Season’s greetings, everyone!
As we come to the end of 2023, it’s worth reflecting on just how powerful Elliott wave analysis can be with a very recent example.
In Frost and Prechter’s 1978 classic book, Elliott Wave Principle, the patterns which R.N. Elliott identified back in the 1930s were laid out in detail.
One of the most interesting price patterns is the ending diagonal. Subsequently becoming known as a rising or falling wedge in other pattern recognition methods, Elliott, the pioneer, discovered the detail within the pattern. As Frost and Prechter state,
“…a diagonal is the only five-wave structure in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one and within which all the waves are ‘threes.’”
The text also goes on,
“An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone ‘too far too fast,’ as Elliott put it.”
And further,
“In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement.”
When ending diagonals complete, the subsequent reversal can be dramatic. This chart shows the German 10-Year Bund Yield.
It was in September 2021 that Elliott Wave International predicted that a significant rise in the yield was dead ahead. After that had come to fruition, a classic ending diagonal in the German 10-year bund yield can be observed in the wave five position from March to October this year.
EWI was following the pattern as it developed, and on the 22nd of September, Elliott Wave International’s European Short Term Update stated,
“We’re still searching for a bottom in the bund futures’ price peak in yield as the ending diagonal wave five concludes. This count anticipates a dramatic decline in the bund yield.”
Then on the 29th of September, we stated,
“The bund could have traced out a classic throwover of its ending diagonal.”
A few days later, the bund yield peaked at 3.02%. Since then, over just 10 weeks, the yield has declined dramatically, currently hovering just above 2%.
It’s worth noting that this pattern was anticipating a dramatic decline in the bund yield well before the narrative that “central banks are essentially finished their rate hiking cycle” began to take over the zeitgeist two or three weeks ago.
As always, market prices make the news, not the other way around, as most people think. If you want to anticipate the news before it happens, stay tuned to EWI.
For all you strategic thinkers out there
You just saw how patterns of market psychology could have helped you prepare for the biggest financial trend change of the past three decades: the spike in interest rates and everything it brought with it.
Our Global Rates & Money Flows is a service for fixed income investors who understand the importance of keeping an eye on the big picture.
All you strategic thinkers out there, join in.