US dollar and a magnifying glass

Sherlock Holmes the Great Trader

A market analyst is a bit like a detective. In order for a homicide detective to make an arrest, he needs a body, a murder weapon, motive, physical and testimonial evidence. Just like a detective, making market forecasts is all about building a solid case based on multiple types of evidence.

Trader Skillset uses Elliott wave analysis as our primary technical analysis evidentiary tool, because there are times when it makes the action so clear that trading becomes almost easy – like getting a confession. But, as any good prosecutor knows, sometimes, even a confession isn’t enough. We’d like to  review a recent bullish call of ours on USDCHF from our weekend review on October 19th, which shows how we built a case on multiple pieces of evidence.

First, here’s the chart and what we wrote that day:

“Clearly corrective action has developed in both USDCHF and last week’s favorite USDCAD. Other pairs suggest dollar strength ahead too, but some of that may be “terminal action.” USDCHF and USDCAD remain our favorite major pairs; could the Swiss National Bank (SNB’s foolish EUR/CHF floor) and oil price weakness (leading to USDCAD strength) come into traders’ focus coming up?

A Decline Into Support, Remain Bullish
The original forecast as of Oct 19: “A Decline Into Support, Remain Bullish”

Let’s review the evidence for our bullish stance by spotting these detailes on the updated charts below:

  1. A 20-month corrective decline ended in March ’14 (area 1)
  2. RSI remained in “sustainable bull” territory (area 2)
  3. Five months of coiling ones and twos followed, ending at the wave (ii) low (area 3).
  4. Prices accelerated higher (at area 4) in September, pushing above the base channel.
  5. RSI hit a new high into the wave [iii] top (area 5).
  6. There’s a three-wave decline from .9689, which retraced .382 of wave iii, and prices bounced from prior fourth wave support (at area 6).
  7. The upside impulsive action is incomplete.

The only problem is that the action up from this week’s low isn’t clearly impulsive. But, the balance of the evidence suggests that we adopt a bullish bias. That means we don’t need count every single wave, just be a buyer on dips. One approach would be to be bullish once prices on a 4-hour chart are above its 20-bar moving average, once that 20-bar moving average has a positive delta (i.e. once it has a positive slope).”

Spotting easy to read technical facts on the updated daily USDCHF chart
Walking through most of the evidences on the updated daily CHF chart. Have you spotted all of them?

It’s a pretty clear call to action. We started with the “big picture” for 1 & 2. A bit like studying a crime scene. It’s important to get confirmation from larger time frames, or the bigger picture. In fact, the weekly timeframe RSI was sitting above 67 on the indicator pane. One further explanation about the “sustainable bull” territory we mentioned in point 2. What we mean is that RSI was continuously able to top above 67 and find support at or above 40 since April 2014 – check area 2 and 8.

For points 3-5, we simply are acknowledging the up trend. In the same way a detective would interview witnesses and gather physical evidence. We point out that RSI hit a new high in 5, and that confirmed the acceleration underway, as most trends accelerate until around the point of symmetry in an impulsive move.

In number six above, which highlights the “three-wave decline from .9689,” we’re getting a bit more granular, like interviewing a suspect directly. Using Elliott waves is nothing more than stringing together waves of fives and threes. Once we were able to count a three-wave correction down, that tells us, by an Elliott rule, that the larger trend was still higher. In addition, we had a common Fibonacci relationship for waves iii and iv (38.2% retracement), and the Elliott guideline for “prior fourth wave support” held true.

The real key to Elliott is when you’re able to build a strong case through multiple pieces of evidence. We use Elliott to develop our Context, or directional bias. You’ll notice that once the bias was created based on evidence, we wrote, “we don’t need [to] count every since wave, just be a buyer on dips.” That’s where Momentum and Signal comes into play; Trader Skillset’s two additional proprietary techniques. What we want to emphasize is that Elliot creates the Context, but one needs to confirm that Context with Momentum, and finally look for actual entry Signals, which are individual bars, or a series of them.

Happy Trading!

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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