European Stocks: "Nimble Elliott wave traders could benefit from a countertrend bounce."

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European Stocks: "Nimble Elliott wave traders could benefit from a countertrend bounce."
Plus, why Elliott wave analysis gives global investors an edge

By Vadim Pokhlebkin
Tue, 01 May 2012 09:15:00 ET

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To continue the "global investments" theme started by the recent interview with EWI's Asian-Pacific analyst about the markets in India, Pakistan, Sri Lanka and Indonesia, I also sat down with our own Brian Whitmer.

Brian is the editor of our European Financial Forecast and contributor to our monthly Global Market Perspective -- a comprehensive, 50-page publication that covers over 40 key markets for global investors. (Note: New, May 2012 Global Market Perspective publishes Friday, May 4.)

Vadim Pokhlebkin: Brian, these days it's easier than ever to get exposure to global markets, especially given the explosion in ETFs. But there are too many markets to focus on, and too many opinions about them. You chose Elliott wave analysis as your market-forecasting method. Why Elliott? Why not just watch the news, like most investors?

Brian Whitmer: To be successful in the markets, you need an edge. Like one of the characters in the movie "Too Big To Fail" puts it -- rather cynically, I must say -- "To win in the investment business, you have to be first, be better than the next guy -- or cheat." You won’t "be first" or "better than the next guy" by merely watching the same news and reading the same reports as everyone else. Elliott wave analysis is the most straightforward way that I know to get an edge over other investors. Elliott often allows us to "be first," or "better than the next guy" at predicting a market trend, and -- equally important -- a change in the trend.

VP: You have an example of how wave analysis helped you see an opportunity in one of your markets recently?

BW: Just in March, we labeled an Elliott wave pattern in the Spanish IBEX index a “contracting triangle.” Triangles -- overlapping, sideways moves on a chart that are usually contained by converging trendlines -- are very tradable patterns, because they always eventually break out of their trading ranges. (R.N. Elliott called the post-triangle move a “thrust.”) In the case of Spain's IBEX, the pattern screamed “big decline ahead!” (Chart shown with larger-degree Elliott wave labels removed for this article. -- Ed.)

If you’ve been watching, you know that the IBEX has indeed led European markets to the downside in April, dropping more than 15% (so far). Not every Elliott wave forecast works out this well -- but the waves give you a good "map" of where the prices should go. Investors who trade according to the waves have a definite advantage.

VP: Like you just said, Elliott wave forecasting is not fool-proof; no method is. For that reason, one of the most important parts of any method is its ability to let you know when the forecast may be wrong, so you can act quickly and limit your exposure risk. How does Elliott help you do that?

BW: The Elliott wave model posits that all liquid markets move according to a specific fractal form. Smaller waves make up the larger ones. So whether you zoom in on a 5-minute price chart, or zoom out to a yearly time frame -- if you are trained, you will see the exact same Elliott wave patterns (5-wave and 3-wave moves) on every time frame.

Think how much that simplifies your analysis. There are only 13 known Elliott wave patterns, each with a defined set of rules. Once you establish where in the wave pattern you are, you can make a confident forecast as to where the price should move next. You also know at what price levels the pattern gets negated. For example, wave 2 cannot retrace more than 100% of wave 1. Such built-in "circuit breakers" help you manage risk -- in this case, by placing a stop-loss just past the start of wave 1.

The wave model details what stocks can and cannot do under a particular Elliott wave count. There’s no guesswork. You know exactly when you’re wrong and can exit a losing position immediately.

VP: What is the one opportunity in your markets you see ahead in the next few weeks, and how do you plan on helping your subscribers capture that?

BW: Peripheral Europe will be a wealth of opportunity for years to come. Right now, the Spanish and Italian stock markets are homing in on their long-term lows from March 2009. So, we’ve got a long-term support level that’s aligning with some interesting wave patterns and negative sentiment extremes. Nimble Elliott wave traders could benefit from a countertrend bounce.

I'll talk more about that in the May issue of Global Market Perspective on Friday.

VP: Thank you, Brian.

Yours risk-free for 30 days:

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Tags: AEX, bailouts, Bank of England, brian whitmer, CAC40, DAX, debt crisis, diversification, Elliott wave, Elliott Wave trading, eu, euro, euro stoxx 50, euro/USD exchange rate, europe, european central bank, European debt crisis, european markets, European Union (EU), eurozone, FTSE, Swiss Market Index (SMI), technical analysis

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