Tuesday, February 10, 2009



Welcome to the premier issue of Elliott Wave Technology’s E-briefings. As promised, our maiden letter will reveal just how easy it is to buy low at major bottoms, and sell high at major tops.


The chart above illustrates 4 arrowed “BUY” zones just before and after the lows of the bear market bottom of 2002 and 4 arrowed “SELL” zones just before and after the highs of the bull market top in 2007.

Certainly, anyone with 20-20 hindsight can look back and say with certainty that these critical zones of reversal were the quintessential sweet spots where one would have ideally shifted their largest speculative expressions on the market.

In our view, “investing for the long-haul” is a fool’s game. Recent events and those similar throughout the entire history of financial markets prove without equivocation that financial markets are EXTREMELY SPECULATIVE no matter what ones time horizon may be. To believe otherwise is to gamble heavily on timing ones need to cash-out with that of the markets willingness to oblige.

Following the collapse of equity markets in the fall of 2007, most all global equity indices are now sporting trajectory lines, which harbor the power to wipe them out completely. Well-established historical gauges for “total collapse” targets range from 80% to 90% declines from peak values. We provide identification to all of the Global Markets “risk of ruin” trajectories and their respective downside price objectives (should they eventually breach) in our latest Millennium Wave Quarterly Report.

With this newfound view of reality, we suspect many readers are hell-bent on figuring out a definitive way to engage markets with a level of certainty, which assures that the lion’s share of their core account positions will be OUT, or SHORT amid big market downturns, and IN and LONG amid major market advances.

In general, the hardest thing about buying low and selling high (in any time frame) is setting concise technical boundaries to price data, trusting in what those boundaries portend, and then pulling the trigger when those boundaries are crossed. It is that simple.

As we see it, one must first resolve how they are going to approach executing either one specific or a combination of five levels of market engagement. Although many may prefer a multi-layered approach, using multiple accounts from which to concurrently engage various and at times, opposing levels of engagement within the organized framework of a much larger master trading plan, for the purposes of this briefing, we shall limit our focus exclusively to addressing only LEVEL-I engagement , which is the longest-term time horizon of practical utility.

To illustrate the simplicity of our LEVEL-I approach; we will use engagement results in the NASDAQ 100 as example of this pro-active method of assuring stellar profits vs. rolling the dice on a useless buy and hold approach.

Although it is not necessary to have grand strategy visions of plausible market outcomes, acquiring them does add a significant level of confidence in trusting the charts, and executing speculative trade plans with the least amount of pause, doubt, or hesitation.

In addition to cogently applying the principles of Elliott Wave along with a host of additional ancillary technical indicators, the most basic tool enabling one to stay with long-term trends is a simple moving average barometer.

The problem most people have with this very simple rule of engagement is that they are just too lazy to be diligent about checking each week’s closing price to see if it is above or below this simple-to-track boundary measure.

Imagine that. In less than an hour per year, (one minute each weekend) one is able to get LONG near critical bottoms and SHORT near major tops. As with most speculation, this is NOT rocket science, nor some mystical magical method of reading tealeaves, but rather an ongoing exercise in patience, discipline, and resolve. Either you have it, or you don’t. It’s that simple.

Sell-Tops Image-1

Thirteen weeks after the bear market bottom in 2002, Level-I core positions reversed core short positions and went long the NDX @ January’s weekly close above our moving average boundary at a price of 1087. The print low in October of 2002 was 795.25, and we waited for more than three months and a 36% advance off the low to REVERSE HIGHLY PROFITABLE SHORT POSITIONS in order to shift long side entry positions at LEVEL-I.

If anyone is foolish enough to be shocked at the simplicity of this discipline or to harbor disappointment that such an entry does not represent buying “the” bottom, but rather an arbitrary level nearly 40% above, then we suggest those individuals must immediately realign such unrealistic expectations with the harsh realities and disciplines associated with successful ongoing speculative operations.

One must remember that speculating is a constant exercise in odds, which involves constant exposure to risk. When one speculates or invests, one must be willing to risk odds of a measurable loss in exchange for the bounty of financial reward in kind.

Upon pulling the trigger on a LEVEL-I core reversal long signal @ 1087, it was then required that we place our initial stop-loss orders beneath the October 2002 low. Bear in mind that this LEVEL-I long reversal was a major PROFIT-TAKING event from the prior dot.com collapse. In this context, risking an initial 40% after booking MASSIVE PROFITS on a previous core LEVEL-I short-trade is of no major consequence.

Now here is where the hard part comes into play. After the first meaningful buy-signal price-close above our observed moving average, the market immediately submerged back beneath the long-signal boundary for five successive weeks in a row.

