Category Archives: Technical Analysis

technical analysis

Learn to Spot a Head & Shoulders Pattern in Your Charts (Video)

Learn to Spot a Head & Shoulders Pattern in Your Charts (Video)

A Trading Lesson from Elliott Wave International’s Jeffrey Kennedy

By Elliott Wave International

Senior Analyst Jeffrey Kennedy is the editor of our Elliott
Wave Junctures
trader education service and one of our
most popular instructors. Jeffrey’s primary analytical method
is the Elliott Wave Principle, but he also uses several other
technical tools to supplement his analysis.

You can apply these methods across any market
and any timeframe. Enjoy this lesson and
then find out how you can get additional trading lessons from
Elliott Wave International.


My primary tool as a technical analyst is, of course, the Wave Principle. Even so, I find great value in other forms of technical analysis, such as candlesticks and indicators. With this in mind, let’s review one of my favorite old-school chart patterns — Head-and-Shoulders.

Spotting a Head & Shoulders Pattern

This formation was popularized by Edwards and Magee in their seminal work Technical Analysis of Stock Trends. It is a reversal pattern and consists of a left shoulder, a head and a right shoulder.

A trendline drawn between the price extremes of the left shoulder and head and head and right shoulder is referred to as the neckline. The neckline is important for two reasons — the first being that a parallel of the neckline drawn against the extreme of the left shoulder can identify the extent of the formation of the right shoulder.

The second important aspect of the neckline is that it can provide a high probability target for the subsequent breakout. If prices decisively penetrate the neckline, the distance between that point and the head is often a reliable objective for the ensuing price move. Watch this 4-minute video where I explain more:



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This
article was syndicated by Elliott Wave International and
was originally published under the headline Learn to Spot a Head & Shoulders Pattern in Your Charts (Video).
EWI is the world’s largest market forecasting firm. Its staff
of full-time analysts led by Chartered Market Technician
Robert Prechter provides 24-hour-a-day market analysis to
institutional and private investors around the world.

The 3 Essential Parts of an Elliott Wave Trade [Book Excerpt Part 1 of 3]

The 3 Essential Parts of an Elliott Wave Trade
A NEW series of educational trading lessons from “Visual Guide to Elliott Wave Trading” — Part 1 of 3

By Elliott Wave International

When it comes to improving your wave-based analysis and technical
trades, three steps may sound simple enough. Yet if you have
any experience trading, you know that nothing about trading
is easy
.

Senior Analyst Jeffrey Kennedy knows that it takes skill,
discipline and courage to execute a successful trade. In the
new book he has coauthored with EWI’s Wayne Gorman (now a
No.1 Amazon Bestseller), Visual Guide to Elliott
Wave Trading
, he picks up where Frost and Prechter’s
classic textbook Elliott Wave Principle leaves off
to give you the perfect blend of traditional textbook analysis
and real-world application.

According to Kennedy, there are three key components of a successful trade:

  • Analyze the price charts.
  • Formulate a trading plan.
  • Manage the trade.

In this excerpt (Part 1 of 3), Kennedy examines a high-confidence trade setup in Caterpillar (CAT).

Part One: Analyze the Price Charts


When it comes to trade setups, it doesn’t get much easier than the price chart of CAT from April and May 2011. As you can see in Figure 2.1, prices fell in five waves from 116.55 to 108.39. This wave pattern was significant because impulse waves identify the direction of the larger trend. Thus, this five-wave decline in CAT implied further selling to come that would take prices below 108.39 in either wave (C) or wave (3).

The subsequent rally in CAT that developed in three waves supported this analysis. Countertrend price action typically consists of three waves, so I knew to expect another move down in CAT. Moreover, the three-wave advance in CAT traveled to 112.47 to retrace 50 percent of the previous sell-off. That 50 percent is a common retracement for corrective waves. Also nearby was 112.84, the price level at which wave C equaled a .618 multiple of wave A, which is a common Fibonacci relationship between waves C and A of corrective wave patterns.

The only question at this point was whether the move up from 108.39 should be labeled as wave (B) or wave (2). From a short-term trading perspective, this question was academic because, either way, the trade objective was a price move just under 108.39. A final observation about the corrective rally: The slope of wave C in this case was shallower than the slope of wave A. A shallow wave C slope, which demonstrates a decrease in momentum, is a harbinger that the larger trend is resuming. These shallower slopes within zigzags are so common that they are almost a qualifying characteristic of the pattern.

