Name: Glenn Neely


Posts by Glenn Neely:

    Specific Trading Strategies For Today’s Difficult Markets

    Written by Glenn Neely
    August 11th, 2010 at 12:57 pm

    The Three Phases of Market Activity and the Best Trading Strategies to Employ

    Do you know the best trading strategy to use in today’s challenging markets? Do you know which phase of market activity we’re in right now? Most traders – including professional investors – don’t know the answers to these questions. In this article, I outline the three phases of market activity, then discuss the best trading strategy to employ for each phase, including Elliott Wave and other techniques. In addition, I recommend specific trading strategies for today’s current, difficult environment.

    The three phases of each market are:

    • Bottoming/Topping,
    • Accumulation/Distribution, and
    • Trending (up or down).

    First phase of market activity: Bottoming/Topping

    A major market top or bottom is rare and, by definition, lasts a long time. Therefore, you can’t have a major top or bottom every few weeks. Recognizing a market top or bottom can be difficult, yet extremely profitable if you’re right.

    However, this phase of market activity is one of the most dangerous times to trade, because it can produce repetitive losses if you continually guess incorrectly. For example, in an expanding environment, a market can be in a topping phase, yet make minor new highs over and over without changing the fact that a top is forming. Unfortunately, many people trade as if major market tops or bottoms happen frequently, which is why they can end up losing so much money.

    Second phase of market activity: Accumulation/Distribution

    Since one is the mirror image of the other, let’s focus on Accumulation: After bottoming, the market may bounce off the low and experience a period of back-and-forth consolidation. This occurs because financially powerful traders are accumulating positions, preparing for the future market advance. While wealthy traders accumulate positions, less experienced, under-capitalized traders are selling into the retest of the market’s bottom, thinking the market will go lower. While a majority of traders are selling into the market’s decline, this “public activity” makes the Accumulation phase possible for a minority of wealthy traders to hoard large, Long positions. In other words, when the majority of traders are selling, the wealthy understand this is an excellent time to buy, and they have the “financial patience” to wait for the demand environment to change, forcing prices higher. In the Distribution phase, the opposite is true.

    Third phase of market activity: Trending (up or down)

    Continuing our discussion from above, once nearly all positions that can be bought have been purchased, the Accumulation phase is complete. Most traders are committed – they’ve laid their claim – and are now waiting for the market to move their way. During Accumulation, wealthy traders capture nearly all supply in the hope future demand will make their long-term commitment worthwhile. This sets the stage for the Trending phase of market activity. As the economy improves – as it always does – the public realizes the “end of the world” did not occur, so their willingness and ability to invest increases. Over time, growing public demand forces prices upward. (Remember Economics 101: Increasing demand coupled with limited supply creates higher prices.)

    In comparison to the prior two phases, the Trending phase lasts the shortest time. Generally, it’s the most difficult phase to profit from, because most traders are uncomfortable entering a market well after the bottom since it’s obvious they’re no longer getting a bargain.

    What are the best trading strategies to employ for each phase?

    Bottoming/Topping – At market extremes, NEoWave or Elliott Wave trumps all other techniques, leaving little doubt what will happen next and what to do. Wave theory clearly portends market potential, allowing you to catch major market turns. Ironically, at such times, the public (and your friends!) will have the exact opposite market perspective, leaving you a “lone voice in the woods.” Consequently, profiting from Wave theory requires the ability to identify patterns and enter when multiple patterns simultaneously end. Identifying and entering at major market tops or bottoms makes most traders extremely uncomfortable. As a result, placing your trust in Wave theory at this time requires mental fortitude and the personal confidence necessary to buck the majority and take an unpopular position. Though it often appears contrary to “logic or reason,” following NEoWave (or Elliott Wave) during this phase of a market’s development generally offers the greatest possible reward.

    Accumulation/Distribution – After a major top or bottom, a market will transition into a choppy period (above its low or below its high). Wave theory can still be useful at such times, but its usefulness starts to diminish. Instead, oversold and overbought indicators tend to be more useful, allowing you to “trade the range,” getting in or out at each market oscillation. The longer the consolidation, the longer you would initiate this strategy.

    For example, let’s say you have interest in the Gold market. In this scenario we’ll assume Gold recently began rallying from the $900 level. As one who desires to accumulate Gold, you patiently watch it rally to $1,000, which in hindsight enables you to see the market created an important and obvious low at $900. That observation allows you to objectively implement your accumulation strategy. When Gold begins to pull-back from the $1,000 level, carefully watch your indicators for an oversold condition similar to what occurred near the $900 low. If that oversold condition occurs when Gold is around $950, it’s time to buy. If Gold later exceeds $1,000, you can decide to liquidate some of your position (noting the new high) OR simply wait for the next “oversold” condition to pick up even more Gold. This process can be repeated over and over every time the market exceeds the newly noted high.

    Trending (up or down) – As I discussed in my previous interview, this market phase can be random and unpredictable. Here, Wave theory is least useful. During the Trending phase, it’s best to do what most people are afraid to do: buy into market strengths. Keep in mind, strong market trends are not common, especially those in which you can buy into a new high or sell into a new low. When strong market trends happen, they can yield tremendous return in a very short period, far outweighing results you might get from other market phases.

