It's Monday, and once again I sit down to talk with Jeffrey Kennedy, editor of Elliott Wave International's Futures Junctures Service. In it, Jeffrey delivers to subscribers daily and other opportunities in almost two dozen futures markets.
Vadim Pokhlebkin: Let's talk about the basics of the Elliott Wave Principle, the method you use to make forecasts in your Futures Junctures Service. Is the "basic Elliott wave picture" different in commodities than, say, in stocks or currencies?
Jeffrey Kennedy: No. The basic Elliott wave pattern of every liquid, freely traded, market is the same. You've got five non-overlapping waves in the direction of the larger trend (those are called motive waves, or "impulses," and labeled 1, 2, 3, 4 and 5) and three choppy, overlapping wave against the larger trend (those are called corrections and labeled A, B and C):
Once you've identified which part of this pattern your market is in, you can make a reasonable forecast where prices will go next; that's the basis of Elliott wave forecasting.
VP: You said that waves in an impulse don't overlap, but in corrections they do. Is that how I tell one from another on a chart?
JK: Exactly. And once you learn these basics, you can go deeper. For example, there is one instance when waves within a 5th wave of a larger impulse (or a wave C of an A-B-C correction) actually do overlap.
VP: Wouldn't that make it a correction, by definition?
JK: No, it's a motive pattern, yet it's not an impulse. It's called a Diagonal Triangle (or an Ending Diagonal), and I'll show you an example. In tonight's Daily Futures Junctures (Ed. – Oct. 27; online now), I tell subscribers about a Diagonal Triangle that I see in Soybean meal charts right now. This pattern consists of five overlapping waves, wherein each wave subdivides into three smaller waves, as this diagram shows (for both bull and bear markets):
VP: If a Diagonal Triangle is a 5-wave move that is part of an impulse, why does its internal structure subdivide into 3-wave moves, instead of 5-wave ones?
JK: Yes, Diagonal Triangles typically form in a fifth wave position of an impulse, but, like I said, also in a wave C of an A-B-C correction. The Elliott Wave Principle* book says they appear when the market has gone "too far, too fast." If you remember one thing about them, remember this: They are ending patterns. Because they signal the end of the larger trend, they often ignite volatile moves that quickly retrace the entire preceding wave pattern. This is the Diagonal Triangle I see forming in a larger wave C in Soybean Meal right now, on a 45-minute chart:
VP: So, it seems that the message from a "normal" Elliott wave impulse and one where a fifth wave is a Diagonal Triangle (and when it's a wave C of an A-B-C correction) is still the same: Expect a price reversal soon?
JK: Yes. I show two more charts in tonight's Daily Futures Junctures (Ed. – Oct. 27; online now), explaining how far Soybean Meal prices are likely headed next, based on this pattern.
VP: Thanks for another lesson in wave analysis, Jeffrey.
JK: My pleasure!
* BONUS: You get a free copy of Elliott Wave Principle – Key To Market Behavior with your risk-free subscription.