In 1929, Deflation Started in Europe Before Overtaking the U.S.

In 1929, Deflation Started in Europe Before Overtaking the U.S.
What Happens in Europe Will Not Stay in Europe 

By Elliott Wave International

More than 1,500 years after the fact, scholars still debate the causes of the Roman Empire's fall.

What historians do agree on is that the crumbling empire's final days were marked by economic contraction, a struggle to fund Rome's routine affairs and excessive debt.

Sound familiar?

Mark Twain said, "History doesn't repeat itself, but it does rhyme."

That quote seems to apply when economically comparing the Roman Empire and the United States.

Today's superpower also faces a mountain of debt and a slow economy.

Unlike then, however, the modern economy is global.

So an economic downturn in one major area of the globe is likely to affect another. In fact, even during the Great Depression (long before the phrase "global economy"), Europe was exporting to America.

But one historic export was not the kind that the U.S. welcomed.

The economy is clearly vulnerable to a debilitating wave of debt deflation. The threat is approaching quickly from an important source: Europe. The same sequence of events occurred in 1929, when deflation started overseas before lapping onto U.S. shores.

The Elliott Wave Financial Forecast, January 2012

The Financial Forecast has long kept a careful eye on the threat Europe's debt crisis poses to the U.S. economy.

The economic slowdown that EWFF characterized in January as Europe's "top export" is finally reaching foreign shores. Several financial news outlets report that the U.S. and China are now "slipping in sync" with Europe.

The Financial Forecast, June 2012

And recent news registered the economic slowdown.

• Small Businesses Grow Wary; See Fewer Hires -- Reuters, Oct. 9
• IMF Slashes Forecasts for Global Economic Growth -- CNBC, Oct. 8
• World Bank Cuts East Asia GDP Outlook, Flags China Risks -- Reuters, Oct. 7
• Europe's Richer Regions Want Out -- New York Times, Oct. 7
• Entrepreneurship is 'weaker than ever' -- CNNMoney, Oct. 5
• The U.S. unemployment rate tumbled to 7.8% in September but a broader measure was flat at 14.7%. [emphasis added] - Wall Street Journal, Oct. 5
• Orders to U.S. Factories Plunge -- Bloomberg, Oct. 4
• Spain's Tax Take Tumbles as Companies Go Abroad -- Reuters, Oct. 3
• Trade Slows Around World -- Wall Street Journal, Oct. 1

Indeed, the European Central Bank recently initiated a new bond buying plan, the Bank of Japan just expanded its asset purchase and loan program, and the Federal Reserve announced QE3.

But don't count on central bankers to rescue the global economy.

Consider what Robert Prechter said in the July 2012 Elliott Wave Theorist:

The Fed's actions are short-term inflationary but are setting up a bigger crash than would happen otherwise.

Why do The Fed and other central banks around the world keep making these types of mistakes? You can find out for free. See below for details.

USD/JPY: Lemons into Lemonade

USD/JPY: Lemons into Lemonade
How Elliott wave analysis helps you as a forex trader with built-in, risk-defining safeguards 

By Elliott Wave International

Elliott wave analysis is not a crystal ball. (No market-forecasting method is.)

But here's what is remarkable: Even when your Elliott wave forecast doesn't pan out, you have built-in safeguards to alert you -- and help you manage risk. Here's a real-life example.

Going into the November 14 low, USD/JPY charts had been showing an impulsive downward Elliott wave pattern. Impulses are 5-wave moves, but on November 13-14, the pattern looked incomplete: the fifth wave down seemed to be missing.

Here's a chart our Currency Specialty Service subscribers saw early on November 13:

So, our analysis on November 13 suggested that USD/JPY would fall further. But USD/JPY just would not fall; instead, it went sideways.

That suggested to our Currency Specialty Service team that the wave (4) you see in the chart above was extending. Perhaps it was developing as another Elliott wave pattern -- maybe a contracting triangle? This chart and analysis described to subscribers that scenario:

"A bearish fourth-wave triangle is another idea that's in a position to yield new lows in wave (5). Resistance rests at 79.655/765."

Note that line: "Resistance rests at 79.655/765" -- it represents the very risk-defining safeguards I mentioned earlier.

How? Well, there are things that Elliott wave patterns just are not allowed to do. In a contracting triangle (an A-B-C-D-E formation), prices must stay within converging trendlines -- and they cannot overlap the start of wave A, the origin of the pattern. Resistance at 79.655/765 was exactly that: the price point where the contracting triangle interpretation would be invalidated.

