Using my Elliott Wave Principle fundamentals can give us an edge on predicting future movement of the financial markets.

The internals continue to show a similar story for the latter 90% of this rally since it started August 25th, and that’s a picture of low volume on this price rise. Today the NYSE barely breeched 900 million shares which is still very low. Not good for the bulls if they wish to argue in favor of a sustained rise based on the current market behavior.

Also of note is the fact that despite the market closing higher today, the VIX was in solid positive territory today and up over 4% most of the day before it closed up only 2.5%. So some fear and skepticism into this rally is creeping in here. It also corresponds well to the VIX market sell signal that executed September 7th that calls for a huge spike in volatility and stock market weakness.

Look at a daily chart of the NYSE Composite. Since the Composite topped August 9th, volume had 4 solid breaks above the 13 day moving average with a steady increase in volume as the market fell. Since the NYSE Composite’s bottom on August 25th, there were only 2 days that breeched the 13 day moving average, and one of those days was the bottoming day itself which probably had a lot of down volume in it, and the only other day was immediately following that bottom. Since then there’s been a substantial decrease in volume leading up to the current structure of the past few days.

So for the bigger picture, this chart here does not bode well for the bulls who may be using this rally as a centerpiece for their long term bullish arguement. To me, this says that there is a lack of interest in rallies and it’s actually the selloffs bring in the big numbers and bring the real interest into the market. That’s bearish.

ELLIOTT WAVE THEORY COUNT

My 4hr wave count chart of the S&P (switched from the Dow in previous posts). You can see that this count has become quite unlikely at the moment since the August high of 1129.24 is almost broken, therefore invalidating this count. But although some EWP guidelines have been broken here as far as the depth of wave (ii), no rules have been violated. Wave (ii) can carry all the way up to the start of wave (ii) if it wants. It just can go one tick above it.

Notice also that the stochastics on the 4hr timerame are now showing a divergence as they tried to cross down with today’s weakness. This divergence also supports the above wave count since it shows that the action the past few days is a finishing move, most likely a 5th wave, and momentum divergences often occur at that point.

Also keep in mind that the market is fast approaching my key dates of September 17th and 20th which correlate well with the major top in September 19, 2008.

Moving now to the short term count I have to switch back to the Dow count (sorry for the switch back and forth but with that bad tick in there on my S&P chart, and the fact that I look at the S&P as the primary overall market indicator for EWP, I have to put the S&P in there whenever I can like I did above). Here on the Dow you can see what I’m talking about with the 5th wave causing the divergence in momentum. Just as seen in the 4hr stochastics on the S&P chart above, the 1hr Dow chart shows divergence in the RSI since wave iii. ended. In other words, price continues to make new highs while the RSI does not. Again this is typical behavior in 5th waves, and so this is one of the reasons I’m hanging on to this count for the moment…..it just looks like a 5th wave and I feel it fits the best in the bigger picture. But we’ll see if both the Dow and S&P’s August highs hold. I admit it’s not looking good, but from a wave count perspective, we have to respect the potential laid out above.

INTER-MARKET DIVERGENCES

Below are list of the very short term new highs, or lack thereof, in the various markets I follow. Oftentimes near the end of rallies we’ll see that some indices make new highs while others do not. So the key points here are that the Nasdaq 100 exceeded its August high and yesterday’s high, the Nasdaq Composite only exceeded its yesterday high, and the S&P and XLF failed to do either.

So although these divergences here are very small, they’re worth pointing out because you never know when this little small short term market action signals a huge market move to the downside.

Keeping an eye on the bigger picture is key here as the market has been wandering sideways for months now. So here’s another article from EWI titled Understanding Robert Prechter’s ‘Slope of Hope’ that I feel is appropriate within the context of the current discussion and market structure.

PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.

Readers that are searching for more info about the niche of forex investment, please go to the website which was quoted in this line.

If the box size is set at 10 pips and the reversal amount is set at three boxes, the reversal amount in pips is 30 pips. So in case of a rising X column, price would need to turn back by at least 30 pips before a new O column would be added.Download your 82 page Candlestick Guide with strategy flash cards!

