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Strong

A New Technical Triad and Gold

One of the most popular questions that we're asked here at MarketClub is to recommend which chart studies should be used in conjunction with one another. While we don't have an answer for this question - mainly because we realize that there is no right answer, you're in luck as today's guest blogger has developed a strategy using 3 different technical tools and described it in detail for us below.

Gary Wagner of WFGForex.com has developed a unique strategy using Elliot Waves, Fibonacci retracements, and candlesticks to gain insight on the current gold market. Since Gary received such a great response last time he was a guest, we hope that you will enjoy is newest post as well. Read about this interesting way of analyzing the market and leave your comment below.

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Most market analysts will agree that supply and demand economics are a major influence on the current price of a commodity. It is however market sentiment that greatly determines the perceived future price.  If one can understand, and quantify market psychology or market sentiment, one can more effectively forecast future prices. This has been the underlining assumption of Elliot Wave and Fibonacci Retracement theory.

To the market technician Elliot wave and Fibonacci retracement theories go together like peas and carrots. Elliot Wave incorporates many aspects of the Fibonacci sequence and retracement theory. It uses different retracement levels as benchmarks that certain waves should go to. Even though when R.N. Elliot created his theory he did not know of Fibonacci theory and only made this correlation later on in his studies, they are now considered to go hand in hand with each other.

Might I suggest a third ingredient to the mix, Japanese Candlestick pattern theory?  I have found that adding this technique in combination with both wave and retracement theories can deliver greater market insight.

These techniques are all based upon the assumption that a market’s behavior is based upon natural laws of nature and laws of market psychology. They all believe that these natural cycles can be identified and quantified to use in market forecasting.  All three techniques believe that the ways markets behave are predicable; because there is a mass psychology that guides and defines the way we as traders think. All three techniques although different, have identified a specific and mathematically definable set of rules and guidelines.

Elliot wave, Fibonacci retracement and Japanese candlesticks are roadmaps or descriptions of how markets might perform. They are all able to define market sentiment or market psychology in mathematical terms. It is my assumption that by combining these three techniques together the synergistic effect is a more reliable and a much more effective process for price forecasting.

As the executive producer for the “Forex Gold Forecast” tm, a daily video newsletter, my focus has been on the price of gold. As of this writing gold is trading at a record price, as the prior historical price of 1221 was surpassed and is currently trading at 1230.  The price of gold has moved in a predictable manner, if you know the right roadmaps to follow. By applying the Elliot wave count, one is given a tremendous amount of information and insight.

According to Elliot wave theory, a market trend follows a cycle. That cycle is made up of eight waves. This eight wave sequence will repeat until the trend is exhausted. This trend structure is composed of eight waves, divided into 2 phases; the motive phase and the corrective phase. The motive phase is composed of 5 waves (waves 1 through 5). Waves 1, 3 and 5 will move in the prominent direction of the trend. These 3 waves are called the motive waves. They will be separated by two retracement or corrective waves (waves 2 and 4), where the price action will move against the current trend. The corrective phase is composed of three waves (A, B and C), they will move opposite the primary trend. Waves A and C will be corrective waves, while the B wave will move in the direction of the primary trend.

Figure 1 Daily US/UAX (Forex gold) candlestick chart with Elliot Wave count

Figure 1 is a daily candlestick chart of Forex gold (US/UAX) in which the Elliot wave count has been added. The motive phase drives gold to a new historical high of 1221 in December of 2009.  The corrective phase in Forex gold lasted from December 2009 to February 2010. With this top in place we were able to calculate our Fibonacci retracement levels. We used the low created just before gold broke 1000 which was at 980 dollars per ounce, and the high at 1221dollars. During the corrective phase the market will give back a percentage of its gains. It will not be until the completion of the full wave count at the C wave that gold will find a bottom, and begin the wave count all over again. By the completion of this corrective phase, gold had given up almost 78 % of its gains closing at just 1040 dollars per ounce.