Practical application: If you were bearish on USD/JPY on November 14, you could have used the price area of 79.655/765 to manage your position risk.

As you probably know, USD/JPY did not go sideways for long. Nor did it go down. Soon after, it went higher and breached that key resistance level:

When one Elliott wave pattern ends, another one begins. As soon as that key resistance in USD/JPY was breached, a new road map for the Japanese yen became clear.

Which Works Best -- GPS or Road Map? (Part 3)

Which Works Best -- GPS or Road Map? (Part 3)
Trading with Elliott wave analysis 

By Elliott Wave International

(Here are Part 1 and Part 2 of this article.)

Think of Investing as a Trip

Here's my advice: View the Elliott wave Principle as your road map to the market and your investment idea as a trip.

You start the trip with a specific plan in mind, but conditions along the way may force you to alter course. Alternate counts are simply side roads that sometimes end up being the best path.

Elliott's highly specific rules keep the number of valid interpretations to a minimum. The analyst usually considers the "preferred count" to be the one that satisfies the largest number of guidelines. The top "alternate" is the one that satisfies the next largest number of guidelines, and so on.

There are only three hard-and-fast rules with the Wave Principle:

1. Wave two cannot retrace more than 100% of wave one.
2. Typically wave four does not end within the price territory of wave one but may do so from time to time in highly leveraged markets.
3. Wave three is never the shortest wave of an impulse.

Elliott's rules give specific "make-or-break" levels for a given interpretation. In Figure 2, for example, if the move labeled (2) continues below the level of the beginning of wave (1), then the originally preferred interpretation would be instantly invalidated.

By eliminating subjectivity, the rules help you firm up your investment strategy -- and reduce your risk.

"Are We There Yet?"

You've heard that irritating question, "Are we there yet?," from the back seat just about a million times. Every map has a scale, and it's the scale that helps me determine how many miles I have to travel before I reach my destination. When using the Wave Principle, Fibonacci relationships are the scale.

Many investors today know that Fibonacci ratios are used for market forecasting. But few realize that Fibonacci analysis of the markets was pioneered by R.N. Elliott. The use of Fibonacci ratios requires a valid Elliott wave interpretation as a starting point. Unfortunately, many non-Elliott analysts try to find Fibonacci proportions between market moves that are not related to each other in any way. This has made the approach appear to be far less valuable than it is.

Elliott wave analysis has two chief insights concerning Fibonacci relationships within waves. First, corrective waves tend to retrace prior impulse waves of the same degree in Fibonacci proportion. For example, wave (2) in Figure 2 retraces 38% of wave (1). That's a common relationship. Other frequent wave relationships are 50% and 62%. Second, impulse waves of the same degree within a larger impulse sequence tend to be related to one another in Fibonacci proportion. For example, common relationships include wave three traveling 1.62 times the distance traveled by wave one of the same degree. When that occurs, wave five often tends toward equality with wave one of the same degree.

Planning the Trip

Just as I sit down and plan my trips before shoving off, I rely on wave interpretations and Fibonacci relationships to help establish investment strategies and reduce risk exposure when I analyze the markets for our clients. Investors use these same wave analysis methods to help decide where to get into a market, where to get out and at what point to give up on a strategy. The Wave Principle lets you identify the highest probability direction for the market, as you also adopt an optimum position to take advantage of it -- all while protecting yourself against lower probability outcomes. You couldn't ask more from your own GPS.

By the way, we did make it to Cades Cove on our way back across Smoky Mountain National Park. I turned off my GPS and consulted my map. The old tried and true worked like a charm.

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Who is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI's Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim's latest thoughts about FX markets and the business of trading them at his Twitter feed.

Which Works Best -- GPS or Road Map? (Part 2)

Which Works Best -- GPS or Road Map? (Part 2) 

Trading with Elliott wave analysis 

By Elliott Wave International

(Part 1 of this article is posted here.)

A Quick Road Map of Wave Analysis

For this overview of wave analysis, I have borrowed from the "Cliffs Notes" version that we provide for free to anyone interested in learning about wave analysis. It's called Discovering How To Use the Elliott Wave Principle.