The significance of these two variables, the box size and the reversal threshold should be clearly understood. These two variables make the point and figure chart so effective at representing only the most major market moves disregarding all minor fluctuations known as noise.

The point and figure charts are excellent indicators of both trend and support/resistance. Since point and figure charts outline support and resistance so well, one of the best trading strategies in most common use with the point and figure charts is breakout trading.Don’t miss 1500 Pips a day Forex Signal Service!

In bar and candlestick charts, a double top is a potential bearish reversal signal. Now there is a notable distinction between the bar and candlestick charts and the point and figure charts in the interpretation of double and triple tops and bottoms.

However, on the point and figure charts, a double top is a resistance point where traders should be looking for a bullish break to the upside. The same difference holds for the double bottoms as well as triple tops and bottoms.

Charts patterns like triangles are prevalent as well. Like the horizontal support and resistances levels on these charts, the main method of trading trendlines and pattern on the point and figure charts is through breakouts. Point and figure charts also have their own versions of diagonal trend lines which are drawn at 45 degrees.

Price action is the most important aspect of technical trading. Point and figure charts give a very clear view of the market movements. The point and figure charts focus exclusively on the price action.

Point and figure charts had originated in the 19th century. It is because of this clarity in viewing and interpreting the price movements that the point and figure charts have withstood the test of time and are still popular with traders today as an increasing relevant analytical tool for forex traders.

Without the extraneous elements to clutter the picture, point and figure charts excel at representing clear evidence of such important technical characteristics as trend, support/resistance and breakout.

Other data that is readily available on the bar and candlestick charts like time, period opens/closes are generally excluded on the point and figure charts. This leaves only the uncluttered purity of price action. Some may characterize point and figure trading as based upon pure price action.

If you are a new E-mini trader you be careful as traders are expected to pay for the difference between the margins for the entry and exit points. In case you lose at the end of the day you are likely to pay in a big way. The margin requirements for E-minis are much less than the normal contract. The day trading margin is less than the margin to hold an overnight position in S&P 500 E-mini Futures contract.

All futures contracts are settled daily. At the end of the trading day they are assigned a final value price. The values of all positions are marked to the market each day after the official close based on the settlement price. Based on how well your positions fared in that day’s trading session, your account is then either debited or credited. In other words, cash will either come into your account or leave your account based on the change in the settlement price from day to day as long as your positions remain open.

As losses are not allowed to accumulate without some response being required, this system gives futures trading a rock-solid reputation for creditworthiness. It is this mechanism that brings integrity to the marketplace.

Leverage: The effect of price changes is magnified because futures markets are highly leveraged. You typically pay the price in full with stocks (i.e., without leverage) or on margin (50 percent leverage). Leverage can produce large profits in relation to the amount of your initial margin if you speculate in futures and the market moves in your favor. However, you also could lose your initial margin if the market moves against your position.

Suppose you have decided to put $10,000 into a futures account and you buy one E-mini S&P 500 index futures contract when the index is trading at 1000. Your initial margin requirement for that one contract is $3,500.

Each one-point change in the index represents a $50 gain or loss because the value of the futures contract is $50 times the index. You could realize a profit of $2,500= (50 points) ($50) if the index increases 5 percent, to 1050 from 1000. Conversely, a 50-point decline would produce a $2,500 loss. The $2,500 increase represents a 25 percent return on your initial investment of $10,000 or a 71 percent return on your initial margin deposit of $3,500.

Conversely, a decline would eat up 25 percent of your original $10,000 or 71 percent of your initial margin. In either case, an increase or decrease of only 5 percent in the index could result in a substantial gain or loss in your account. That’s the power of leverage.

It makes your money work harder and produces more in a shorter period of time when everything’s going your way, than if you paid for everything in full, up front. In such a situation leverage can be a beautiful thing. Indeed, leverage is the key distinctive aspect of futures trading as compared with stock trading.

Now suppose you use $5,000 in your account to buy an E-mini S&P 500 contract worth $50,000. However, prices fall by 10 percent instead of going up, and the contract’s value drops to $45,000. Your $5,000 is completely gone. This is the dark side to leverage. You’ll be obligated to put up even more money if the market keeps moving against you unless you get out of the position with an offsetting sale when your maintenance margin level is violated. Leverage is the one ingredient that can produce either horror stories or happy endings. It is extremely important that you fully understand the power of leverage and how to manage it well to get the happy ending.