Figure 2 Daily US/UAX (Forex gold) candlestick chart from corrective phase to current motive phase

After the completion of the eight waves, the cycle is completed and the count begins again. Once again the gold market enters the motive phase. This is the phase we are currently in. The first Wave (1) occurred on February 2, 2010, as seen in figure 2. From a low of 1040 per ounce, gold climbed 100 dollars higher to over 1140. Gold prices moved from the 78% retracement level to above the 38 % retracement level on this single wave.  This signaled the first corrective wave (2).  There are specific rules for the wave count. Corrective wave 2 should not retrace more than 61.8 % percent of the gains achieved in wave 1. Wave 2 which took just under three weeks to complete did in fact trade right to that Fibonacci retracement level.

Figure 3 Daily US/UAX (Forex gold) candlestick chart with Elliot Wave Rules

To the untrained eye, some might consider the wave count to be subjective, with room for interpretation. Because of the complexities in which markets behave, there are many variations to basic wave pattern. However all wave patterns must follow 3 major rules that R.N Elliot indentified. These three rules have no flexibility, and for one to achieve a correct wave count all 3 rules must be followed. Figure 3 illustrates the basic example of the wave count with all three rules in place. Because rule three states that wave 4 can never overlap wave 1, we have a clear indication that the current wave 3 has not ended.

Figure 4 Daily US/UAX (Forex gold) candlestick chart with Fibonacci wave rules

Figure 4 is a daily chart of Forex gold starting at wave 1 after the completion of the 8 count. This chart contains the Fibonacci rules needed for a correct wave count.  According to this count we are currently in wave 3. If this wave count holds true, we could see the full wave not completed until it reaches 1.618 times the size of wave 1. This could take the market as high as 1246.  We should experience a corrective wave (wave 4) after the completion of wave 3; this correction should retrace roughly 38 % of the gains in wave 3. This will be followed by one more motive wave (5) to complete the motive phase.  Wave 5 should take gold to a new record high price, moving a length equal to wave 1.

Figure 5 Daily US/UAX (Forex gold) candlestick chart with Elliot Wave, Fibonacci and Japanese Candlestick Patterns.

Figure 5 examines all three components of this technical triad: Elliot wave, Fibonacci retracement and Candlestick patterns. If we look to see the points where all three indicators are in confluence, we can effectively create a triple filtering system.

In figure 5 the first corrective phase’s wave (A) trades to a low of 1077, the 61 % Fibonacci retracement point. A piercing line pattern forms and signals a bullish reversal... The B wave trades higher finding resistance just below the 23 % Fibonacci resistance level. A “Shooting Star” candle marks the top. This marks the end of wave B. The C wave, which is the last of the corrective phase breaks below the 61 % retracement point and just before it reaches 78 % multiple candlesticks and a rare candle pattern form. Two reversal candles the Doji and inverted hammer are part of a pattern called a unique three river bottom. This signals the end of the corrective phase, and a new wave count begins at again. An Engulfing Bearish signals the end of wave 1, just as the on neck pattern signals a bullish reversal and the end of wave 2.

It is my contention that Japanese candlesticks have an uncanny ability to reveal and identify key reversal points quickly; however filtering these signals with other market information is a critical component for success. Where a pattern is found within the trend determines the strength or weakness of that signal. By looking at all three methods at once, one is given a very comprehensive market analysis.  By combining these three methods one can produce much greater insight then any of these techniques by themselves. They completely complement each other, and naturally form a more synergistic approach to market forecasting.

Gary S. Wagner

WFGForex.com

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Bio:
Gary S. Wagner has been a technical market analyst for twenty five years. He is the Co-author of “Trading Applications of Japanese Candlestick Charting”.  A frequent writer for Technical Analysis of Stocks & Commodities magazine, he also Co-developed software applications for market forecasting. He produces a daily video newsletter “The Forex Gold Forecast tm” for WFGForex.com.  Gary can be reached at gary@WFGForex.com

REFERENCES

*Gary S Wagner & Bradley Matheny - Trading Applications of Japanese Candlestick Charting (Wiley, USA)

* R.N. Elliott, R.N. Elliott's Masterworks New Classics Library, 1994

* Alfred John Frost, Robert Rougelot Prechter, "Elliott wave principle: key to market behavior",
New Classics Library, 20th edition 1998

* Seiki Shimizu - The Japanese Chart of Charts (Tokyo Futures Trading Publishing Co, Japan).

