Category Archives: EW Education

What Signals A Crash? A Look at 3 Historic Examples | 26th October, 2017

Could the indicators and classic technical analysis used here at Elliott Wave Stock Market have warned of the last three major crashes of 1987, 2000 and 2007?

1987

WEEKLY CHART

S&P 500 Weekly 1987
Click chart to enlarge.

A candlestick pattern at the high offered the first warning of a trend change.

Moving averages are lagging indicators. They offered no warning at the high. They only caught up with the crash after the low; in November 1987 they were full bore bearish.

ADX gave no warning.

RSI offered a strong warning with double bearish divergence while overbought.

Stochastics offered a weak warning.

MACD was fully bullish at the high.

Volume data is unavailable for this time period from StockCharts.

DAILY CHART

S&P 500 Daily 1987
Click chart to enlarge.

Moving averages were fully bullish at the high. This changed on the 13th of October to a mid term pullback, and finally on the 28th of October they were fully bearish.

ADX at the daily chart level did offer an early warning of an extreme upwards trend susceptible to a pullback.

RSI offered a reasonable warning of a high in place, as did Stochastics.

MACD gave a bearish crossover on the 27th of August, and was fully bearish by 15th of September.

AD LINE

S&P 500 Daily 1987
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The AD line did offer a strong warning, with over 4 months of clear bearish divergence. Double divergence developed just before the high.

2000

WEEKLY CHART

S&P 500 Weekly 2000
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For later data, volume data is also available.

A strong bearish candlestick reversal pattern was seen at the high.

Volume offered no warning. The first bearish signal from On Balance Volume came in mid March.

At the high, in March 2000, moving averages were fully bullish.

ADX offered no warning. ATR offered no warning.

Not only did RSI not offer any warning, it indicated there was room for price to rise.

Stochastics did offer a warning with bearish divergence.

MACD was fully bullish at the high.

DAILY CHART

S&P 500 Daily 2000
Click chart to enlarge.

A candlestick reversal pattern was given at the daily chart level as well as the weekly.

The first bearish signal from On Balance Volume came on the 12th of April.

ADX and ATR offered no warning. RSI showed very weak bearish divergence and was not overbought at the high.

Stochastics offered no warning. MACD was fully bullish.

By the 13th of April, bearish signals came from: On Balance Volume, MACD, ADX and rising volume with falling price.

AD LINE

S&P 500 Daily 2000
Click chart to enlarge.

Of all three examples looked at in this article, the strong and persistent divergence between price and the AD line in March 2000 is the most striking. This would have been a very strong warning that something big to the downside may be brewing.

2007

WEEKLY CHART

S&P 500 Weekly 2007
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A very strong Bearish Engulfing pattern at the high offered some warning.

Volume offered a small warning as it declined up to the high in October 2007. On Balance Volume offered no warning; its first bearish signal came at the end of December 2007.

ADX offered some reasonable warning as it had been extreme for a long time prior to the high, and then had declined as price moved higher.

RSI offered a warning with long term bearish divergence.

Stochastics also offered a warning with single bearish divergence.

MACD was fully bullish at the high and only became fully bearish at the end of December 2007.

DAILY CHART

S&P 500 Daily 2007
Click chart to enlarge.

Moving averages offered no warning. Volume did offer some warning as it declined towards the final high.

On Balance Volume did not offer a warning prior to the high, but it did give a bearish signal very soon after on the 15th of October, 2007. This was followed by two more bearish signals shortly after, noted on the chart.

ADX offered no warning.

ATR offered some warning as it declined towards the final high.

RSI offered no warning. Stochastics offered only a weak bearish warning.

MACD was fully bullish.

AD LINE

S&P 500 Daily 2007
Click chart to enlarge.

The AD line again offered a very strong warning, with clear and strong divergence over 4 months.

CONCLUSION

Markets do not repeat, but they do rhyme.

In each of these examples of price approaching a final high prior to a large bear market, only the AD line was consistent in offering a warning each time. That does not mean it must do so prior to a future bear market, only that the probability of it doing so again for at least 4 months is high.

The other indicator which appears to more consistently offer a warning shortly after a high is On Balance Volume.

The current bull market today has no divergence with the AD line, and no bearish signals at all from any of the indicators studied here. That points to a very low probability of a bear market developing in the next few months.