The evening session starts at 3:30 PM (15 minutes after the close) and continues on the Globex until 8:15 AM overnight. Individual contract holders are limited to no more than 20,000 net long or short contracts at any one time.

A price limit is how far an S&P futures contract can rise or fall in a single trading session. The limits are set on quarterly basis. If the index experiences major declines or increases beyond these limits, a procedure is set in place to halt trading. If these price limits are crossed, circuit breakers are triggered.

Collar Rule: The collar rule addresses price swings related to program trades that move the Dow Jones Industrial Average (DJIA) more than 2% by requiring index arbitrage orders, or orders that bet on the spread between the futures and the cash of stock indexes to be stabilizing. This limits the traders from piling buy or sell orders in an attempt to exaggerate the gains or losses of the market. What this rule does is limit the chance of huge gains or losses as a result of futures trading.

Especially during slow seasons in the stock market such as summer, fall and around the winter holidays, overnight or pre-market trading can be thin and dangerous. It’s time to learn how an S&P futures contract ticks once you have mastered futures basics such as the performance bond margins, the mark to market requirements and the account specifics.

Hundreds of futures contracts trade on the federally regulated futures exchanges in the United States. Each of these exchanges trade contract that are somewhat unique to it. CME’s most actively traded contracts are Eurodollar futures and S&P futures including the E-minis.

E-mini S&P Futures contracts: The E-mini S&P futures contracts (ES) are the favorites of the day traders because of its high intraday price volatility and major price swings on a daily basis. The E-mini S&P futures contracts (ES) are among the most popular stock index futures contract because they enable you to trade the market’s trend with only one fifth of the requirement.

One tick on E-min S&P futures contract is equal to 0.25 of the index point or $12.50. The value of the E-mini S&P futures contract is $50 times the value of the S&P 500 stock index. The E-mini S&P futures contract can be very volatile and can move even more aggressively during times of extreme market volatility.

The S&P 500 is made up of 400 industrial companies, 40 financial companies, 40 utilities and 20 transportation companies offering a fairly diversified view of the US economy. The S&P index introduced in 1957 is currently the investment industry’s standard for measuring portfolio performance.

The original S&P 500 futures contracts were valued at $500 times the index. As the stock market began to surge higher, the index more than doubled in three years. With the index approaching the 1000 level, the value of the S&P futures contract neared $500,000 and a 10 point change was worth $5,000.

The margin requirements for that sized contract ruled many traders out of the market. So in 1997, CME introduced an S&P futures contract that was worth $250 times the value of the index. A move of a full point is now worth $250. Suppose the S&P 500 index value is at 1450, the value of the S&P futures contract will be ($250) (1450) = $362,500.

Earlier in that same year CME introduced another mini S&P futures contract. This news mini contract became highly popular with individual traders instantly and was a hit with the investing public. E-mini S&P futures contract is worth only $50 times the S&P 500 index and the value of this new E-mini S&P futures contract brought the initial margin requirements down to around $4,000 at that time.

Even with a margin requirement of only about 6 percent of the contract’s value, the rising stock market put the initial margin at $15,000 with this $250,000 contract, keeping the S&P futures contract out of the reach of many individual speculators. The E-mini put the S&P 500 Index within the capabilities of many individual accounts.

Another important decision that the CME officials took was giving traders direct access to the market without going through an order handler. Now trading orders could take place entirely on a trade matching computer with no human intervention. This was the real innovation that allowed small orders of this new E-mini market trade entirely on an electronic platform and not in the traditional open-outcry pits.

Electronic trading would no longer be limited to after-hours trading or to supplement the primary pit contract, but it became the mainstream market for the E-mini contracts as the allowable number of contracts was increased over time.

And, as long as trading was all computer-based, the CME also decided it might as well keep the market open almost 24 hours a day. The radical move caught the wave of online trading and day trading that was revolutionizing the stock market at the same time.