Elliott's road map, or basic wave pattern, consists of "impulsive waves" and "corrective waves." An impulsive wave is composed of five subwaves and moves in the same direction as the larger trend -- or the wave's next larger size. A corrective wave is divided into three subwaves, and it moves against the trend of the next larger degree. As you can see in Figure 1, there are plenty of right and left turns -- or up and down moves on a price chart.

Figure 1 reveals the general roadmap that markets follow during bull markets. Notice the building-block process. The completion of an initial impulsive wave (waves 1-5, up-down-up-down-up) sets the stage for a corrective phase (waves A-B-C, down-up-down). Combined, those waves represent the first two legs of a larger "degree" advance. In this illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive wave, labeled as wave (1).

A five-wave rally from a significant low tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction -- in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree. At that point, again, a three-wave correction of the same degree occurs.

Note that, regardless of the size of the wave, each impulsive wave peak leads to the same result -- a correction.

If we isolate the corrective waves, the subwaves A and C move in the direction of the larger trend and usually unfold in an impulsive manner. Referring to Figure 1, the (A)-(B)-(C) decline that follows the (1)-to-(5) sequence illustrates this structure. Waves labeled with a B, however, are corrective waves; they move opposite to the trend of the next larger degree. In this case, they move upward against the downtrend. Notice that these corrective waves are themselves made up of three subwaves.

Reading the Wave Analysis Map

So now that you have a wave road map in hand, let's talk about how to apply it to the actual terrain of financial markets. When I look at a price chart for the first time, my first task is to identify any completed five-wave and three-wave structures. Once I do that, then I can interpret where the market is along the pre-defined path and, from there, where it's likely to go.

Say we're studying a market that has reached the point shown in Figure 2. So far we've seen a five-wave move up, followed by a three-wave move down.

But this is not the only possible interpretation. It's sort of like having a GPS that tells you that you've arrived, when you've actually got miles to go. In this example, it is also possible that wave (2) hasn't ended yet; it could develop into a more complex three-wave structure before wave (3) gets under way. Another possibility is that the waves labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger impulsive downtrend, as shown in the "Alternate" interpretation at the bottom of the chart. According to each of these interpretations, though, the next imminent movement is likely to be upward. That tells you more than most technical analysis systems do.

Alternate counts are an essential part of using the Wave Principle. They are neither "bad" nor "rejected" wave interpretations. Rather, they are valid interpretations that are given a lower probability while the count works itself out. If the market doesn't follow the original preferred scenario, the top alternate usually becomes the preferred count.

I consider alternate counts to be similar to detours -- just a different way for the market to get to where it's going. How many times do you actually go from point A to point B non-stop in your travels? Admit it, you have to stop to grab a bite to eat or ask for directions once you realize you're lost. After consulting the map, you get back on track toward your intended destination. The new path represents an alternate count.

This seeming ambiguity about a wave structure illustrates an important point about the Wave Principle that, in my opinion, is often misunderstood. The Wave Principle does not provide certainty about any one market outcome. Instead, it gives you an objective means of determining the probability of a future direction for the market. At any time, two or more valid wave interpretations usually exist. Unlike actual physical roads that exist, price movements in financial markets are always changing, and the best you can do is be somewhat confident of whether they are moving up or down. That's the kind of confidence that the Wave Principle provides.

(Come back soon for part 3 of this series.)

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Who is Jim Martens?
Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI's Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim's latest thoughts about FX markets and the business of trading them at his Twitter feed.

Which Works Best -- GPS or Road Map? (Part 1)

