Once again, I sit down to speak with Jeffrey Kennedy, Elliott Wave International's Senior Commodities Analyst and editor of Daily Futures Junctures, a service that brings you daily opportunities in commodity markets.
Vadim Pokhlebkin: Jeffrey, while trading commodity futures and investing in commodities are two different things – mainly, from the time horizon standpoint – when it comes to risk management, the approaches one could use are similar, wouldn't you agree?
Jeffrey Kennedy: Yes, I think so. In both cases, you could -- ahead of time -- identify critical support and resistance levels that may help you stay on track.
VP: Support and resistance? Can you explain?
JK: Simply put, resistance levels are "price ceiling" points that are likely to provide resistance to a trend, while support levels provide "price floor." For example, in a bull market, if the price stays above your support levels and blows through resistance points with ease, things are going well.
VP: And how do you identify those levels?
JK: Well, it takes a lot of hard work; that's a lot of what I do in my Daily Futures Junctures for various commodity markets. I typically use a three-prong approach that is based almost entirely on Fibonacci-calculated proportions between market moves – or waves, as we, Elliotticians, call them. For example, if you look at an idealized diagram of the basic Elliott wave sequence, I can tell you that, at least in commodities, second waves typically retrace .618 percent of first waves. Fourth-wave corrections, on the other hand, tend to retrace .328 or .500 of third waves. All those numbers are Fibonacci ratios.
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VP: And how exactly do I use these Fibonacci ratios to come up with support and resistance levels?
JK: I explain my three-prong approach to my subscribers in some detail in the June 11 Daily Futures Junctures, using Lean Hogs futures as an example. But in short, it involves zooming in closer and closer on the smaller Elliott wave structures within the larger ones and continuously measuring Fibonacci ratios between waves. It's tedious, but doable, and it will likely prove to be worth your time – regardless of whether you're a long-term investor or a short-term speculator.
VP: Thanks, I'll be sure and look for that in tonight's DFJ. Can you recommend any other source that teaches support and resistance techniques in more detail?
JK: Sure. As you know, I regularly include Elliott wave lessons in my Monthly and Daily Futures Junctures. Over the years, subscribers have seen a few dozen of them; probably more. Lessons V and VI of my Trader's Classroom Collection (Vol. I) show you the history and practical tips on the application of Fibonacci-derived support and resistance levels.