By applying the most basic Elliott wave analysis to the price chart of CAT, I could see five waves down and three waves up into Fibonacci and structural resistance at 112.47-112.84. That meant that odds strongly favored a sell-off below 108.39 from near current levels. So, the question at that point was how best to capitalize on this information.

Stay tuned for parts 2 and 3 of this lesson.


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This article was syndicated by Elliott Wave International and was originally published under the headline The 3 Essential Parts of an Elliott Wave Trade . EWI is the

world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to

institutional and private investors around the world.

The 2 Most Important Keys to Successful Trading

Examples from Whole Foods Market and Reynolds American, Inc show you what to do (or not) to trade successfully with Elliott Wave

By Elliott Wave International

After 20 years of experience applying the Elliott Wave Principle, Senior Analyst Jeffrey Kennedy says that it remains the one tool that will tell him — down to the tick, to the pip, even to the penny – when his forecast is no longer viable.

That, according to Kennedy, is one of the two most important keys to successful trading:

“Know where you are wrong.”

In his May 8 Elliott Wave Junctures educational video, Kennedy shows subscribers how to acquire that knowledge when revisiting an earlier forecast that didn’t work out. This lesson was adapted from our EWJ service, and also explores the second of Kennedy’s Keys to Successful Trading:

“Don’t pick tops and bottoms.”

See the logic behind Kennedy’s wisdom by reviewing his analysis of Whole Foods Market, Inc. (WFM) and Reynolds American, Inc. (RAI).


My outlook for Whole Foods Market was right and my outlook for Reynolds American was wrong. While price evidence was compelling for both issues, the forecast in WFM was in the direction of the trend and RAI’s incorporated top picking. Here’s what happened:

On May 1, price evidence called for new highs in Whole Foods Market. We had a clearly defined uptrend, a three wave move in the direction opposite the primary trend, and the move to the downside was contained within parallel lines:

Additionally, we had a double closed-key reversal when the low was made, as well as some bullish divergence on the smaller timeframes. Price evidence was very strong that this market would continue to new all-time highs, so my outlook was bullish.

The bullish outlook in WFM required the April low of $81.39 to hold. The trend was clearly up from 2009 into 2013. From an Elliott Wave perspective we knew that this was a countertrend move with an A-B-C structure (a corrective wave pattern within a larger trending market). We had the wind at our back and were not “picking a top.” We simply looked at the price evidence in support of a further rally.

Conversely, the following example in Reynolds America, Inc. did not work out.

On March 22, I anticipated a move to the downside in Reynolds American, Inc. as we had a five-wave decline and a subsequent advance that was a three-wave move. I was looking for a tradable selloff to the downside in wave (C) or wave (3):

Unlike the successful WFA example, I was not trading with the trend. Instead, I was looking for a “top.”

Yet I was able to prevent a losing trade from becoming a devastating trade because I could use the Elliott Wave Principle to “know where I was wrong.”

This bearish wave pattern was viable only as long as prices held below the February high of $45.17.

Once prices exceeded this critical resistance, I knew not to look to the downside – that my outlook was no longer viable:


Learn to Find Opportunities in the Markets You Follow with Jeffrey Kennedy’s 47-page eBook: How to Spot Trading Opportunities

Now’s your chance to discover a whole new way to analyze charts and spot high-confidence trade setups using technical analysis. For a limited time, you can download EWI’s 47-page How to Spot Trading Opportunities eBook for FREE! ($79 value).

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This article was syndicated by Elliott Wave International and was originally published under the headline The 2 Most Important Keys to Successful Trading. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

(Video) Top 3 Technical Tools Part 3: MACD

(Video) Top 3 Technical Tools Part 3: MACD
Enhance your trading confidence with a 2-minute lesson on how to combine Moving Average Convergence Divergence with other technical tools.

By Elliott Wave International

“Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.”

-Jeffrey Kennedy

Jeffrey Kennedy is an accomplished teacher and a Senior Analyst here at EWI. Yet he often says that the Wave Principle alone is not a trading methodology. It does not tell you how much trading capital you can afford to risk, or specific guidance about which entry or exit levels are best suited for your trading style or where to set your protective stop.

Kennedy also says that along with risk management and emotional discipline, the right technical tools are a vitally important part of supporting your wave count.