Whether we were sitting on massive profits or not, it was still quite challenging to maintain confident resolve to long exposure from 1087 in the last week in January, especially when February ushered in an immediate pullback print low back down to the 938.52 level, drawing down open equity by more than 13%.

Those were five weeks of hell and tense frustration in questioning whether the market was indeed heading back to fresh bear market lows. Such is the price of admission, and a natural part of the speculative process.

If one so chose however, they could have opted to take an immediate 6.4% loss the next week by exiting flat @ the following week’s 1017 close beneath the boundary trigger. Five weeks later, they would have had signal opportunity to enter long again, this time from 1015.

By 31-December 2003, based upon long-entry at 1087, our speculative investment position was up nearly 35% on the year.

The pure take-away is that no matter which discretionary approach one takes in “trading the boundary trigger”, maintaining resolve and discipline in methodically probing for that ever-elusive bottom or top will eventually pay-off handsomely.

No, it does not come easy, and it is quite rare that one receives immediate comfort or validation for all of their hard work, diligence, and exposure to risk. On the contrary, one should expect inordinately high levels of challenge toward their efforts for without pain, sacrifice, and hard work; there are surely no rewards of lasting merit.

Next, we will briefly explore the return trip south following the bull market top in 2007 some four years later.

The trend is your friend but only if you treat it fairly, respect it, and hold it to task when it pushes the envelope toward boundaries beyond those with which you are comfortable.

Sell-Tops Image-2

Sparing much of the blow-by-blow details, this is the very same process of buying bottoms but in reverse. Here we took over 30% in long side profits on core directional positioning, and reversed short at the late 2007 closing price of 1960. In this case, we had ten straight weeks of immediate validation ecstasy as we found our new short expression in the market up nearly 15% by mid-March.

Wait a minute, “not so fast” says the market. Over the next 8-weeks, the market took back all of the validation it had given us, and posted four solid closes back above our sell-signals moving boundary. As if this were not frustrating enough, the market continued to move against our position, and drew down open equity to a loss of nearly 4-%. Again, such is the price of admission and a very natural part of the speculative process.

However, with over 30% in booked profits on our previous long side expression, and a 15% stop-loss on our new LEVEL-I short position, we maintained resolve in holding the former uptrend to task in proving itself more friendly than the recent introduction and prospects of a new long-term downtrend being kinder and gentler toward our shifting speculative bias.

Grand strategy views expressed in the form of Elliott Waves (along with ancillary technical indications) made it objectively easier for us to have held faith in our newfound opinion of the price action, especially considering the prospective alarming outcome if the markets telegraphed intentions were to eventually deliver the full bounty of bearish goods suggested. We trust that all would agree that the subsequent 54% crash into the November 2008 low an adequate delivery of such goods.

One may be wondering just what happened amid the two years spanning 2004 through 2006? In sum, a whole lot of NOTHING.

From our perspective, it was a miserable dead-end two years of mistrust, trials, and tribulation in holding trend to task. Whipsaws abounded as the market gyrated in fits and starts leaving the constant question of trust-in-trend forever on the table.

It is times like these where the hardest of work and diligence applied, paradoxically brings the least amount of reward. However, this is the essential cost of assurance that one must pay in order to avoid ruination by a major market collapse, or to find oneself left behind amid a bullish rocket launch thrust to the upside.

Admittedly, in this particular time horizon, the buy, & hold crowd came out on top to the tune of 13%, and without lifting a finger. Ah, such is the allure and seduction of “set it and forget it” “the market always comes back” mentality.

In our view, they can keep that ideology along with the 13% they may garnish from it every couple of years amid any given decade. We would much prefer to toil endlessly for valid assurances rather that succumb to the temptation and false promise of erroneously “sure-things”.

Sell-Tops Image-3

Whipsaw City
The chart above illustrates outcome to our long side market exposure in place from 1087 in 2003 through July of 2004. We reversed posture and booked 32% profit on long side exposure as noted. As the chart goes on to depict, a series of seven whipsaws in trend developed from July 2004 through May of 2006, which on balance, yielded no returns whatsoever.

It was not until the buy-signal of September of 2006 that the trend stabilized from a most horrid and nasty consolidation to one that was much more friendly and easy to get along with. Despite this series of seven core-position-shifts producing the agony of zero results, the 13% cost of assurance drudgery made capturing the final 33% of upside remaining in the cycle that much more rewarding.

We hope that you have enjoyed this maiden issue of our new Quarterly Briefings, and have gained some lasting and realistic insights as to just what it takes to engage the markets prudently at LEVEL-1.

Until next time…

Trade Better / Invest Smarter…
Joseph Russo
Publisher & Chief Market Analyst