Real-Time Trading using NEoWave™ Concepts · Copyright ® 1998 by Glenn Neely Elliott Wave...

Elliott Wave Institute, 1278 Glenneyre, Laguna Beach, CA 92651 • (800) 636-9283Copyright ® 1998 by Glenn Neely

FUTURES WEST 1998 • Real-Time TRADING using NEoWave™ Concepts

Real-Time Trading using NEoWave™ Concepts

Presented by

Glenn Neely

President of the

Elliott Wave InstituteLaguna Beach, California - USA



Topics Covered Today

• Trade CONTEMPLATION

• Trade INITIATION

• STOPS and Trade MANAGEMENT

• Price FORECASTING and positionLIQUIDATION

• Trading Does and Don’ts



Pre-TRADE Considerations

• Is the market worth trading?

• Is Psychology in your favor?(Put/Call Ratios, sentiment, etc.)

• What will be your RISK upon entry,what might be your REWARD?

• Can you identify signs ofImpending Trend Change



Behavior Associated with Impending TOPS

To increase confidence thatan important top is approaching,or has taken place, look for of these conditions:

A . Each successive advanceleading up to the high is takingmore time to cover less ground.

B . The market advancesviolently to its highest point,that is then followed by aslower, larger decline that dropsbelow the starting point of thefinal violent advance.

C . Following a high andsome consolidation, the declinesbecome more violent than theadvances.

In relation to surrounding priceevidence, the advance into the high isviolent. The high is then followed bya larger , but slower and morecomplex decline. This is one of thebest signals that a top is forming.

A violent downmove , followed by a slowermore complex rally, indicates the trend hasalready changed from up to down.

A.

C.

B.

Each successive advancetaking more time, but makingless progress. Usually a verynegative arrangement.



Behavior Associated with Impending BOTTOMS

To increase confidence that animportant bottom is approaching,or has taken place, look for these conditions:

A . Each successive declineleading down to the lowmore time to cover less ground.

B . The market declinesviolently to its lowest point, isthen followed by a slower, largeradvance that rallys abovestarting point of the previousviolent decline.

C . Following a low and someconsolidation, the advancesbecome more violent than thedeclines.

In relation to surrounding priceevidence, the decline into thelow is violent. The low is thenfollowed by a larger , but slowerand more complex advance.This is one of the best signalsthat a bottom is forming.

A violent upmove, followed by a slowermore complex decline, indicates the trendhas already changed from down to up.

A.

C.

B.

Each successive decline istaking more time, but makingless progress. Usually a verypositive arrangement.



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NEoWave™ Momentum Studies (S&P data)

Markets almost alwaysprovide clues or warningsthat a trend change is in theworks. If a market is readyto reverse on a morepermanent basis, inpreparation for that event,it will almost always beginlosing momentum.

The market is rallying less andtaking more time, implyingthat a reversal of the uptrendis approaching.

Declines getting smaller,taking longer - Bottom near

Buy Level

Sell Level



What is the TREND of the market?

To determine which side of amarket you should trade, locate thelargest, fastest move on the chart (aviolent move that covers the mostterritory in the shortest time); thatwill almost always be the directionof the trend for at least a whilelonger (see Segment A at far right).

Next, notice how much theviolent move is retraced. If themarket consolidates, retracing lessthan 38.2% of the violent move, thetrend is powerful and shouldcontinue. If retracement is between38.2% and 61.8%, the trend is lesspowerful, but should continue. Ifretracement is between 61.8% and100%, the trend is coming to an end,and may end with the nextapproach/retest of the area where theviolent move ended. If retracement ismore than 100%, the end of theviolent move probably marks animportant high or low. Look for acounter-trend trade to develop soon.

Market drifting lowerAFTER a high was made.Indicates the uptrend is notstrong and may indicate achange of trend is occurring.

Based on previous discussions,the market started advancingfaster AFTER a low was alreadyin. That is a sign the trend hasturned from down to up, so Longside of the market is best.

Segment A

END of Segment A

Segment A retracedbetween 61.8% and 100%.Indicates the trend couldend with the next approachof Segment A’s END point.



