Chart of the week: A chart technician's dream

STAN is riding my waves

This share Standard Chartered has been one of my favourites since I started writing COTW because it has traced out lovely textbook Elliott waves, trendlines/tramlines and Fibonacci retracements. In fact, it has been a chart technician's dream.

I last updated my coverage on 24 April and much has happened in the general market since then, with a Trump Slump in the Dow and a 'bullish' Macron Mound in France. So have these big events put a huge dent in my roadmap forecast last month?

After all, 99.999% of investors/traders believe it is the news that drives the markets, and is also a heavy influence on market sentiment that is the ultimate force behind the up and down waves we see play out in the charts.

But for yours truly and the 0.001% that understand how markets really work (hint: markets make the news, not the reverse), these events should have no real impact on forecasts that I made using my Tramline methods.

So let's put the conventional 'news makes the markets' theory to the test here. Last time, this was the chart I showed:

From the high in 2013, the relentless decline was in the form of a classic five Elliott waves down as marked with the lovely blue trendline using the wave 2 and wave 4 highs as touch points. Note, also the wave 5 low was made on a momentum divergence as marked by the red bar. A complete five-down is followed by a three-up -that is the firm forecast that Elliott provides.

I like to see such divergences at the ending wave 5 extreme because it confirms the selling force that drove the entire bear trend was drying up and investors/traders were far less bearish at those levels. In fact, I use this indicator to forecast reversals and these are excellent places to be a true contrarian and go long.

I read many traders who claim to be contrarians, but most are really catching a falling knife with no logical reason to trade against the trend. They are in effect saying "boy -this market has tanked, surely it can't go any lower!"

Sadly, in many cases, it sure can go lower and, without using a sensible stop loss policy, such traders take a mammoth hit -and usually throw in the towel right at the bottom just before the rally they were praying for finally emerges. This adds insult to injury because they are not on board.

No, a totally disciplined approach is especially necessary when trying to pick a top or a bottom. If you are unable to do so, then trading with an established trend is by far the safest approach.

This is what I wrote last month:

One basic rule Mr Elliott discovered was that charts are patterned in five waves and then three counter-trend waves. A five is followed by a three in the opposite direction.

Not to disappoint Mr Elliott, the market duly climbed off the low and eventually broke above the major blue downtrend line. This is a very significant line. Before the upward break, it acted as a reliable line of resistance. Every time the market attempted to get above it, the selling forces prevailed and a short sale then was indicated every time the market touched the line.

But now, the line is acting as support. If the market can retreat to test it, that would likely be a great area to buy.

And here is the chart updated:

A month ago, the market was in retreat from the A wave high and, despite all of the swirling news influences, it continued to make the red B wave low and when that was in, it is rising in red wave C.

This is straight out of the Elliott Wave textbook! B waves are second waves and are usually formed by three sub-waves, as is beautifully demonstrated here. Remember, this roadmap was set back in April when the news in May was yet to be made.

If you still cling to the theory that markets are shaped by the news, ask yourself this: If you knew in advance what the news was to be tomorrow, would you be able to make a confident prediction of tomorrow's share prices?