To enhance trading confidence, Jeffrey’s 3 favorite technical
tools are Japanese candlesticks, RSI, and MACD. (read Part
1 on Japanese Candlesticks
and Part 2 on RSI ). Today’s lesson shows you how MACD can help identify trading opportunities with an example from USDCAD.

This 2-minute video and overview of MACD are adapted from Jeffrey’s Elliott Wave Junctures educational service (which empowers subscribers with information on nearly every aspect of trading. Try it risk-free for 30-days >> ).


Moving average convergence divergence (MACD) is a momentum indicator developed by Gerald Appel. It consists of two exponential moving averages, the MACD line and Signal line. The difference between these two lines yields an additional indicator, MACD Histogram.

Since these studies evaluate momentum, they work optimally in trending markets. When combined with reversal candlestick patterns, MACD and MACD Histogram can increase confidence in these patterns as well as continuation of the larger trend.

MACD divergence occurs when prices move one way and MACD moves the other. Bearish divergence forms when prices make new highs and MACD does not. Conversely, new price lows without lower MACD readings is bullish divergence. These conditions aid traders in identifying potential changes in momentum and trend.

MACD is constructed using two lines referred to as the MACD line and the Signal line.

When the MACD line appears to penetrate the Signal line, but fails to do so, a hook forms. The significance of a hook is that it coincides with countertrend price moves.

MACD is excellent technical tool provided you know how to use it and what to look for.


Learn the Best Technical Indicators for Successful Trading

This free report from Elliott Wave International will teach you how to incorporate technical indicators into your analysis to improve your trading decisions.

You’ll learn which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, and which are best for spotting high-confidence trade setups. You’ll also learn how technical indicators can be used to complement Elliott wave and other technical methods.

Get your technical indicators report now >>

This article was syndicated by Elliott Wave International and was originally published under the headline (Video) Top 3 Technical Tools Part 3: MACD. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

(Video) Top 3 Technical Tools Part 2: Relative Strength Index (RSI)

(Video) Top 3 Technical Tools Part 2: Relative Strength Index (RSI)
EWI senior analyst Jeffrey Kennedy shows you how to identify quality trade setups with supporting technical indicators.

By Elliott Wave International

“There are many different forms of technical analysis. A completed Elliott wave pattern supported by additional evidence allows for more confident forecasts and higher probability trades.”

-Jeffrey Kennedy

Trader and technical analyst Jeffrey Kennedy has more than 25 years of experience using with the Elliott Wave Principle. To support his Elliott wave analysis, Jeffrey says that his 3 favorite technical tools are Relative Strength Index (RSI), MACD, and Japanese candlesticks.

This 3-part series includes Jeffrey’s practical lessons and proven techniques to support his wave counts (read Part 1 here >>). Today’s video clip shows you how RSI and range rules can help identify trading opportunities: Part 3 will cover MACD.

Jeffrey’s second lesson, excerpted from his Elliott Wave Junctures educational service, gives an overview of RSI followed by a video example.


Buying pullbacks in uptrends and selling bounces in downtrends are great ways to trade trending markets.

Developed by J. Welles Wilder, Jr. and presented in his 1978 book, “New Concepts in Technical Trading Systems,” RSI measures the strength of a trading vehicle by monitoring changes in closing prices and is considered a leading or coincident indicator. Andrew Cardwell popularized RSI as a trading tool by introducing the concept of range rules.

The theory behind range rules is that countertrend price action in trending markets has specific momentum signatures. RSI, for example will find support within roughly the 50-40 region when pullbacks in uptrends occur. Conversely, when bounces develop in downtrends, RSI will meet resistance in the 50-60 area.

Taking the path of least resistance is a benefit of trading in the direction of the trend. Moreover, the use of RSI and application of Andrew Cardwell’s range rules help identify when a trader can rejoin the trend.


Learn the Best Technical Indicators for Successful Trading

This free report from Elliott Wave International will teach you how to incorporate technical indicators into your analysis to improve your trading decisions.

You’ll learn which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, and which are best for spotting high-confidence trade setups. You’ll also learn how technical indicators can be used to complement Elliott wave and other technical methods.

Get your technical indicators report now >>

This article was syndicated by Elliott Wave International and was originally published under the headline (Video) Top 3 Technical Tools Part 2: Relative Strength Index (RSI). EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Top 3 Technical Tools Part 1: Japanese Candlesticks

EWI senior analyst Jeffrey Kennedy shows you how to identify quality trade setups with supporting technical indicators.

