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there is one observation from the theory that can be highly useful in calling the bottoms and tops of secondary corrections in bull and bear markets, respectively. Elliot wave theory postulates that market price movements follow recurring wave pattems. Within these pattems, he describes an A-B-C movement as illustrated in Figure 7.15.

Secondary corrections in both bull and bear markets almost always follow this pattem. Another aspect of this pattem is that volume dries up on the wave. To be valid, the movement must be confirmed by the other significant averages. Exceptions occur with the advent of major news affecting the market. As the illustration shows, the point of a secondary correction in a bull market can either test or break the low established by the A point. The converse is tme for a bear market. Obviously, if you can determine when the point has been established, that is an ideal time to go long in a bull movement or short in a bear movement.

A good way to establish a speculative position during the stage of a secondary correction in a bull market is to buy when prices break the trend line established in the wave, provided volume has been diminishing on the decline. Stops should be established at the lowest of the A and points to protect against the ever present possibility that the exception to the mle is at hand.

If volume is relatively stable on the breakout of the wave trend line, then the chances for a bottom are slighter. If volume increases sharply with the movement of the line, there is a good chance that the movement is not a correction but the second leg of a change in the primary trend, provided that fundamental conditions warrant the change.


The art of speculation consists of buying and selling stocks, bonds, currencies, mmodities, options, and so on. within the intermediate-term trend. The best long speculative position is one taken at or shortly after the bottom of an intermediate downtrend has occurred, which can be either at the end of a bear market or the tuming point of a secondary correction in a bull market. Conversely, the best short position is one taken at or shortly after the top of a bull market or the top of an intermediate correction in a bear market.

If you use the above methods as a preliminary selection riteria, a tremendous amount of time and energy can be saved. Once you become familiar with these principles, it is possible to "eyeball" the charts and quickly develop a list of likely securities, futures, or other instmments to buy and sell and to eliminate a host of others that are too indeterminate to speculate on. Once this list is developed, more particularized knowledge can be sought to choose those equities, govemment securities, and commodities that offer the highest reward potential with a minim um of risk. In the next chapter, a few additional technical methods are discussed that can be used to support your decisions.


Typical ABC Correction In Bear Market

Figure 7.15 The ABCs of Secondary Corrections-a typical ABC correction in bull market.


I often marvel at the sophistication of the reports that analysts put out-so much detailed research, such complex determinations of "market value." Invariably, analysts reports contain all kinds of interesting information, and the best of. them are well-reasoned, wellwtitten, and quite convincing. But do you know what? I havent read one in many, many years.

When I give talks to groups of market professionals, I sometimes open up by asking the following question:

"If the tide shifts out off the coast of P eru, would you be a buyer or a seller of soybeans? Usually. I get looks that say. "I thought this guy was good at what he does. What the hell is he talking about?"

Then I explain that when the tide shifts outward, the anchovies that feed in the shallows ff the coast of Peru move further out into the Pacific. The anchovy fishermen, whose primary market is the Japanese who feed anchovies to cattle, lose yield. The supply of anchovies dries up. and the Japanese start feeding their cattle with soybean products. The demand for soybeans goes up, and so does the price of soybean and soymeal futures. Therefore, if the tide shifts out oft the coast of Peru, you should be a buyer of soybeans.

At this point. Ive usually captured the attention of most of the audience, but there are still a lot of looks out there that say, "So what"" The point of the story is not that you should find a way to monitor the tides off the coast of Peru to trade soybeans effectively. The point i5 that you dont have to know everything there is to be known about a market in order to trade it. In fact, there is no way you can know everything, and it will probably be the one thing you dont know or havent thought about t hat will bum you if you try to trade from knowledge of the specifics of a market. In other words, what the analysts dont know can kill you.

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Like Peter Lynch explained in his book One Up on Wall Street, common sense is usually more useful than a myriad of facts and figures. But where Lynch and I differ is in my conviction that if you know what to look for. the market will tell you most of what you need to know. In particular, there are a few key technical indicators that are tight more often than not and have stood the test of time throughout my entire career.

In glancing through my copy of Technical Analysis of Stock Trends, by Edwards and Magee, I counted over 20 different technical pattems discussed in just five chapters. With all due respect t Edwards and Magee and their fine and useful book, I do not recommend using most of these complex technical observations as a primary tool in trading. A few technical tools, however, are of tremendous value as secondary measures of the merits or pitfalls in any trade, especially in the stock market. I call these technical tools "secondary" because I never base any trading decision on them alone. I use them more to tell me what not to do, than what to do.

The secondary technical tools that I use most are:

1. Moving averages

2. Relative strength indicators

3. Momentum indicators (oscillators)

As I have said before, the art of speculation consists of putting money at risk only when the odds are in your favor. These secondary technical observations serve to supplement odds measurement. Of all the technical measurements that I know about, other than th ose discussed in the last chapter, these work the best.

What the Analysts Dont Know Can Kill You

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