more precise and more objective picture of what a stock is doing. The technician's job is to determine to what the primary trend is and to what degree a stock is correcting off of the highs or correcting off the lows in the wave structure. The patterns will determine whether a stock is bullish or bearish and whether it is going to break to the upside or to the downside. Finally the indicators and oscillators will confirm and conform to the bullish or bearish trend, wave structure and pattern in a chart. That is why we have waves, patterns and trends in technical analysis.
How Short Interest is Determined - Short interest is just off of all time highs for NCX, but the days to cover is at new highs. Keep in mind that the days to cover has increased because the average daily volume has dropped off in the stock. The lower the average daily volume determines how many days to cover. To determine how many days it takes to cover, they divide the average daily volume into the actual short interest and how long it would take for the position to unwind.
Nova Chemicals Corp. - (NCX) Monthly Chart - Falling Wedge Reversal Breakout Pattern - Chemicals Sector - Optionable The monthly chart illustrates that NCX has just broken out of the falling wedge reversal this month. I like to look at the monthly chart first because I want to see what the big picture is of a stock that I may pick. The further out in time you go when looking at a chart the more clarity you get as to the trend, wave structure and pattern a stock is in.
Now let us discuss wave structure. What I want to point out here, is that you can clearly see that NCX is 5th wave move up. How was this determined? By being able to identify what the current wave number is, you can then determine what the overall wave structure is. Since we already know that wave 2 to wave 3 is the longest wave out of the five, which we can see clearly on the chart, and we also know that wave 3 to wave 4 contains a corrective wave in the form of a falling wedge, and we know that wave 4 can never overlap wave 1. Consequently, like Sherlock Holmes, we can then deduct with logic, that NCX is now in a 5th impulse wave up move. Furthermore, you can see that all the waves in the chart conform to Elliot wave rules. In addition, we also know that the falling wedge reversal pattern is a bullish continuation type pattern.
The pattern then also confirms the wave structure. On top of that information, we also know that the PPO and RSI always match the wave structure and you can see that the RSI and PPO topped at wave 3 and is now bottoming at wave 4. The indicators and oscillators on the monthly chart are still in a bearish trend reversal that coincide with a counter trend pullback that the corrective wave 3 to wave 4 represents. Since NCX has broken out of the bullish falling wedge to begin the 5th impulse wave move up and we already know that wave 5 cannot exceed the length of the 3rd impulse wave move up, then we can determine that the price target would be around 58.00.
How do we know where to enter the stock. As a general rule, after a stock breaks out of a down trend or corrective wave pattern, it will back test the broken down trend line before it resumes it's uptrend. We always want to get in on that back test because it reduces our risk to reward ratio. Naturally, you always want to get into a stock after the lows have been placed and reconfirmed, and where you still have a high risk reward ratio, of greater than 3 to 1. Consequently if we enter the stock on the back test to the low 30's and the price target is almost 25 top 28 points away, then we only risk $4.00 in order to make $25.00. The downside risk is low versus the upside reward of almost 100% gains.
How do we know where do we place our stop? We set our stop based on the wave structure and the pattern. Again, since we know that wave 4 can never overlap wave 1, then we would want to place our stop at the last low. This would be in the $26.09 area. If NCX fell below $26.00 then we would know the pattern trend and wave structure were broken and as a result we would be stopped out of our stock due to wave structure and pattern failure. Furthermore, the stop is based on the monthly chart for the swing trade because you do not want to get stopped out prematurely.
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