*Gregory Morris - Candlestick Charting Explained: Timeless Techniques for Trading  Stocks and Futures (McGraw Hill)

Comments

  1. Pierre says:

    Hi Gary,

    how would your view on gold change if gold goes below 1145 pls?

    Tks again, Pierre.

    • Gary Wagner says:

      I am long with my subcribers from 1185. I see support at 1154. So yes my stance would change if it broke support. As of this point gold is at 1200 + I see little chance of 1145. but I have been wrong before/

      you can follow the link above and get a free week of my daily updates, give it a try !

      Gary

  2. C. Soogrim says:

    I been a subscriber of Gary Wagner website from the start, so I know his ability to forecast prices in gold to be very precise and accurate. He explains in detail, just like the article above, why he enters and exit trades. He has listed his track record above, and it speaks of itself. You won't be disappointed if you decide to subscribe to his service. The money you make will definitely pay for his monthly service. I believe he is offering a free trial, so try it.

  3. Gary Wagner says:

    This theory (wave 4 will go to a 38 % retracement of wave 3) is just a benchmark and not etched in stone. There are three rules which must be followed and the retracement of wave 4 to 38 % is not one of them. The Hard non breakable rule is that wave 4 cannot trade into the range of wave 1. That means it should not trade below 1145.00

  4. Pierre says:

    Hi Kenny,

    tks much for this article, very very informative. Could you pls detail why the wave 4 currently being done should retrace 38% of wave 1?

    Tks in advance, Pierre.

  5. Old toade says:

    A really good example of these analytical tools applied to a market (gold) that has all the influences assumed to be extraordinary to
    typical natural wave theory e.g. manipulation for one.
    Weeks ago Adam was sure gold would not see the current runup and new high that just occurred. Yet your charts make it seem obvious.(The wave 3 correction midway fell below the wave 1 peak signaling a continuation of wave 3).
    If for example one of several brewing crises unfolds in the near term that shakes all the US markets, I would expect investor/trader psychology to change abruptly, as markets fall (and everything gets sold). If this happened next week for example and the drop in gold was severe, would you have a new interpretation of the current wave count?
    Just how much trust can there be any predictive method when the foundations of trader/ investor psychology are quite possibly based on misleading information?

    • Gary Wagner says:

      Old toade, you are not only old but wise I suspect. As I said in an earlier response my mentor who was a hardcore technical trader would say “We as market technicians are merely watching the wake from the back of a boat. We can see where the boat went and the direction it is headed by studying the wake of the boat, however only the captain knows before he will turn the wheel, that the boat is about to change direction”

      That being said, I am still convinced the technical analysis is a very solid and worthwhile approach to market frecasting

      As far as your comment about Adam H. I have known Adam since the early 90’s, he is a brilliant market analysist, and like all of us technicians, we are never always right. But you can never fault him for his conviction, or knowledge. I am sure that the advise he has given over the many years has made quite a few people very wealthy.

  6. Linda Josef says:

    I have been following Gary's signals for about 6 weeks. So far he has been spot on. Maybe Elliott Wave has its limitations, but Wagner combines EW with Fibonacci and Candlestick patterns. In the 6 weeks that I have been following him, I have not seen his signals (which are crystal clear) to be wrong. He sees things in Candlestick patterns and meshes them somehow with Fibo and EW. He also has a good handle on loss control. No one is ever 100% but he has come as close as any guru I have ever followed. He has a free trial so anyone interested can follow in real time and make up their own mind. There are a lot of debates about theory, but this system seems to work pretty well. Unlike a lot of prognosticators he explains his rationale in detail and is available to answer questions.