Which Works Best -- GPS or Road Map? (Part 1) Trading with Elliott wave analysis By Elliott Wave International Some of the best stories about global positioning systems (GPS's) are the weird detours they sometimes recommend to drivers. Just like some of the weird detours that financial markets can make you take when you think they would be better off going in a straight line either up or down, depending on how you've positioned your trades. Not long ago, while taking a trip with my family through Great Smoky Mountains National Park on the way to Gatlinburg, Tenn., I decided to use my GPS to drive around the park's western boundary. We wanted to visit Fontana Dam and Cades Cove to see the wildlife. We'd do the go-carts, miniature golf and rides the following day. From Fontana Dam, my old-fashioned map made it look like it would take the better part of the day to drive around the park to Gatlinburg and then head into Cades Cove from the north. But my new GPS unit suggested that Cades Cove was less than 20 miles away. I could have kissed it -- my GPS was going to save me hours of travel time! Or so I thought. Little did I know until I got there that the road my GPS suggested for the final few miles was only the remnant of an old wagon trail -- and it was a one-way wagon trail, going the wrong way. I had to backtrack and take the much longer path my paper map suggested. What's the moral of the story? Sometimes the new-fangled gadget is not much of an improvement over what it's designed to replace. Although my GPS unit is great when it comes to identifying the quickest and most efficient route from point A to point B, it sometimes fails to take into account some of those necessary nuances, such as whether a street is one way or whether it might be impassable at times. Every so often, the old-fashioned way of doing things is still the best way. I believe that's true when it comes to analyzing markets, too. The method I employ every day has been around since the 1930s, and it works as well as, if not better than, any new-fangled technical analysis method for which you must buy some expensive computer software. My method is a form of technical analysis based on the Elliott Wave Principle, which Ralph N. Elliott worked out via hundreds of hand-drawn charts, well before the dawn of charting software. If you like those GPS units that talk you through every turn, you can almost imagine Ralph's voice explaining where to turn as you follow a market. Those directions -- the road map he drew for tradable markets -- have withstood the test of time. As I found during my trip, detours are a fact of life. They are also a part of market trends. For instance, a bull market shows periods of "punctuated growth" -- that is, periods of alternating growth and non-growth, or even decline. The patterns then build on themselves to form similar designs at a larger size, and then again at an even larger size. You've probably heard of this idea of repeating patterns on increasing and decreasing levels of scale. This emerging science, which is called "fractal geometry," is a branch of chaos theory. And it is precisely the model identified by R. N. Elliott more than 60 years ago. (Stay tuned for parts 2 and 3.) is Jim Martens? Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI's Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd. Catch up on Jim's latest thoughts about FX markets and the business of trading them at his Twitter feed.

Moving Averages and the Wave Principle

Moving Averages and the Wave Principle
Improve your Elliott wave pattern identification skills with this lesson from Jeffrey Kennedy 
November 02, 2012

By 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. Among Elliott wave traders, you will likely find an especially high percentage of investors and traders who incorporate moving averages into their Wave analysis.

Here's why: you can use moving averages to identify Elliott waves.

Senior Analyst Jeffrey Kennedy knows how to take complex trading methods and teach them in a way you can immediately understand and apply -- his step-by-step tutorials are beneficial to traders at any level of experience. Jeffrey is also well-known for combining ancillary technical tools to strengthen his Elliott wave analysis.

The following lesson provides a powerful example of how moving averages can strengthen your ability to identify Elliott Patterns. It is excerpted from Jeffrey's free 10-page eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages. (Click here to get your copy of this free eBook now.)

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If you're new to the Wave Principle, I recommend using a moving average to get you started, and the reason why is that a moving average overlaid on a price chart will help train your eye to see developing Elliott wave patterns.
For an example of a schematic Elliott wave, look at the figure below:

If you've read The Elliott Wave Principle by Robert Prechter and A.J. Frost, you know that wave patterns are illustrated as line diagrams.
When you look at a real price chart rather than a schematic, the basic chart is typically an open-high-low-close price chart. Each price bar represents a single period and is illustrated by a vertical line with a small mark to the left and a small mark to the right as seen in the next figure:

The little lower line on the left-hand side of the vertical bar is the open; the little upper line on the right-hand side of the vertical line is the close; the top of the line is the day's high or that trading period's extreme; and the bottom of the line is that trading period's low.
Here's the thing: Whenever you're making the transition from looking at a textbook diagram to actually counting Elliott waves on a real price chart, it can be confusing to the eye. If you use a moving average, it will help you to see the wave pattern more easily.
Let me prove my case more thoroughly with this chart of Corn:

The blue line is an 8-period simple moving average of the close, which clearly shows that a five-wave decline has unfolded from the upper left-hand side of this price chart. With the aid of a moving average, the subdivisions within this selloff are more easily discernible than with the untrained naked eye.
Also, notice that the slope of the move up in wave 4 is shallow. This detail is important because one of the key characteristics of countertrend price action is that it moves slowly, thus its slope will be inherently more shallow than what one can expect to encounter when a motive wave is in force.

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Learn How to Trade the Highest Probability Opportunities: Moving Averages No matter what your level of experience in the markets, you'll be amazed at how quickly you can benefit when you include moving averages in your Elliott wave analysis. 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-probability trading opportunities. Begin to improve your trading and investing with Moving Averages today! Download Your Free eBook Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Moving Averages and the Wave Principle. 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.