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Exhaustion And Reversal

ATW's Jerry Simmons offers his technical (Elliott Wave) analysis for US equities, oil and gold. His preferred scenarios seem the first is heading into exhaustion, the second is now in dubio about what direction next and the third one seems poised for weaker prices. Total duration for this broadcast is 53 minutes.

Summary

Using the S&P500 equity index futures, 5-wave Elliot waves are analysed, including the important initial and ideal completion targets, i.e. where we expect the price to culminate and turn around. Concepts such as “structural exhaustion” are explained. An interesting pattern regarding the first day of a trading month is explained that can be traced back for decades and has become even more prominent in the last 2 years. It has a high statistical probability of resulting in a gap up, big range expansion and close at or near the high of the day.

Analysing Crude Oil Futures, the concept of role reversal and how important a tool it is for defining trend change is looked at. Finally, looking at gold futures, the recent prevalence of Head & Shoulder patterns is pointed out and the resulting bracket trades.

Comments

S&P500 Futures Index

A 5-wave Elliot wave is in progress. It may have completed at the DF51 ($1328.80) but, quite possibly, could also be subdividing into a lower degree 5-w move with a possible completion target at the higher degree DF51X at $1334.90. This combination of a higher-degree 5-wave move subdividing into a lower degree 5-wave move represents a classical type of structural price exhaustion and is one of the highest rated trade setups.

A pattern that can be shown to have been active for decades and has become even more prominent in the last two years regards the first trading day of the month, in this case the 1st March. Often, the 1st trading day of a month starts with a sizeable price gap up. The price action during the day then forms a big range expansion and often the price finished the day at or near the high, and often continues that up movement into the next day. This pattern often starts developing not just on the last day of the previous trading month but 2 or 3 days before. This is because institutions, because of the size of their trades, are effectively barred from day-trading and have to scale into positions and scale out of them. This requires them to start buying 2 or 3 days before the end of the month and then selling on the 2nd and the sub sequent trading days of the following month. The pattern is not without exception, but nevertheless statistically relevant enough to be profitably traded.

Crude Oil Futures

There are two crucial levels below the market: 1. $95 2. $93.50

Any break-out below these zones, especially the lower one, should send the price much lower. A conservative break-out confirmation would be $93 and lower, i.e. given a price fall from the current level to $93 and lower would offer the opportunity to go short. Such breaches of major support lines are viewed by Jerry Simmons as a better indicator of trend changes (i.e. changes in the fundamental dynamics of the market) than moving averages or the traditional “higher highs/higher lows” and “lower highs/lower lows”.

On the other hand, Jerry notes the formation of an upwards price channel with a pull-back forming a DAlt of the previous upswing, and, at the same time being a 786 RTC of the previous upswing. Not only that, but a DAlt overlaps the 786 RTC which represents a DF70. A break-out above par 50 ($100.50) would represent a very bullish 1-2, 1-2.

Here, we have another instance of the recently frequently occurring “bracket trade” opportunities, i.e. a situation where the market is utterly undecided which way to go and really can go either way with nearly equal likelihood. In such situations, we place a buy stop above a confirmed break-out point, and a sell-stop below a confirmed break-out point. The break-out points are defined ahead of time as “conservative” or “aggressive” and sometimes “super-aggressive”. “Conservative” levels give up some profit potential for lower risk.

Gold Futures

Gold Futures formed an inverse Head & Shoulders pattern from about 20/1/11 to 3/2/11. Then, about 4 February, they broke out to the upside what the ATW calls a “diamond pattern”. It appears that at about $1420-$1435 a fully qualified Double Top is now forming. However, an alternative interpretation of price action is that we are in wave 4 of a 5-w move and one of 3 things will now happen:

1. We have completed w4 and will move into the final wave, wave 5 2. Or, we have formed sub-waves A and B of wave 4 and are now into forming sub-wave C, the final sub-wave, of wave 4. This would then also be followed by wave 5. 3. We are dealing with a failed 5-wave structure and the price will now fall.

Alternative 3 appears unlikely. More likely, we will see a completion target at the DF51/Exhaustion Fib Alternate confluence at the $1430 price level, which is the area of the all-time high and would, at the same time, form a major Double Top. Any break-out below the DAltX of wave 4, at $1380, would seriously damage the 5-wave structure.

To view the ATW Strategic Prep Video (originally from November 29, 2010) titled "ES_CL_GC" click HERE or visit the FNArena Investors Education section of the website.

Here's the direct link: http://www.fnarena.com/index2.cfm?type=dsp_front_videos

All views expressed are Jerry Simmons's, not FNArena's (see our disclaimer).

Jerry Simmons has over 25 years of full-time trading experience. He is the senior partner and head mentor for the “Masters” Programme within the education system at New York based Advanced Trading Workshop (ATW). ATW recently set up shop in Australia through the establishment of ATW Australia (since mid-2010).

FNArena is pleased to have Jerry Simmons as a highly valued contributor to its service which aims at both educating investors and assisting them with their own market analyses.

The above mentioned videos can be accessed via the FNArena Investor Education section at http://www.fnarena.com/index2.cfm?type=dsp_front_videos)

About ATW Australia Founded in June 2010, ATW Australia is a “one-stop-shop for all a trader needs to succeed”: quality education for new traders, superb advanced trading education, fast unfiltered data, a world-leading trading platform, customer oriented competitive brokerage, quality ‘Made in the USA’ specialized trading computers, trading magazines, and the all-important psychological mentoring and coaching for traders. The trading educational products are provided by the Advanced Trading Workshop, Inc. in New York, all other services are provided by a network of partners that were chosen based on their superior products and services in their specific field of expertise. FNArena is one such partner.

To learn more visit www.advancedtradingworkshop.com.au.

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