Discover the Dynamics of Using Moving Averages
How to Spot High-Probability Trading Opportunities
November 23, 2010

By Elliott Wave International

The "moving average" is a technical indicator which has stood the test of time. Nearly 25 years ago, Robert Prechter described this indicator in his famous essay, "What a Trader Really Needs to be Successful." What he said then remains true today:

"...a simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use."

Indeed, "objectively defined rules" are vital to the successful use of moving averages. And as you might imagine, advanced rules and guidelines work to the benefit of more advanced technicians.

What is a moving average? As EWI's Jeffrey Kennedy puts it, "A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down."

Jeffrey also says, "One way to think of a moving average is that it's an automated trend line."

A 15-year veteran of technical analysis, Jeffrey wrote "How You Can Find High-Probability Trading Opportunities Using Moving Averages."
[Descriptions of the following charts are summaries from that eBook]:

Let's begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.

For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).

Let's look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.

In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.

Jeffrey's 33-page eBook also reveals a useful tool to help you avoid "whipsaws."

You can read the first two chapters for FREE for a limited time, once you become a Club EWI member.

The first two chapters reveal:

• The Dual Moving Average Cross-Over System
• Moving Average Price Channel System
• Combining the Crossover and Price Channel Techniques

Jeffrey's insights are all about making you a better trader. Remember, the first two eBook chapters are FREE through November 30. So take advantage of this limited time offer by clicking here!

Robert Prechter Explains The Fed, Part II
The world's foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve

November 22, 2010
By Elliott Wave International

This is Part II of our three-part series "Robert Prechter Explains The Fed." You can read Part I here -- and come back later this week for Part III.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

... Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to “buy” the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against -- as “backing” for -- that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called “monetizing” the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for “bailing out” debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

[Next: Prechter explains "how the Federal Reserve has encouraged the growth of credit."]

Come back later this week for Part III of the series "Robert Prechter Explains The Fed." Or, read more now in the free Club EWI report, "Understanding the Federal Reserve System."


Happy Trading!!

Robert Prechter Explains The Fed, Part I
The world's foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve
November 19, 2010

By Elliott Wave International

The ongoing financial crisis has made the central bank's decisions -- interest rates, quantitative easing (QE2), monetary stimulus, etc. -- a permanent fixture on six-o'clock news.

Yet many of us don't truly understand the role of the Federal Reserve.

For answers, let's turn to someone who has spent a considerable amount of time studying the Fed and its functions: EWI president Robert Prechter. Today we begin a 3-part series that we believe will help you understand the Fed as well as he does. (Excerpted from Prechter's Conquer the Crash and the free Club EWI report, "Understanding the Federal Reserve System.") Here is Part I.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

An argument for deflation is not to be offered lightly because, given the nature of today’s money, certain aspects of money and credit creation cannot be forecast, only surmised. Before we can discuss these issues, we have to understand how money and credit come into being. This is a difficult chapter, but if you can assimilate what it says, you will have knowledge of the banking system that not one person in 10,000 has.

The Origin of Intangible Money

Originally, money was a tangible good freely chosen by society. For millennia, gold or silver provided this function, although sometimes other tangible goods (such as copper, brass and seashells) did. Originally, credit was the right to access that tangible money, whether by an ownership certificate or by borrowing.

Today, almost all money is intangible. It is not, nor does it even represent, a physical good. How it got that way is a long, complicated, disturbing story, which would take a full book to relate properly. It began about 300 years ago, when an English financier conceived the idea of a national central bank. Governments have often outlawed free-market determinations of what constitutes money and imposed their own versions upon society by law, but earlier schemes usually involved coinage. Under central banking, a government forces its citizens to accept its debt as the only form of legal tender. The Federal Reserve System assumed this monopoly role in the United States in 1913.

What Is a Dollar?

Originally, a dollar was defined as a certain amount of gold. Dollar bills and notes were promises to pay lawful money, which was gold. Anyone could present dollars to a bank and receive gold in exchange, and banks could get gold from the U.S. Treasury for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars -- in both cash and credit -- and their holders’ level of confidence that those values will remain intact.

Exactly what a dollar is and what backs it are difficult questions to answer because no official entity will provide a satisfying answer. It has no simultaneous actuality and definition. It may be defined as 1/42.22 of an ounce of gold, but it is not actually that. Whatever it actually is (if anything) may not be definable. To the extent that its physical backing, if any, may be officially definable in actuality, no one is talking. ...

Do you want to really understand the Fed? Then keep reading this free eBook, "Understanding the Fed", as soon as you become a free member of Club EWI.

