I continue my conversations with Jeffrey Kennedy, editor of Elliott Wave International's Futures Junctures Service, which brings subscribers daily and longer-term opportunities in commodities.
Vadim Pokhlebkin: Jeffrey, one of the most important questions for any trader (or investor) is – is the trend in my market "for real" or not? In other words, if a market sells off after a rally, how do I know that it's just a bull market correction and not a complete reversal? And conversely, if my market rallies after a selloff, how do I avoid getting trapped in a bear market rally? You deal with commodity markets day in and day out – how do you handle these questions?
Jeffrey Kennedy: First of all, it's crucial to remember that a market forecasting method that can tell you with 100% certainty what "the real" trend is simply doesn't exist. It's a truism, but new traders often forget that. Having said, Elliott wave analysis can be very helpful when you're struggling with this question.
VP: How so?
JK: Well, you know that the Wave Principle teaches that the market is fractal. It's the same 13 Elliott wave patterns repeated over and over again at ALL degrees of trend. Smaller patterns make up larger ones, just like this idealized diagram shows:
So, if you see a 12345 impulse followed by an ABC correction on a 5-minute chart, you must realize that both of them will fit into a larger-degree wave pattern on a 30-minute chart. And that chart's pattern is part of an even larger one. And so on.
This is very powerful knowledge if you want to know what "the real" trend is. All you have to do is "zoom out." Then you might find out that what looked like a start of a new bull market on a 10-minute chart is just a larger-degree B-wave bear market rally; or, that a selloff that scared you is just a wave 2 correction within a developing bull market move. This can do wonders for your market perspective.
VP: Can you give us an example?
JK: Sure. In my yesterday's Daily Futures Junctures (Jan. 26; online now. – Ed.), I focused on Cotton futures. Earlier, I had marked the price level of 50.90 as critical for the trend; well, yesterday Cotton rallied beyond it. It was frustrating, but to find out if that rally was "for real," I did exactly what I said earlier: I "zoomed out" to look at the larger picture. And what I saw on a 300-minute chart was this:
You can clearly see that the recent advance in Cotton is sloppy and overlapping. Also, you can draw parallel lines across the top and bottom of the rally, as I did in the chart above. Those are all characteristics of an Elliott wave correction, not an impulse. So, my conclusion was that Cotton's rally is not "for real," and I told my subscribers where it's likely to go next. This is basic Elliott wave analysis, and it can put you miles ahead of other traders.
VP: That's very impressive… and pretty simple, too! Thanks for another great lesson, Jeffrey.
JK: My pleasure.
Soybeans, Corn and Wheat – that's the focus of the latest, January 27 Daily Futures Junctures. Get details on these and other opportunities online now, risk-free for 30 days. Details.