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What if Trend Concludes AT High or Low?

Part of theevidence that a trendhas concluded AT ahigh or low occurswhen a violentcounter trend moveunfolds immediatelyafterward (see twocircled points, theirhighs were followedby the largest, fastestmoves to occurfollowing significanttrends).

Confirmation thatthe trend is not overoccurs if the violentreversal is“completely” retracedby future action.

Whether new highsare made or not, thepattern of one largerdegree is not likely toend right at this high.

Violent counter-trend decline beginsconsolidation. In both cases, the violentdecline is completely retraced by futureaction - a set up that almost guaranteesthe larger trend is still UP.

Market datacontinued onnext page...



What if Trend Concludes BEFORE

When a trendcompletes BEFORE ahigh, it implies theuptrend will continueand is probablygaining momentum.

Conversely, if apattern concludesBEFORE a low, itimplies the downtrendwill continue and isprobably gainingmomentum.

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Trend concludeshere, NEW highmade during theconsolidation

Consolidation ENDS,new trend begins



What if Trend Concludes AFTER

If a pattern concludes AFTERa low, the probabilities are highthat the higher low will produce asignificant change in trend. Toanticipate such a situation is notdifficult, it just requires patience.If you see a market bottomfollowed by a recovery that islarger but slower than the oneright into the low, this situationmay be setting up.

The same rules that apply for abottom apply for a top. If themarket makes a top, reacts, thenmakes a lower high that isfollowed by a violent decline, thechances for a significant high aresubstantial.

The only exception to this ruleis when the market is forming aContracting environment (such asa Contracting Triangle). But, evenin that situation, the market willmove away from that high or lowuntil the “thrust” occurs. Eventhen the “thrust” may move awayfrom the high or low you wereanalyzing.

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Under NEoWave™theory, the downtrendconcluded here,AFTER the low.

Recovery off low is larger,but slower than the finaldrop into the low. That isa reliable warning of amarket preparing for asignificant bottom.



Which VEHICLE should you use?Stocks, Futures, Options

• Impact of TIME on Selection

• Checklist for Trading OPTIONS

• Checklist for Trading FUTURES

• Checklist for Trading STOCKS



Trade INITIATION

• BREAKOUT Trading inContracting environments

• REVERSAL Trading inExpanding environments

• TREND Trading inNeutral environments



BREAKOUT Trading inContracting environments

If the market has beencontracting for some timeand you think the pattern isapproaching conclusion, thisis the time to plan a“breakout” trading strategy.Decide the price level that, ifthe market moved beyond,would indicate a quick moveto a new level or thebeginning of a new sustainedtrend.

Depending on your levelof conviction, you woulddecide at which high a pricemove would indicate that theconsolidation is over and thenew trend has begun. Even ifthe trend does not last long(which is frequently the casewith Contractingenvironments), it usually willmove far enough to make thetrade worth while.

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Possible“breakout”points - Buyabove one orboth levels



REVERSAL Trading inExpanding environments

If using a “WAVE” chart in anExpanding market environment, thebehavior needed to justify counter-trendtrading is zigzagging action in theopposite direction of the trend you think isgetting ready to end; right as that zigzagbegins, your position should be entered.

If using a BAR chart in an Expandingmarket environment, the behavior neededto justify counter-trend trading is thebreak of a previous day’s high or low; youwould enter your position as that occurs.

NOTE: For this appoach to work, thechart you are following must complex or too simple.The chart shown isapproximately the ideal complexity.

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Counter-trendZigzagging action

started here

ExpandingEnvironment

Buy Buy

Sell



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Original consolidation range

TREND Trading inNeutral environments

If you are confidentof the direction of amarket’s trend in anenvironment ofsideways consolidations,the best way to enter ison a new low (if thetrend is down) or a newhigh (if the trend is up).Once you enter, yourstop should be on theopposite end of theconsolidation range at apoint twice the width ofthe consolidation. Oncethe new trend hasdoubled the width of theoriginal consolidationrange, part of yourposition should beliquidated and your stopshould be moved to thelast low or high beforethe trend reinstated.