  7. Tom says:

    Fundamentals are important (supply and demand, etc.).
    But there is nothing more "fundamental" than what people and buying and selling.
    That's why the technical observations are important too.

    I often suspect, however, that the technical predictions can be self-fulfilling.
    If enough people think the gold is going UP next week, then gold will go up today.
    If enough people (traders) think that a trend change will follow a head-and-shoulders, then it simply will happen.
    Since many folks and funds believe in resistance and support at certain %levels, voila, there is the resistance and support. And we are foolish if we ignore it.

    Love the mystery.
    Tom

    • Gary Wagner says:

      “Fundamentals are important (supply and demand, etc.)”
      My take is that they are everything. It is what moves the markets
      Technical indicators, as far as I am concerned are simply a mathematical
      way to view the fundamentals. To be honest, I think numbers are easier to look at and figure out then the news which moves the markets.
      As for your statement “I often suspect, however, that the technical predictions can be self-fulfilling.”
      To a degree I have to agree with you, If a majority of the technical traders see a support level and place stops or buy orders at that level, it will in fact become self fulfilling.
      However a fundamental shift do to new information, like if the news report said there will no bailout package for Greece, then throw your technical down the drain.

      The Mystery countinues .....

  8. steve warshaw says:

    I mean no disrespect to people who use E.W. but frankly I find the theory to be totally useless. It's kind of like seismology, where seismologists have no clue when an earthquake is going to happen, but when one strikes, they say "There is a 50 / 50 chance of another larger earthquake, or strong aftershock."

    The thing about E.W. is that E.W. is never wrong, only the application, which is completely vague, can be wrong.

    In short, you are better off identifying and trading familiar chart and volume patterns, and NEVER trade anything else. A stable of 3 continuation patterns and 3 reversal patterns that you can create solid trading plans around (Adam calls them game plans) will out perform E.W. or any fancy set of indicators you can come up with.

    One such strategy for bull markets is my Record Price Breakout strategy. Combine this will Le Beau's chandelier trailing stop method, or exit method of your choice, and you will consistently profit in bull markets.

    -Steve

    • Gary Wagner says:

      The debate whether Elliot Wave has merit will go on much past this blog. I can only tell you my experience with this technique. I use it as a tool in my toolbox. I have found it to be not only useful but at historical highs necessary to aid in my projections. I am glad that you can “consistently profit in bull markets”. I cannot make the same claim. As for your approach, as Kenny said in the introduction to this blog there is no right or wrong. But there are techniques that are profitable and ones that are not, I am glad you found one that works. Best of luck

  9. Seng says:

    Gary, during the 2 months I have followed your analysis, you have been accurate in calling the short and longer term tops and bottoms using your analysis.

    It seems that this methodology is aptly suitable for gold as great deal of emotions and volatility are involved.

    Brilliant!

    • Gary Wagner says:

      Thank you very much. As a subscriber to my daily service, you know how hard I work to make profitable recommendations.
      It pleases me that these recommendations allow my subscribers to make money.
      We all know no system is perfect, but I have found that the combination I use, as you have seen, first hand works well with gold.
      During periods where they market trades in a narrow range, as a trend trader I simply want to be positioned and tightly control risk. This way when the market does run we can make a big play. As you can see from the recommendations I have issued that I have maintained a bullish stance for the better part of this year. Fundamentally I felt it was only a matter of time before gold becomes the new currency choice. Because of the debt crisis both in the United States and Europe I believe will continue to motivate investors to look at gold as a more reliable asset then hard currency.

