The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “T...
Identifying High-Confidence Reversal Zones
01/02/2013 6:00 am EST
In a conversation with Jill Noble, Elliott Wave International senior analyst Jeffrey Kennedy shows you to how to use three technical tools to find price reversals.
Technical analysis offers several ways to spot pullbacks that indicate a reversal of the larger trend. When you use the Elliott Wave Principle, it can be very useful to "gain a consensus" from more than one indicator to spot a high-confidence trading opportunity.
"Price gaps, wave relationships, and Fibonacci retracements act as support or resistance for countertrend price moves. When combined, these characteristics help identify high-probability reversal zones."
Identifying high-probability reversal zones is simple, IF you know what to look for.
- Price gaps occur when the range of a price bar does not include the range of the previous bar. It acts as a reliable level of support and resistance for subsequent price action and should always be monitored.
- Elliott wave relationships help identify a range that will lead to the resumption of the larger trend. The most common relationship between waves C and A of zigzags and flats is equality, the second being a 1.382 multiple.
- Fibonacci retracements: Fourth waves tend to encounter Fibonacci support/resistance at a .382 multiple of wave three. Depending on the depth and duration of the correction, prices may also test the .500 and .618 retracements.
In the daily chart for Akami Tech Inc. (AKAM), you can identify all three characteristics:
- Price gap at 34.69
- Elliott wave relationship of 1.382 between waves C and A of a zigzag pattern at $33.79
- Fibonacci retracement at 50% of the prior advance at $34.04.
Using this information, you can see the very tight zone in which you may locate a probable reversal in this market (within the red circle).
Rather than focus on a single indicator, Jeffrey encourages you to combine them together to better identify high-confidence reversal zones in your price charts.
Insights like this can help you master many critical aspects to spot—and act on—opportunities in the markets you trade.
Jill Noble and Jeffrey Kennedy can be found on ElliottWave.com.
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