Scribd
Upload
97 views

Notes On CMT Reading Assignments Level 2: Elliot Wave Theory

Uploaded by

stuartb4u
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
97 views

Notes On CMT Reading Assignments Level 2: Elliot Wave Theory

Uploaded by

stuartb4u
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 7

Vishal B Malkan, MFM, CMT

Meghana V Malkan, CS, LLB, CMT

NOTES ON CMT READING ASSIGNMENTS

LEVEL 2

ELLIOT WAVE THEORY

MAJOR IMPULSE WAVES

Wave 1
Must be in 5w of lower degree
Subtle changes in volume and breadth

Wave 2
Must be in 3w
Cannot go below low of w1
Can retrace upto 78.6% of w1

Wave 3
Is usually the longest wave
Must show dynamism
Usually shows gaps, volumes, breadth, news
Usually 1.618 x w1 or greater
If non-extended, then next wave will be strong

Wave 4

Profit taking wave. So deep correction unlikely


Can expect a triangle pattern here
Ideally will not correct more than 50% of w3
If deep correction then chances for weak w5

Wave 5
Extended if w3 is non dynamic
Look for terminal triangle
If w3 extended, then w5 will be like w1
Look for failure (if w4 deep retracement)
Should not break 2-4 trendline before completion
Most be in 5 waves

www.malkansview.com Page 1
MAJOR CORRECTIVE WAVES

Wave A
Can be 3 or 5 waves

Wave B
Always in 3 waves
Remains within 62% retracement in ZigZag
Can go up to 1.272 of wA in an Irregular Correction

Wave C
Always in 5 waves
Chances for a triangle
If wC is less than 62% of wA the look for triangle

Some Observations –

1. If 5 wave structure then possibilities are 1/3/5/A/C – Decides the main trend
2. If 3 wave structure then possibilities are 2/4/A/B/X – Points to contra trend
3. Are wave tops and bottoms clear of one another? Impulse probability
4. Are waves overlapping one another? Corrective probability
5. One of the three Impulse Waves will be extended (1/3/5)
6. One of the two Corrective Waves will be extended (A/C)
7. Major gains will accrue through one of the impulse waves only.
8. Most of the damage will be inflicted by one of the corrective legs only.
9. When one leg of the corrective is deeply damaging, then other two legs will be subnormal
10. ZigZag is more damaging as C will finish much below A
11. Overlapped moves are corrective moves
12. Simple correction will change to complex when either price or time is not complete.
13. Clear wave counts are seen less than 50% of the time
14. If top of 5 or bottom of C is reached and prices carry on, recheck the count.
15. Avoid wave counts where it is tending towards complexity.

*****

www.malkansview.com Page 2
INTERMARKET ANALYSIS - JOHN MURPHY

Four Asset Classes

 Currencies
 Commodities
 Bonds
 Stocks

Relationships between various asset classes -

1. USD and Commodities - Inverse Relationship


USD ↓ Commodities ↑

Falling USD could be bearish for Bonds and Stocks ONLY IF Commodities are rising
Falling USD can co-exist with rising Bonds and Stocks as long as Commodities are stable

2. Commodities and Bonds – Inverse Relationship


Commodities ↑ Interest rate (yield) ↑ Bonds ↓
Interest Rates ↑ Stocks ↓ Bonds ↓

3. Bonds and Stocks – Direct Relationship


Bonds ↑ Stocks ↑
(Exception – major turning points)
(In deflation they decouple – bonds rise and stocks fall)

4. Commodities and Stocks– Inverse Relationship


Commodities ↑ Stocks ↓
(Depends on the position of economic cycle)
(Stocks change direction before commodities)

5. USD and US Stocks/Bonds – Direct Relationship

6. Oil & Stocks – Inverse Relationship


Crude Oil ↑ Stocks ↓
Oil shares are a leading indicator of oil – they top and bottom first

www.malkansview.com Page 3
Currencies:

USD ↓ Drug Stocks ↑ Multinational Stocks ↑


(Since major revenue comes from global markets)

USD ↑ Small Cap Stocks ↑


(Since major revenue comes from domestic markets)

Australian & Canadian dollars – commodity based currencies – directly correlated to commodity prices

Commodities / Bond ratio –

Commodities / Bond ratio ↑ - Inflation ↑


Gold/energy/aluminum/copper/ paper & forest products ↑

Commodities / Bond ratio ↓ - Inflation ↓


Interest rate sensitive stocks/ consumer staples/financial & utilities ↑

Global Interest Rates always rise and fall together.


Stock sectors have a tendency to perform globally.
(Eg- Auto sector ↑ in US - Auto sector ↑ in Japan)

Inflation/Disinflation/Deflation

 Inflation – prices of goods rise at a fast rate - Commodities are strongest


 Disinflation - prices of goods rise at a slower rate – Stocks are strongest
 Deflation - prices of goods fall – Bonds are strongest

Inflation – Commodities – strong, Stocks & Bonds – weak


Disinflation - Commodities – weak, Stocks & Bonds – strong
Deflation - Commodities – weak, Stocks – weak, Bonds – strong

Normally Bonds and Stocks tend to move in same direction. But in deflation they decouple. Bonds rise
and stocks fall (eg – as happened in the year 2000)

Asset Cycle:
Bonds top out first Bonds bottom first
Then Stocks top out Then Stocks bottom
Commodities top last Commodities bottom last

Yield Curve–

Steep yield curve – prerequisite for an early recovery


Flattening yield curve – sign of an economy that is in recovery
Inverted yield curve – sign of economic weakness

www.malkansview.com Page 4
Inverted Yield Curve (IYC)
 IYC is a situation where short term rates are higher than long term rates
 Stocks with high PE ratios become vulnerable (eg-dot com stocks in 2000)
 IYC – positive for Bonds, negative for stocks
 All recessions were preceded by IYCs
 Ideal thing to do while an IYC develops – sit on cash

Real Estate Funds – REITS –

Affected by long term interest rates – rates ↑ REITs ↓


Are counter cyclical – move opposite to business cycle

REITs are an ideal investment in bear market because –


1. High dividend yield
2. Low correlation to stocks – provide diversification
3. Negative correlation to tech stocks (like in 2000)

Real & housing – both inflation as well as deflation sensitive


Real estate cycle – 18 years – called “The Long Cycle” – combination of Kondratieff & business cycle.

Economic Cycle – consists of 5 stages

3 stages of economic expansion

 Early Expansion – Transportation


 Middle Expansion – Technology / Service
 Late Expansion – Energy

2 stages of economic contraction


 Early Contraction – Consumer Staples
 Late Contraction – Financials & consumer cyclicals

Relative Strength
To compare two asset classes – use Relative Strength (RS) or Ratio Analysis

Secular & Cyclical Trends

 Secular Trend – One that lasts for many years or decades


 Cyclical Trend – Is a short counter trend within a secular trend
- Relatively shallow in nature
- Causes no damage to secular trend

www.malkansview.com Page 5
Efficient Frontier

 A blend of portfolio with different asset classes


 Addition of commodities futures to a portfolio (max 30%) increases the ratio – ie – lowers risk and
increases returns.

*****

www.malkansview.com Page 6
www.malkansview.com Page 7

You might also like