      To maintain this stance I needed to use technical indicators for entry and exit points. I have found that the primary indicators that I use IE Candlesticks, Fibonacci retracement and Elliot Wave do just that. I Can be faulted in that I have beened stoped out by placing a stop to tight but over all we are profitable. Again thank you for your support, and I will continue to work to make goodd reccomendations

      12-06-09 Sell 1158.00 12-18-09 Buy 1099.00 + 59.00 $59.00
      12-18-09 Buy 1099.00 12-21-09 Sell 1092.00 - 07.00 $52.00
      12-23-09 Buy 1095.00 01-20-10 Sell 1119.00 + 24.00 $76.00
      02-02-10 Buy 1115.00 02-04-10 Sell 1095.00 - 20.00 $56.00
      02-09-10 Buy 1079.00 02-23-10 Sell 1100.00 + 21.00 $77.00
      02-26-10 Buy 1118.00 03-08-10 Sell 1124.00 + 06.00 $83.00
      03-09-10 Buy 1125.00 03-10-10 Sell 1100.00 - 25.00 $58.00
      03-15-10 Buy 1115.00 03-18-10 Sell 1100.00 - 15.00 $43.00
      03-25-10 Buy 1097.00 04-12-10 Sell 1149.00 + 52.00 $95.00
      04-07-10 BUY 1145.00 04-12-10 Sell 1149.00 + 04.00 $99.00
      04-19-10 Buy 1135.00 04-21-10 Sell 1134.00 - 01.00 $98.00
      04-23-10 Buy 1156.00 05-4-10 Sell 1170.00 + 14.00 $112.00
      05-05-10 Buy 1176.00 05-06-10 Sell 1198.00 + 22.00 $134.00
      05-09-10 Buy 1201.00 Open stop @1220.00
      05-09-10 Buy 938 EURO/UAX Open stop @ 950.00 +

  10. Tom says:

    fter he departed from his original partner he was promoting a candlestick while working out of his house in California. There were issues with the software. I would call and email him. But never one did he respond. I even spoke to his wife once and she said she would give him my message.
    He's got a problem as far as I am concerned...in my opinion. In my opinion I personally do not trust him.

    • Gary Wagner says:

      I am the original partner. I say this because he was married not me. I was the one who came up with the idea for this software. I believe you are speaking about the co developer of the first software program we wrote, “The Candlestick Forecaster”, Brad Matheny. He is still writing code and can be reached at his through his web site ment.com. I am very sorry you had issues, if you would please email me at gary@wfgforex.com I would be happy to respond.

  11. Manny says:

    Great stuff!
    I find that adding % Williams and RSI analysis provides further insight to market psychology to confirm trading signals.

    • Gary Wagner says:

      I have used both of those indicators in the past, and still continue to use them. However here we have a different scenario. We in uncharted waters! When markets are trading in a defined range, indicators like RSI, %R and the fast or slow stochastic can be very effective. However at historical tops, western technical indicators that are oscillator based will not be effective. Since they look for oversold or overbought conditions as the market trades to new highs it will always be oversold.
      Fibonacci retracement cannot be implemented until a correction is in place. That leaves us with Western projection based techniques such as Elliot Wave and Gann and pattern study. Lastly Japanese candlestick patterns are also ideal in that a bearish reversal pattern found within the context of a trend will be just as valid whether you are at historical highs or within a defined range

  12. John Willier says:

    Hello:

    Thanks for the brilliant analysis on gold. I am a newby so have some questions. Are we about peaked out on wave 3? it would appear so since POG hit 1246. If I am correct then we should be entering wave 4 soon. Or have I misinterpreted the information you have presented?

    Thanks

    • Gary Wagner says:

      According to Elliot wave theory the 3rd wave will typically extend 1.62 times that of wave 1. But I would look at this as a benchmark, to see how the market reacts at this point. They simple fact is we had this projection of price far before the market even traded near 1200.What I will look for are candlestick patterns that are bearish reversal patterns or exhaustion signals to indicate a correction. Please note this market is absolutely fundamentally driven right now. As news of the debt crisis in Europe is disseminated, it is the trader’s knee jerk reaction that drives the price of gold. Also I truly believe that “gold” is the new currency of choice. It is these factors driving gold to new historical highs
      Since we in uncharted waters western technical indicators that are oscillator based will not be effective. Since they look for oversold or overbought conditions as the market trades to new highs it will always be oversold.