Published @ 3:26 a.m. EST on 27th October, 2017.

Expanded Flat Corrections – A Real Life Example | 1st September, 2017

I mentioned in comments on Thursday that I wanted to illustrate a real life example of an expanded flat. The concept is important when trading corrections.

S&P 500 daily 2017
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I did not have to go far back at all to find a good example of this very common corrective structure.

This expanded flat is in a second wave position within the final wave up of intermediate wave (5), which may have ended primary wave 3 at the last all time high.

Within expanded flats, both waves A and B must be three wave structures. Wave B is a minimum 1.05 length of wave A, so it makes a new price extreme beyond the start of wave A.

There is unfortunately no rule stating a maximum length for B waves within flats. There is a convention within Elliott wave that states when the possible B wave is longer than twice the length of the possible A wave the idea of an expanded flat should be discarded based upon a very low probability. I have seen a few expanded flats though which in hindsight were correct that had B waves that were longer than twice the length of their A waves.

The longer wave B is in relation to wave A the longer wave C should be expected to be. Here, wave C has a good Fibonacci ratio to wave A. Wave C of an expanded flat should move substantially beyond the end of wave A. The whole structure has an expanding sideways look to it.

Expanded flats are very common (only zigzags would be more common). It is my judgement given nine years of professional daily Elliott wave analysis that expanded flats are the second equal most common corrective structures alongside combinations.

What technical signals may give an expanded flat away? The answer lies in the strength, or lack of it, in wave B.

S&P 500 daily 2017
Click chart to enlarge.

Within wave B, some weakness can be noticed from:

– Very slight divergence at the end of wave B between price and RSI.

– Strongly declining ATR.

– Strong divergence at the end of wave B between price and Stochastics, after Stochastics has reached extreme.

– Declining volume.

Published @ 03:13 a.m. EST on 2nd September, 2017.

Volume and Breakouts – Is it Necessary? | 11th August, 2017

This chart was published two days ago. At that time, it was warned that the possible upwards breakout of the 8th of August lacked support from volume and may turn out to be false:

S&P500 Daily 2017
Click chart to enlarge.

That was proven correct. The strong downwards movement from the S&P comes on a day with an increase in volume. This is a classic downwards breakout.

When a downwards breakout has support from volume, that adds confidence in it. Downwards breakouts do not require support from volume; the market may fall of its own weight. Price can fall due to an absence of buyers as easily as it can from an increase in activity of sellers. But when volume supports downwards movement, it may be more sustainable, at least for the short term.

This downwards breakout was predicted by strongest volume during the consolidation being a downwards day.

This volume analysis technique looks at the presence or absence of support from volume on the breakout after a consolidation period to tells us how reliable the breakout may be.

Original post published @ 12:17 a.m. EST on 12th August, 2017, on Elliott Wave Gold.

Volume and Breakouts – Is it Necessary? | 9th August, 2017

After a consolidation price will break out. The presence or absence of support from volume on the breakout tells us how reliable the breakout may be.

Gold Daily 2017
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Pennant patterns are one of the most reliable continuation patterns. But in an upwards trend the breakout should have support from volume.

For price to keep rising it requires increased activity of buyers. Upwards breakouts that do not have support from volume are suspicious.

This upwards breakout comes on a day with slightly higher volume, but the balance of volume for the session is downwards. Stronger volume during the session supported downwards movement, not upwards.

The breakout is suspicious and may turn out to be false.

While volume is important for upwards breakouts, it is not so important for downwards breakouts. The market may fall of its own weight.

Original post published @ 04:47 p.m. EST on Elliott Wave Gold.

Non Farm Payroll – What Direction for the S&P500? | 3rd August, 2017

A simple classic technical analysis pattern may answer the question of what direction to expect tomorrow from the S&P500 upon release of Non Farm Payroll data. This release is expected to move markets strongly:.

Gold Daily 2017
Click chart to enlarge.

Pennants are reliable continuation patterns. The pattern is supported if volume declines as the pattern forms. Pennants normally appear about halfway within a trend.

The measured rule takes the flag pole which precedes the pattern and adds that length to the expected breakout of the pattern.

If this pattern is correct, then tomorrow may see an upwards breakout to new all time highs for the S&P500.

Original post published @ 06:28 a.m. EST on Elliott Wave Gold.