By Elliott Wave International

“I always will be an Elliottician, but other technical tools have merit and are indeed worthwhile: they allow me to build a case, build a more confident reason for making a forecast and for taking a trade; making a trading decision.”

-Jeffrey Kennedy

I recently asked Elliott Wave International analyst Jeffrey Kennedy to name his 3 favorite technical tools (besides the Wave Principle). He told me that Japanese candlesticks, RSI, and MACD Indicators are currently his top methods to support trade setups.

In this 3-part series, we will share examples of how to use these 3 tools to “build a case” in the markets you trade. These practical lessons allow you to preview how Jeffrey applies techniques with proven reliability to support his analysis.

We begin this first lesson with a basic candlestick-style price chart.

This is excerpted from Jeffrey Kennedy’s teachings. Follow this link to learn more about Jeffrey Kennedy’s educational trading service, Elliott Wave Junctures.


You may be familiar with an Open-High-Low-Close (OHLC) chart: comprised of vertical lines with small horizontal lines on each side. The top of each vertical line is the high and the bottom is the low. The small horizontal lines on either side represent the open and close for that period.

Here’s an example of a Japanese Candlestick chart:

Japanese candlestick charts employ the same data that OHLC price charts do except that the data is expressed differently. The real body is the range between the open and close, and appears as a small block. Shadows are the lines that extend upward and downward from this block, and represent the highs and lows.

Next, take a look at the chart below.

Two bearish candlestick reversal patterns that Jeffrey finds highly reliable are the Evening Star and the Bearish Engulfing Patterns. This weekly continuation chart for the Canadian Dollar combines a 20-period moving average to show that the trend is down — allowing you to focus on bearish reversal candlestick patterns to spot trading opportunities.

Jeffrey notes that “combining these reversal patterns with moving averages makes them even more dynamic because they focus your attention in the direction of the larger trend.”

Japanese Candlesticks begin our spotlight on Kennedy’s top 3 ancillary tools for trading with the Wave Principle. We’ll share parts two and three via how Kennedy uses RSI and MACD indicators to support his Elliott wave interpretation in coming weeks.


To learn more about these tools now, access our FREE 10-Lesson Trading Series, “How to Apply Some of the Most Powerful Technical Methods to Your Trading.”

You will gain access to an archive of lessons that includes a wealth of information: in-depth guidance and insight on the Elliott Wave Principle and other technical approaches. You’ll learn some of the best technical indicators for analyzing chart patterns, anticipating price action, and spotting high-confidence trade setups.

Learn how you can access your free lessons now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Top 3 Technical Tools Part 1: Japanese Candlesticks. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Learn to Label Elliott Waves More Accurately

EWI Senior Analyst Jeffrey Kennedy shows you how to use momentum patterns to confirm your count

By Elliott Wave International

Are you looking for an easy way to improve your confidence as you analyze the charts you trade? Take a quick look at this chart (adapted from Jeffrey Kennedy’s December 26 Elliott Wave Junctures lesson) to see how divergence relationships help clarify your analysis.

According to Jeffrey, divergence relationships are easy to identify. Whenever prices make a new extreme, look for underlying indicators to move in the opposite direction. Specifically,

The momentum relationship most often seen in waves 3 and 5 is divergence. Bullish divergence forms when prices make a new low while an accompanying indicator does not. Conversely, bearish divergence occurs when prices register a new high while an accompanying indicator does not. Bullish and bearish divergences are common to waves A and C, just as they are waves 3 and 5.

Notice the bearish divergence between waves 3 and 5 in the daily price chart of Halliburton Company (HAL) — Prices reach a new high, yet the MACD indicator moves in the opposite direction:

Jeffrey notes that if you label an advance as a 5th wave move, and yet you do not see momentum divergence, that tends to argue for an extended 5th wave.

Next, at waves A and C, you can see an example of bullish divergence. Wave A bottomed at $32.90 in HAL and wave C ended much lower at $29.83. The histogram readings that correspond to waves A and C are -36.26 and -26.60, respectively.

Here’s another example of divergence between waves A and C in Akamai Technologies (AKAM).

Notice that wave C is lower in price than wave A. However, if you look at the MACD histogram, you’ll see that it registered a higher reading in wave C than it did in wave A, thus giving us a bullish divergence.

Understanding that Elliott waves demonstrate unique momentum relationships as well as price structure allows you to label waves more accurately and with greater confidence.


