Squawk Morning Briefing: Patterns in Snow

Today’s DJIA and Euro briefings contain similar theme.  In both we want to see breaks of certain levels to enhance the likelihood of an important change in trend; coincidentally, both levels happen to be right at FibGrid snow lines.  The collection of tools in our Elliott wave framework give us three ways to identify changes in trend:

1. When a trend move counts complete one can look for a the trend to reverse.  This is the most forward looking measure, and when the pattern is clearly visible this can allow us to anticipate where a turn may be likely to occur.
2. When price moves far enough in opposition to the prior trend that it invalidates wave patterns allowing the trend to continue, it adds further evidence to the idea of a trend change.   However, the trend must start to reverse before this behavior can be observed.
3. Even more evidence of a turn comes when the move in the direction of a new trend is observed to be impulsive and in five waves.

When trading, we have to take what the market gives us.  The wave patterns will sort themselves out long after the fact but trading happens in real time.  Therefore we need to assess probabilities.  It is not the market’s job to clearly identify its intentions so we don’t always see clear ending patterns and clear trend moves in the new direction as there will always be multiple interpretations.  Our job is to assess the likelihood of a turn given the current situation.

 

The overall message of current markets is that we cannot see a clear ending pattern at the moment.  It remains possible that trend has changed but we would need clearer evidence using our other tools to suggest that it has already occurred and that would mean identifying it further away from the actual peak.  However, we do this because there is still a good chance that the prior trend is not over.   By giving the market time to show itself, it also leaves open the possibility that we might observe a clear ending pattern and will eventually find a likely turn very close to where it occurs.

For significant changes in trend, it is often more important to have confidence that direction has changed than it is to get it from the very start.  It’s great to get both, but that’s not always possible.  For now, we need to wait and continue to look at what the market gives us.

 

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