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Technical Indicators: A Love-Hate Relationship Part II
How To Use Technical Indicators to Confirm Elliott Wave Counts

By Laura Rispin
Tue, 17 Jan 2012 17:30:00 ET
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In the first part of Technical Indicators: A Love-Hate Relationship, Jeffrey Kennedy gave a quick rundown on how he used MACD to alert to any potential trading opportunities. In the second part of this series, Jeffrey Kennedy continues the examination of MACD and discusses the number one reason to love technical indicators.

The following excerpt from The Commodity Trader's Classroom provides important information  about integrating technical indicators into Elliott Wave Forecasts. See what Jeffrey Kennedy  loves and hates about technical indicators and study how he uses them to his advantage with your FREE 32-Page eBook, The Commodity Trader's Classroom:


Top Reasons to Love Technical Indicators
The previous lesson points out one of the redeeming features of technical studies: You can identify potential trade setups using MACD to find Hooks, Slingshots and Zero-Line Reversals (ZLR). In this lesson, I'm going to continue our examination of MACD, and I've saved the best for last. The No. 1 reason to love technical indicators is that you can use one like MACD to count Elliott waves. Let me count the ways (and the waves):

You Can Count Impulse Waves and Indentify Wave 3 Extremes
Often, an extreme reading in MACD will correspond to the extreme of wave three. This correlation appears when MACD tests zero in wave four, prior to the development of wave five. During a typical wave five, the MACD reading will be smaller in magnitude than it was during wave three, creating what is commonly referred to as divergence. An example is illustrated in Figure 10-10 (Sugar).

 

 

 

 

 

 

 

 

 

 


In this chart, you can see how the extreme reading in MACD is in line with the top of wave three, which occurred in July. MACD pulled back to zero in wave four before turning up in wave five. And though sugar prices were higher at the end of wave v (circled) than at the end of wave iii (circled), MACD readings during wave v (circled) fell far short of their wave iii (circled) peak.

So remember that within a five-wave move, there are three MACD signals to look for:

1. Wave three normally corresponds to an extreme reading in MACD.
2. Wave four accompanies a test of zero.
3. Wave five pushes prices to a new extreme while MACD yields a lower reading than what occurred in wave three.

You Can Count Corrective Waves and Time Reversals
MACD also helps to identify the end of corrective waves. In Figure 10-13 (Live Cattle), you can see a three-wave decline. If you examine MACD, you'll see that although wave C pushed below the extreme of wave A in price, the MACD reading for wave C was above the wave A level.

 

 

 

 

 

 

 

 


You can Identify Triangles
MACD can also help you identify triangles. In Figure 10-15 (Pork Bellies) you'll see contracting triangle wave patterns. MACD traces out similar patterns that are concentrated around the zero-line. In other words, triangles in price often correspond to a flattened MACD near zero.

Overall, my love-hate relationship with technical indicators like MACD has worked out well, so long as I've remembered not to get too caught up in using them. I hope that you will find some of your own reasons to love them, too, but I do want to caution you that you can get burned if you become too enamored with them. Remember, it's price that brought you to this dance, and you should always dance with the one that "brung" you.


Keep reading the FREE 32-page eBook, The Commodity Trader's Classroom, for more examples. Not only will you find more on this Love-Hate Relationship, but you'll find that it's filled with actionable trading lessons you can apply to improve your trading success, such as: 

• How to Make Yourself a Better Trader
• How the Wave Principle Can Improve Your Trading
• When to Place a Trade
• How to Identify and Use Support and Resistance Levels
• How to Apply Fibonacci Math to Real-World Trading
• How to Integrate Technical Analysis into an Elliott Wave Forecast

Download it right now, instantly, when you create your free Club EWI profile.
(Already a Club EWI member? Get your free trading lessons here.)

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