Learn to Use Technical Indicators to Improve Your Trading and Analysis

This is merely one chart example of how you can use technical indicators to strengthen your analysis. You can also learn about Moving Averages, one of Jeffrey Kennedy’s favorite indicators, in a Free 10-page eBook from Elliott Wave International.

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free 10-page eBook. Learn step-by-step how moving averages can help you find high-confidence trading opportunities.

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This article was syndicated by Elliott Wave International and was originally published under the headline Learn to Label Elliott Waves More Accurately. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Fibonacci in Nature: The Golden Ratio and the Golden Spiral

The more you learn about Fibonacci, the more amazed you will be at its importance

By Elliott Wave International

If you’ve studied the financial markets, even for a short time, you’ve probably heard the term “Fibonacci numbers.” The ratios and relationships derived from this mathematical sequence are applied to the markets to help determine targets and retracement levels.

Did you know that Fibonacci numbers are found in nature as well? In fact, we can see examples of the Fibonacci sequence all around us, from the ebb and flow of ocean tides to the shape of a seashell. Even our human bodies are examples of Fibonacci. Read more about the fascinating phenomenon of Fibonacci in nature.


Let’s start with a refresher on Fibonacci numbers. If we start at 0 and then go to the next whole integer number, which is 1, and add 0 to 1, that gives us the second 1. If we then take that number 1 and add it again to the previous number, which is of course 1, we have 1 plus 1 equals 2. If we add 2 to its previous number of 1, then 1 plus 2 gives us 3, and so on. 2 plus 3 gives us 5, and we can do this all the way to infinity. This series of numbers, and the way we arrive at these numbers, is called the Fibonacci sequence. We refer to a series of numbers derived this way as Fibonacci numbers.

We can go back to the beginning and divide one number by its adjacent number – so 1�1 is 1.0, 1�2 is .5, 2�3 is .667, and so on. If we keep doing that all the way to infinity, that ratio approaches the number .618. This is called the Golden Ratio, represented by the Greek letter phi (pronounced “fie”). It is an irrational number, which means that it cannot be represented by a fraction of whole integers. The inverse of .618 is 1.618. So, in other words, if we carry the series forward and take the inverse of each of these numbers, that ratio also approaches 1.618. The Golden Ratio, .618, is the only number that will also be equal to its inverse when added to 1. So, in other words, 1 plus .618 is 1.618, and the inverse of .618 is also 1.618.

This is a diagram of the Golden Spiral. The Golden Spiral is a type of logarithmic spiral that is made up of a number of Fibonacci relationships, or more specifically, a number of Golden Ratios. For example, if we take a specific arc and divide it by its diameter, that will also give us the Golden Ratio 1.618. We can take, for example, arc WY and divide it by its diameter of WY. That produces the multiple 1.618. Certain arcs are also related by the ratio of 1.618. If we take the arc XY and divide that by arc WX, we get 1.618. If we take radius 1 (r1), compare it with the next radius of an arc that’s at a 90° angle with r1, which is r2, and divide r2 by r1, we also get 1.618.

Now here are some pictures of this Golden Spiral in various aspects of nature. For example, on the left is a whirlpool that displays the Golden Spiral and, therefore, these Fibonacci mathematical properties. We also see the Golden Spiral in the formation of hurricanes (center) and in the chambered nautilus shell (right), which also happens to be a common background that Elliott Wave International uses for a number of its presentations and graphics.

We can also see the Golden Ratio in the DNA molecule. Research has shown that if you look at the height of the DNA molecule relative to its length, it is in the proportion of .618:1. If we look at the components of the DNA molecule, there is a major groove in the left section and a minor groove in the right section. The major groove is equal to .618 of the entire length of the DNA molecule, and the minor groove is equal to .382 of the entire length.

This graphic of the human body also shows how the Golden Ratio exists in certain relationships of the human anatomy.


Learn How You Can Use Fibonacci to Improve Your Trading

If you’d like to learn more about Fibonacci and how to apply it to your trading strategy, download the entire 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading.

EWI Senior Tutorial Instructor Wayne Gorman explains:

  • The Golden Spiral, the Golden Ratio, and the Golden Section
  • How to use Fibonacci Ratios/Multiples in forecasting
  • How to identify market targets and turning points in the markets you trade
  • And more!

See how easy it is to use Fibonacci in your trading. Download your free eBook today >>