    While it’s clear when a market is trending, a safe, low-risk entry may be difficult to identify. So, what do you do? To explain, let’s continue our Gold market example: Gold bottomed at $900, rallied to $1,000, then sold off to $950. If the Accumulation phase has ended, Gold will next move into an uptrend. This is when the “scary” buying-into-highs strategy actually works. In our example, you would place an order to buy Gold at $1,001; if activated, your stop would be just below $950 (say $949). This way, you are “going with the flow” of the market, letting it identify your specific entry and stop points as it progresses. When implemented at the right time, this strategy produces the greatest profit in the shortest period.

    Which phase is the U.S. stock market in now and which strategy should you use?

    After rallying significantly off its 2009 low, since January 2010, the stock market appears to be in its Distribution phase. As a result, your focus should be on “selling into strength” as the market forms a top over the next few months. In this period, overbought indicators work best. Sell into overbought conditions on a Daily or Weekly basis with stops above this year’s highs. Lighten-up on shorts when your indicators suggest the market is oversold, but pay careful attention to when the market no longer bounces off an oversold condition. That is when it’s best to remain Short in preparation for the coming downtrend. Most important, focus on protecting capital, select trades carefully, and avoid big, risky bets.

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    Best Trading Strategies for Today’s Unpredictable Stock Market

    Written by Glenn Neely
    April 8th, 2010 at 7:57 pm

    An interview with Glenn Neely, Founder, NEoWave Institute

    NEoWave Institute founder Glenn Neely discusses stock market predictions for 2010 and beyond. In this first interview of the series entitled “Trading Strategies for Unpredictable Markets,” Neely reveals that the U.S. stock market has entered the center of a 20-year correction, and he discusses what this means to traders and investors. Neely’s unique NEoWave technology explains why stock market predictions in 2010 – and for the next several years – will continue to be extremely challenging. This unavoidable phenomenon makes trading at this time more difficult and dangerous.

     Question:             Why is stock market prediction so difficult in 2010, and how can we successfully trade in this environment?

     Glenn Neely:       The current U.S. stock market environment is an interesting phenomenon related to Wave Theory. Most people who approach Wave analysis believe the stock market is predictable all the time – as long as you can figure out the Wave count. The reality is that Wave counts are predictable some of the time – along with market predictability – and sometimes they’re not. Markets go through phases of predictability that I call Specific Predictability, General Predictability, and Unpredictability. This understanding of predictability is an important component of NEoWave technology, an advancement of Wave theory that presents logical concepts, structures, and rules. To be clear, the logical design of NEoWave is not present in the original Elliott Wave Theory.

     Question:             Can you give us insight about the current Wave pattern and why the stock market is so unpredictable right now?

     Glenn Neely:       First, let’s look at the chart (below). This presents the high-low cash data for every six months of the S&P 500 between 1982 and early 2010. This chart illustrates the historical Waves – and shows my stock market predictions for 2010 and beyond.

    As an aside, in my book, Mastering Elliott Wave, I specifically address how to plot charts. You should always plot the market on a cash basis, because cash prices don’t deteriorate over time like futures data. Also, the highs and lows should be plotted in order – do not put the highs and lows on the same vertical plane – this helps you create a chart that actually shows Wave patterns. If you use bar charts, you’re not really looking at Wave patterns, and it’s difficult to decipher Wave structure.

    NEoWave chart

    Now let’s look at the chart, starting with the high in 2000. As you can see, this was the end of a multi-decade advance. Under Wave Theory, this is a five-way structure with a fifth-Wave extension. The pattern concluded, and we went into a bear market, which technically began on September 5, 2000. (The high was in February 2000, but the actual start of the bear market under Wave Theory was September 5, 2000.) The decline began with a strong directional move, which was extremely predictable because we were in the very early stages of a large, 20-year corrective formation.

    Question:             The beginning of a large Wave offers a higher degree of predictability than the center?

    Glenn Neely:       Yes, the beginning of a large formation offers a high degree of predictability, with extremely accurate market predictions. Looking at the chart, the first phase is marked “Wave A” because we were in a correction period. Once that finished, the market moved into the next phase of predictability, which declined from Specific Predictability to General Predictability in late 2002 and early 2003. I was able to generally say the trend is up for the next five years. And I was able to say the stock market would go above the highs of 2000, we’d have a top, then a bear market would begin. In this phase of General Predictability, I was able to put forth that general forecast. But I could not specifically say, for example, “Today we’re going to hit 1500, then we’re going to drop down to 1485, and tomorrow we’ll go up to 1520.” That’s the kind of predictability I had during the 2000-to-2002 decline, which was an extremely high level of stock market predictability.

     In the phase of General Predictability beginning in late 2002 and early 2003, it was difficult to make specific predictions, but my general stock market predictions were correct. The market did exactly as I had forecasted, generally speaking.