Shorting Level (market breaks beloworiginal consolidation range)

Second consolidation range

Third consolidation range

Additional Shortscould be taken here

Retracement LESS than 50%,OK to Short new low

Sell

Sell

Don’t Sell (consolidationretraced too much ofprevious decline)

Retracement MORE than 50%,do NOT Short new low



STOPS and Trade MANAGEMENT

• STOP Placement -Contracting Environment

• STOP Placement -Expanding Environment

• STOP Placement -Trending Environment



STOP Placement - Contracting Environment

After entering yourposition due to the“breakout,” your stopshould be placed justbeyond 61.8% of thelength of the new trendand the highest or lowestpoint right before thebreakout occurred.

If the market reallybegan a new trend, itWILL NOT retracemore than 61.8% of thatinitial move.

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Long Here

Stop Here(62% of

distance frombreakout high

to reaction low)



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STOP Placement - Expanding Environment

Once you have entered anExpanding market environment,the stop should go at the highest orlowest point where the zigzaggingaction began. If you get stoppedout, wait for another zigzaggingperiod in the preferred directionbefore reentering, then begin theprocess again.

Zigzaggingaction started,trade entered

Long

Long

Stop Here

Stop Here

Short

Stop Here

Stop placed at highest orlowest point after entry

Raise Stop

Raise Stop

Raise Stop

Raise Stop



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Width of originalconsolidation

STOP Placement - Trending Environment

After you take aposition in what you thinkwill be a trending market,your stop should be onthe opposite end of theconsolidation range at apoint twice the width ofthe original consolidation.

After the market hasdoubled the width of theoriginal consolidationrange, liquidate part ofyour position and moveyour stop to the last lowor high right before thelatest trend began.

As the market goesthrough anotherconsolidation, the samestrategy should be used tomove the stop again (i.e.,once the width of thesecond consolidation isreached, liquidate more ofyour position and moveyour stop to the end of thesecond consolidation).

Initial Stop (double width of initial consolidation)

Shorting Level

Initial consolidation range doubled,liquid part of position, lower stop

Stop lowered to here (after initial consolidation range doubled)

Second consolidation range

Second consolidation range doubled,liquidate part of position, lower stop

Stop lowered tohere (after secondconsolidation rangedoubled)

Stop lowered to here after thirdconsolidation range doubled



Forecasting and Trade LIQUIDATION

• Using EstablishedSupport/Resistance Levels

• Forecasting • Post- Contraction

• Forecasting • Post- Expansion

• Forecasting • Post- Trending



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Forecasting • Post- Contraction

Price action followingContraction (which contains5 segments) will usuallyapproximate the width of thelargest segment duringContraction. In this real-timeexample, Gold went througha multi-month contraction.Once the pattern was over,the initial “thrust” wasapproximately equal to thewidth of the Contraction in aperiod that wasapproximately half the timeconsumed by the Contraction.When trading such asituation, you would want toexit some of your positionwhen the “thrust” approaches100% of the width of theContraction. If you think the“thrust” is going to END thetrend, you should exit allyour positions. If you thinkthe trend is going to continue,only liquidate part of it.

Height and Widthof Contraction

Post Contraction Forecast

Market exceeded the withof the contracting phase inless than half the time



Forecasting • Post- Expansion

Expanding environmentsare composed of five (5)segments. As the expansionbecomes more obvious, youcan predict its END (and thestart of the new trend) bymaking sure five segments arepresent and that the last legbreaks beyond previous highsor lows,

Unless you understandwave theory and know exactlywhat the expansion is part of, itmay not be possible to predictexactly what will happen the expansion. The mostimportant characteristic toremember is, if the market isgoing to completely retrace theexpansion, it will take moretime to retrace Seg. 5 than Seg.5 took to form.

