by Nico Isaac
Updated: January 12, 2017
Imagine you're on an airplane, mid-air, when the intercom from the cockpit accidentally turns on. You and the entire cabin crew overhear the pilot say this to his copilot:
"I know we're heading northeast at 430 mph. But... I have no idea when or where I'm supposed to land."
That's when you cough up your bag of peanuts!
Dramatic? Sure. Imaginary? Yes. But it also happens to conjure the real limits of mainstream financial analysis. It has no trouble identifying the current underlying trend in a financial market but is often entirely adrift as far as anticipating when or where that trend will end.
This is where the Wave Principle rises above the fold. Elliott wave analysis recognizes 13 wave structures that comprise the price patterns of financial markets. Each pattern conforms to objective rules and guidelines that help you -- the investor or trader -- determine not only what price point the pattern will likely end, but also where the next opportunity will begin.
In terms of Elliott wave structures, one pattern above all else signals the current trend will soon initiate its descent: an Ending Diagonal, a five-wave pattern that can only form in the final position of a wave sequence -- i.e., wave 5 of an impulse, or wave C of a correction.
Most importantly, when this pattern ends, it's followed by a swift and powerful reversal that retraces the entire length of the diagonal. Here's its idealized diagram, in bull and bear markets:
You can't fully appreciate the wonder of ending diagonals until you see them in a real-world financial market -- or pair of markets, in this case: Two popular European exchange traded funds, Germany's EWG and France's EWQ.
At the start of December 2016, both of these funds were mired in powerful declines to five-month lows. But in our December 2 European Short Term Update, editor Chris Carolan identified one main reason why the funds' selloff was coming to an end: ending diagonals:
"The regional ETFs present some interesting potential wave structures here. At a time when most indices were drifting sideways, these products were declining in five-wave patterns.
"The French and German ETFs both show completed diagonals with multiple bullish RSI divergences close to the fifth-wave lows. The implication here is that these ETFs are poised for corrective rallies now."
One week later, the December 9 European Short Term Update captured the beginning of the post-triangle rally that followed:
On January 11, both the EWG and EWQ hit their highest level in 14 months!
Exchange-Traded Funds have offer a clear advantage: They let you easily invest in or trade securities that otherwise may only be available via futures or other derivatives.
For that reason, in their relatively short lifetime ETFs have become a wildly successful investment alternative. Case in point: Between 2014 and 2016, global ETFs went from just under $2 trillion to over $3 trillion in total price value.
Identifying a clear Elliott wave pattern on the price charts of those ETFs -- well, that's priceless.