Robert Prechter’s Elliott Wave International (EWI) has just released a free 10-page trading eBook: How You Can Find High-Probability Trading Opportunities Using Moving Averages, bySenior AnalystJeffrey Kennedy.

Moving averages are one of the most widely-used methods of technical analysis because they are simple to use, and they work. Now you can learn how to apply them to your trading and investing in this free eBook. Let EWI's Jeffrey Kennedy teach you step-by-step how moving averages can help you find high-probability trading opportunities. Jeffrey's trading eBooks have been downloaded thousands of times because he knows how to take complex trading methods and teach them in a way you can immediately understand and apply. You'll be amazed at how quickly you can benefit from Moving Averages with just this quick, 10-page lesson.

Improve your trading and investing with Moving Averages!

Download Your Free eBook Now.

(Don't miss out. It's only available until November 30.)

How to Find Correct Elliott Wave Patterns in Market Charts (Note: This video was originally recorded on August 10, 2007) In this timeless trading lesson on Elliott wave analysis, Elliott Wave International's Senior Currency Analyst Jim Martens gives you an answer to a very important question: "If you've identified the wrong Elliott Wave pattern, how do you find the right one?" NEW! Get 32 pages of FREE practical trading lessons in EWI's new Trader's Classroom eBook.

Download your FREE Trader's Classroom eBook now. A few minutes of learning not enough? Get 32 pages of free practical lessons in EWI's new Trader's Classroom eBook. Taken from EWI's Jeffrey Kennedy's renowned Trader's Classroom series, this FREE 32-page collection of actionable lessons can help you find opportunities in commodities and other markets with more confidence.

Euro's Twists and Turns: What's Next for the Currency? (Note: This video was recorded on November 5, 2010) Since the November 4 high, the euro has declined sharply against the U.S. dollar. Does this mean that it's time for a trend change in the dollar? Watch the free video below to get Elliott Wave International's Senior Currency Strategist Jim Martens' take on what he thinks is coming next.

EWI's Forex FreeWeek is happening now! For an entire week you get free access to EWI's intensive Currency Specialty Service. Hurry! Forex FreeWeek ends Thursday, Nov. 18..

How Analyzing Forex with Elliott Wave Can Help You Catch Both Rallies and Declines
FreeWeek of Elliott Wave International's Currency Specialty Service is here thru Nov. 18
November 12, 2010

By Elliott Wave International

On November 1, the EUR/USD -- the euro-dollar exchange rate and the most actively-traded forex pair -- was trading the $1.38 range, near the level it is today.

But if you look at what the EUR/USD did between November 1 and 9, you'll see a huge 400-point (or pip, in forex lingo) rally into the November 4 top -- and an equally huge decline back to the levels we see today.

That's an 800-pip "round trip" in just six trading days -- a huge move which obviously caught a lot of the U.S. dollar bears and bulls by surprise. Could you have seen it coming?

If you know how to analyze currencies with Elliott wave, the answer is probably "yes." Wave analysis helps you identify patterns in market charts and tells you how those patterns -- ideally -- should develop. In other words, Elliott allows you to narrow down multiple possibilities to a handful of probabilities.

A probability is never a certainty. But it's better than a shot in the dark, as this example demonstrates.

On November 1, Elliott Wave International's Currency Specialty Service posted the following end-of-day forecast. (Some Elliott wave labels removed for this article):

[Higher, into a top] The euro is poised to thrust above 1.4160. The question is if the thrust takes place before the FOMC announcement and ends afterward, or starts in response to the announcement. Before or after, the euro should hit new highs.

What gave Currency Specialty Service the confidence to make that forecast? It was the "contracting triangle" pattern you see in the chart above. They often appear in 4th waves, right before the market's final push in wave 5. The EUR fulfilled the forecast with a 400-pip rally into the November 4 top. The following day, our Currency Specialty Service wrote:

The euro is reversing course after a thrust from a triangle. The decline from 1.4283 might not be in five waves, but it has the characteristics of an impulsive wave. A correction of the rally from August should reach the 1.3636-1.3700 area, the 38.2% retracement of the advance...

...which brings us to the price levels where we find the EUR/USD today. And if you're curious to know what Currency Specialty Service has to say now, you have a great opportunity:

FreeWeek is live through noon EST on Thursday, November 18! You can access all the intraday, daily, weekly and monthly forecasts from EWI's Currency Specialty Service right now through noon Eastern time Thursday, Nov. 18. This service is valued at $494/month, but you can get it free! Click here to access Currency Specialty Service FreeWeek.