Despite the fact that the market has tumbled over the last few trading days, I’m betting that stocks are heading back up this week. How do I know? I rode “the wave”…

The Elliott Wave principle is a system of technical analysis that looks at “waves” to forecast the market’s direction. The principle is based on crowd psychology, and the idea that markets move from bullish periods to bearish periods constantly over the course of any trading session — from a day to many years in length.

These changes in market sentiment create waves that take place in what’s known as a 5-3 pattern. That means that the market moves five ways in the general direction of the market, followed by three corrective waves the other way. And believe it or not, that exactly what’s going on with the market right now…

As you can see in the 15-minute time frequency charts of the indexes below, something very interesting is going on: We are locked in a downtrending channel as defined by the blue lines. If we are going to continue that path then channel support is the lower blue lines.

With all the after charts what we’ve laid out here are potential wave counts according to an Elliott Wave Script from here on out if this is going to be a five-waves affair down (abcde). IF it’s a three-waves affair down (abc), then we are done going down in the short term. However we can’t say that till we see what bounce mode brings next week.

So this is your short-term forecast, watch for it.

As of this moment in time you can see the Dow Jones Index hitting its 50-day average with the full stochastics oversold. So from a daily perspective this is a logical level for the markets to stage some sort of bounce. The super short-term charts of the indexes at the beginning of this report are what you want to key in on. They will tell you when a bounce occurs and just how strong that bounce may be.

The signature pattern we look for on the long side is the “pullback off highs” pattern as you can see here:

When a stock is moving higher, it doesn’t go straight up. Instead, it rises, and then consolidates its gains before resuming its move higher. These mini-downtrends are where it pulls back off of its highs in an orderly manner — often to an area of key support such as its upward trend line and/or 50-day moving average.

We draw a line connecting the lines of the mini-downtrend. A break above the pink line triggers a trade on the long side. For that reason, EBIX was an idea long side set-up.

EBIX triggered a trade Monday by breaking above the pink line. By the end of the day Tuesday, EBIX was knocking on the door of resistance at its old highs — an 18% gain in two days! This is a classic buy support and sell at resistance trade.

And in the world of swing trading, 18% in two-days is huge! Just think about it. Let’s say you have a portfolio of $50,000. And you invest in 100 shares of EBIX at $47.10. After selling it at $54.64, you’ve made a two-day profit of $754.

These are the patterns we’ll be looking for in the near short-term.

Sincerely,
David Grandey
AllAboutTrends.net

October 5, 2009

David Grandey

David Grandey is the founder of All About Trends, an email newsletter service revealing stocks in ideal set-ups offering potential significant short-term gains.  A successful canslim-based stock market investor for the past 10 years, he has worked for Meriwest Credit Union Silicon Valley Bank, helping to establish brand awareness and credibility through feature editorial coverage in leading national and local news media.

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