  13. Ralph Deans says:

    I am fascinated.

    The truth is though, that Elliot wave followers often disagree on where we are in the cycle, or whether it's a big cycle or a little one. I've learned to be cautious when theories are back tested - we unconsciously find ways to make history conform to theory and expectations. This is not to say there are not cycles. It would be strange if there were not because everything in nature is cyclic - the moon, the seasons, sunspots etc, and even perhaps, many aspects of human life, such as an individual's moods and energy levels, which fluctuate (perhaps according to a rhythm), or even wars, uprisings, and periods of prosperity on 50 or 60 year cycles, as Kondratiev proposed.

    What I'd like to see is the human psychology involved in cycles. Why, exactly, do the majority of traders become more or less willing to accept risk?

    This is woolgathering. Back to the charts.

    What one needs is a psychologist to relate the math to human emotions.

    • Gary Wagner says:

      You are absolutely correct; Elliot Wave followers will often disagree on the wave count. I have found in my studies that by adding them to Candlestick pattern analysis they offer me addition insight. Both Fibonacci retracement and candlestick patterns offer much less to the eye of interpretation. They are both much more hard coded in terms of the rules they follow.
      That being said, I still believe there is a lot of relevance to the idea that market move in waves or cycles. If they did not, pattern theory would have no relevance, and there would be no such thing as a head and shoulders formation. But that is another topic all together

  14. Jim says:

    Very interesting analysis. Mathematical interpretation of past results seems to have the potential to forecast with reliable accuracy. Mathmatic precision is succesfully utilized in many disciplines in an effort to remove uncertainty in predictions, but can it serve the purpose adequately in anticipating market moves? To the extent that markets exhibit trending patterns, there appears to be some predictive relationship. However, the more intriguing question is whether, within the trending parameters, the math can accurately predict the specific points in time when trend changes will occur. Imprecision in timing, at least for the smaller investor who has little or no timely access to inside information, has always been the biggest disadvantage.

    No math formula can predict when or to what extent JP Morgan will decide to short silver, or Goldman Sachs will make a counter play designed to take advantage of the uninformed. It is for reasons like these and many others that the "throwing darts" method of predicting market moves has, at least anecdotally, been as accurate as most fund managers' strategies over time.

    The concept of applying analytical math to produce successful market decisions raises a very simplistic question, because it seems to imply that one investor could, in fact would, in time, acquire every asset worth having. Thanks for your insights.

    • Gary Wagner says:

      Thank you for your comment and your point is well taken. One of my mentors early on in my training would say. “We as market technicians are merely watching the wake from the back of a boat. We can see where the boat went and the direction it is headed by studying the wake of the boat, however only the captain knows before he will turn the wheel, that the boat is about to change direction. To that extent, your assumption is correct. That being said, I do believe that there are mathematical signs IE patterns that will reveal an enormous amount of insight and information. That fact is Fibonacci retracement theory, is taken from the Fibonacci sequence, a natural mathematical law in nature. Also Elliot later in his studies concluded that the Fibonacci Summation Series is the basis of The Wave Principle. Lastly Japanese candlestick analysis is predicated on the assumption that traders will act in pre defined ways when they believe that a market is overbought or oversold sold, that is to say that there is a mass psychology at work here.

  15. john says:

    So, you said wave three can never be the shortest impulse leg. But, in the first chart wave three is shorter than wave one. What did I miss?

    In all three of these technical methods does a linear chart always have to be used?

    • Gary Wagner says:

      Wave three is usually the largest and most powerful wave in a trend although some research suggests that in commodity markets, wave five is the largest (Wikipedia)... Elliot did his work on the stock market. I have only seen candlesticks done on a linear chart. which is my prime expertise. however they do have another type of chart besides candlestick chart called a a "Three line break new price line " chart which is non linear. A book called "The Japanese Chart of Charts" by Seiki Shimuzu has a detailes explaination of these charts

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