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Seg. 1

Seg. 2

Seg. 3

Seg. 4

Seg. 5(last leg)

Retracementshould takeslightly moretime than Seg. 5

Post-Expansionretracement

Previous Low brokenduring 5th Segment



Forecasting • Post- Trending

If a market-trend’speak is followed by aconsolidation in whichpart of the consolidationexceeds the end of thetrending period, you cancomfortably assume thetrend is gaining inmomentum (this conceptapplies equally forsituations in which theinitial trend is down).

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Market-trendpeak

Corrective period ends here. During theinterim, the market exceeded the high of thefirst pattern. That behavior implies strengthand indicates the next advance will be atleast as large as the first. To make theprojection, the price/time consumption ofthe first advance is added to the end of theconsolidation.

Minimum Expectation

During consolidation,market makes newhigh, implying futuremarket strength



Trading Does and Don’ts

DO - Maintain charts on multiple time frames so you are aware of ALL influences (trends, support/resistance,trendlines, etc.)

DO - Plan your trading while the markets are closed, you will be more objective

DO - Demand MANY positive factors before entering, just one or two to exit (one can mushroom into many )

DO - BUY Options only during “ dead ” periods, SELL Options only during

DO - Raise stops on a NEW position to breakeven as quickly as possible

---------------------------------------------------------------------------------------------------------------------------

DON'T - use arbitrary Stops (i.e., stops based on %’s, specific $ amounts or rigid time values) - Stop placementshould depend on market conditions, not preconceived notions

DON'T - enter a trade when markets are volatile (risk control is difficult - support and resistance levels areusually too far apart to allow for low risk entry)

DON'T - focus on what you MIGHT make if correct, but what you WILL lose if wrong

DON'T - exit a winning trade because you think you have made enough money, wait for clear signs of trenddeterioration OR for your stop to be hit before exiting

DON'T - risk more than 5% of capital on any one trade (2% is approx. ideal - fve losing trades in a row or moreis a real possibility, if you are risking much more than 2% each trade, it will be nearly impossible to recoverafter only a few losses)



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Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03

B

C

DE

ii ?

A

X

X

S&P 500 - Monthly

Due to thedecline inAug./Sep. of1998, it hasbecome apparentthat the 1994 -1998 “bullmarket” was -underNEoWave™theory - acorrectivepattern. Thatmeans the S&Pwill trendsideways ordown for 1-4years. Downsidepotential is aslow as 700.

[ ]



S&P 500 - Weekly

The drop offof 1998’s highconstitutes thelargest, fastest inover four years.That clearlyindicates the1994 - 1998 rallywas a ComplexCorrective rally.As a result, theS&P will trendsideways for atleast one year; atworst, the S&Pcould correct formore than fouryears and dropbelow 700.

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x

E

X

a

b

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ab

c

As I have said before, 1994’s LOW should not be broken for 100+ years!



Gold - Monthly

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(B)?

(i)

(ii)

(iii)

(iv)

(v)

Cash Gold appearsto be forming a 5thExtension Terminalfrom the 1987 high.If correct, Gold ison the verge of itslargest advance inyears. A moveabove $312 cash isneeded to make thiscount a strongpossibility.



Gold - Weekly

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(v)?

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X

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A

B

C

(iv)

D

E

A complexcorrective declinemay have endedwith Gold’srecent rally. Abreak of thedownwardslanting dashedtrendline shouldprovide stage-1confirmation.



Bonds - Monthly

The violentadvance seen inBonds duringAug. and Sep. of1998 indicate the10+ yearconsolidation hasended. Wavestructure tells usthe next moveshould be amulti-yearadvance inBonds, bringing10 year cashyields to 3% orless!

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(A)

iii

ii

i

B

(B)

(C)

(X)

(A)

(B)

(C)

(D)?

iv?



Bonds - Weekly

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(E)

(A)

(X) (B)

(C)

(D)

As you can seefrom the chart atright, BONDSrecently brokeout of what couldbe an upwardslantingContractingTriangle. Ifcorrect, the recentrally in Bonds isjust the beginningof a MUCHlarger advanceexpected for thenext 1-2 years.

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Real-Time Trading using NEoWave™ Concepts · Copyright ® 1998 by Glenn Neely Elliott Wave...

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