     From January 2008 through 2012 (and possibly 2014), we will be in the Unpredictable phase of Wave pattern development. That’s a long time to not be able to specifically predict what will happen. The interesting part of this Unpredictable phase that began in January 2008 is that it goes through a pattern of Specific Predictability, General Predictability, and Unpredictability. (On the chart, the S stands for Specific, G for General, and U for Unpredictable.) This pattern will continue to occur for several years.

     Note that in 2008, for a very short period of time – about six months to a year – we were in a Specific Predictability phase within the larger, unpredictable environment. In January 2008, I released a public notice that the bull market was over, and we were about to enter a four-to-six year bear market. Many people thought a bear market was impossible – and that I was out of my mind! My prediction turned out to be almost precisely correct. Since we were in the larger Unpredictable phase, I wasn’t able to say exactly how the market would decline. It was a strange period and a bit confusing, but I was able to guide my customers through some of our best trading in five to seven years.

    Question:             According to the patterns you’re showing here, you’re predicting some extreme stock market volatility in 2010 and beyond. Why is that?

     Glenn Neely:       We’re in the center of a very large 20-year correction, and the center of a Wave pattern is the greatest period of uncertainty. Whenever you’re in an environment of unpredictably, it opens up the market tremendously to outside influences, unexpected economic circumstances, and geopolitical events like the terrorist attacks of September 2001 (this was near the center of the 2000-to-2002 decline, which was a period of unpredictability). We’re dealing with that kind of environment now, which means unexpected events, uncertainty, and fear will reign supreme for the next few years.

     Question:             And, as we all know, global events greatly contribute to a volatile market.

    Glenn Neely:       The unpredictability of the U.S. stock market is a result. This is partly due to the fact that, right now, not enough of the public is committed to a specific scenario. You get major tops and bottoms in markets when the majority of people are committed to a stock market scenario that turns out to be wrong! For example, during the highs in 2000, many people were heavily invested in the stock market. This was during the internet boom, and most people thought the stock market was going to the moon. Therefore, the massive bear market caught the majority of people by surprise. It was a lopsided situation in which a majority of people believed the same thing – and were all doing the same thing.

     The center of an unpredictable environment presents a lot of uncertainty due to polarization of opinion. The market can swing in wild ways, because there’s a lot of money either sitting on the sidelines or doing the opposite of what the other half is doing. If one group suddenly decides to join the other group, this can move the market dramatically and quickly. This situation allows for randomness and unpredictability that you don’t get near the beginning and end of patterns. It’s like throwing an extra person on one end of a teeter-totter, which results in a sudden and dramatic shift.

     Question:             Glenn, can you wrap up your thoughts on stock market predictions for 2010 and beyond?

     Glenn Neely:       Unfortunately, this unpredictable market environment will continue for several more years, certainly throughout 2010. The risk of violent, unexpected external events that could affect the stock market is very high for the entire year. Generally speaking, Wave Theory suggests that we’re in a sideways or down trend, which began in January 2008. And I’m certain we’ll be in this sideways or down trend for four to six years. This means the bear market will not finish until at least 2012 – and it could stretch out until 2014. At that point, the large Unpredictable phase will come to an end, and we’ll move back into a General Predictability phase, like that of 2002 to 2007.

    Question:             Can you share trading advice for this unpredictable time? How do we make money during the next four to six years?

     Glenn Neely:       This Unpredictable phase does make trading far more dangerous. As the market moves toward the center formation, our focus has to shift away from dependability on Wave structure and Wave patterns that you would expect to occur. Now, trading strategies must be based on bottom-line-oriented capital management strategies. Traders and investors need to look to market trading strategies that are outside the realm of Wave Theory.

    The best way to deal with unpredictable stock markets is to use what I call second-tier technologies: strategies for trading, risk management, and capital management that are independent of Wave Theory. Clearly, when the stock market is harder to predict, it’s harder to trade. Therefore, you need to be much more careful about risk management and protecting your capital. You need to minimize risk and maximize potential. In this unpredictable environment, you need to reduce the emphasis on predicting the stock market and place the emphasis on careful, strategic trading and on strategies to preserve capital.

    Question:             What’s the next topic in this interview series – “Trading Strategies for Unpredictable Markets”?

    Glenn Neely:       I will introduce the fundamentals of my revolutionary Neely River Technology. This provides a behavioral framework for traders and investors to better deal with the randomness of price fluctuations in unpredictable market environments.

    About Glenn Neely

    Founder of NEoWave Institute, Glenn Neely is internationally regarded as the premier Wave analyst. He has devoted more than 25 years to mastering Wave theory, stock market predictions, and successful trading. In 1990, Neely published his advanced Wave analysis process in his classic book, Mastering Elliott Wave. In the following decades, Neely continued to evolve Wave theory to make it objective, practical, and consistently accurate. This evolution produced NEoWave technology – a precise, step-by-step assessment of market structure, which results in low-risk, high-profit trading and investing. See for yourself: Subscribe to NEoWave’s 2-week Trial Service. Learn more Glenn Neely and NEoWave Trading and Forecasting services at www.NEoWave.com.

    Charts, Elliott Wave, Markets | No Comments