Downside Risk, Investor Sentiment And Elliot Wave Theory With Stock Waves
Summary
– Our guests this week, Stock Waves and The Pragmatic Investor, discuss Elliot Wave Theory and investor sentiment.
– Incorporating fundamental with technical analysis.
– Risk skews to downside.
– Bitcoin, crypto won’t decouple too drastically from broader market.
We encourage you to listen to the podcast embedded above or on the go via
Apple Podcasts or Spotify.
Timecodes:
0:30 – Forecasting US stocks with
Elliot Wave Theory and investor sentiment
4:20 – Incorporating fundamental with technical analysis
9:00 – What is an ideal set-up?
13:40 – Long-term top; risk skews to downside
19:40 – Bitcoin, crypto won’t decouple too drastically from broader market
This episode was recorded on May 24, 2023.
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Stock Waves and The Pragmatic Investor
Transcript
James Foord: Hello, everyone, and welcome to another episode of The Investing Experts Podcast.My name is James Foord, and I’m joined today by Zack and Garrett from StockWaves.Welcome, guys.
Garrett Patten: Hi James.
Zac Mannes: Thank you.
JF: All right.So let’s start off by giving everyone a little quick overview of what you guys do.Obviously, you guys are StockWaves wave, referring to your preferred methodology, which is the Elliott Wave.Just give everyone listening a quick overview of what that is.
ZM: Garrett, you want to jump in?
GP: Sure.
So yeah, we approach our analysis using Elliot Wave theory.I’m not really going to get into the specifics of Elliott Wave if you’re not familiar with it.
But basically, looking at the charts based on their specific patterns, using Elliot Wave theory to forecast what we expect to happen moving forward on those charts.So we cover a lot of different individual U.S.stocks.
Usually, the service focuses on basically looking at those individual stocks on a daily basis.And every day, we do a recording, where we highlight specific setups that we think are more immediately actionable for our members.
And on Thursdays, we also do a live webinar with our members where we take a look at a specific sector and take a look at the holdings of that sector ETF and determine which of those individual holdings seem to look best within that sector.And also, occasionally do a sector review, where we take a look at all the different sector ETFs and kind of get a bigger picture of where the market is currently.
JF: All right.
ZM: James, just wanted to add that the methodology that we use as far as Elliott Wave is based on investor sentiment, and looking for repeating patterns of extremes in investor sentiment.
And so sometimes it might put us, because we’re looking for those points where things are potentially going to shift, it may be different degree of magnitude than the current trend.So sometimes it makes us a little bit contrarian compared to a lot of other momentum analysts or fundamental analysts.
JF: Right.
Well, being contrarian often times pays off.To that extent, Elliott Wave, obviously a form of technical analysis.Do you guys ever incorporate any other technical analysis? If so, why, why not? And kind of maybe what do you think Elliott Wave has maybe over other forms of technical analysis that make you say, okay, this is my preferred method.
ZM: I think we absolutely use other technical analysis tools in conjunction.I think the way I view Elliott Wave and I think Garrett probably agrees here is that we see it as kind of a unified field theory, a way to put all of those other tools into a bigger context.
So because you’re looking at repeating patterns at different cycles and magnitudes and degrees, that replay over and over again.It gives you a way of viewing the whole thing and seeing where some of those other technical analysis patterns show up, from whether it’s a 4, 5 or whether it’s an A, B that makes an inverse head and shoulders or an actual head and shoulders or things like that.
So Garrett can probably speak to more of the other traditional technical analysis tools that we use, but looking for things like moving average, MACD divergence, and things like that.
GP: Yeah, I was going to say the same.
I mean, there’s a lot of overlap between traditional technical analysis patterns and Elliot Wave patterns.So as Zac said it, what Elliot Wave theory does is it kind of puts those patterns in context with that larger picture, Elliott Wave pattern and count.So usually, when you see a bullish setup based on Elliott Wave analysis, very often there will be an accompanying traditional technical analysis pattern to also support the similar expectation.
JF: That makes a lot of sense.Now my next question is relating to how you guys feel about fundamentals.So obviously, technical analysis is what drives most of your work.Do you ever think about fundamentals and try to fit it in somehow because I’ve noticed, for example, that you do work to an extent with
Lyn Alden Schwartzer.I’ve seen her put some articles out where she might use some Elliott Wave charts.
So is that something that you guys incorporate at all?
GP: Yeah, so Lyn’s contribution to the service is on top of her deep dive articles where she takes a look at specific companies, or the broader economy as a whole, is she will take some of our individual charts, that she has done some fundamental analysis on these companies, and does something what is called where fundamentals meet technical analysis.And she overlaps her fundamental analysis with our charts to support the same thesis that we have based on that technical analysis.
And a lot of the time when we’re scanning for stocks, as far as offering setups to our members, I do personally use a lot of fundamental scans to kind of weed out what would otherwise be a company that’s not very fundamentally sound, to then focus on those specific charts of pretty decent fundamentals to begin with, and then take a look at the technical analysis on those individual charts.
ZM: And I think things there are smaller biotech companies that they may only have one drug in a trial, there are certainly things that can affect fundamental things that can affect a price pattern and change things drastically, because that has basically an exogenous effect.
But as Avi has talked about in some of his talks that he’s given and articles, a lot of times the view of sentiment that we get from the chart patterns is often a leading indicator for undercurrents that are going to change the fundamentals.
And so usually as things, if we’re projecting something that might turn down, then — several months later, then news starts to come out or bad earnings reports or other things that kind of mold from what was being seen months ago, when everybody was bullish, to start to fit the same narrative that and explain why the price has gone down or something.
JF: Thanks for clearing that up, guys.Now, what I wanted to know as well as I think you’ve already covered this a little bit, Garrett.How exactly would you go about then finding good opportunities in your service? Do you have a particular list of stocks? Do you look at how do you think about maybe looking at certain sectors? How exactly do you go about that?
GP: Yes, so, as I mentioned earlier, every Thursday, we do a sector review.And that’s either looking again, at all the individual sector ETFs to kind of get a broader view of the overall market, as well as taking a look at a specific sector, usually one that we see bullish potential or bearish potential based on the individual chart, and then drill down on the individual holdings to see which charts either match that expectation or look slightly different than the sector ETF itself.
So during those sessions we obviously will, while looking through those individual charts come across some that look pretty decent for a trade setup.But on top of that, yeah, as I mentioned, I also do individual scans, periodically to look for charts that look interesting.
ZM: We also get some requests from our members to take a look at things.
And sometimes I’ve found some very interesting charts from that.And then we make an effort to look at all of the stocks that are reporting either later that day after market closes or before market opens the next day.We started looking at that years ago, because we had a lot of portfolio managers who were members that found earnings seasons being very treacherous.
So we’re looking for possible pitfalls to warn them of and we started to uncover some good opportunities.And then just looking through all of those charts, it’s – sometimes it gets kind of tedious in — when the days when you have a couple of 100 stocks reporting between the two.
But it gives us a really good pulse on a lot of stuff that we don’t kind of see every day, and nice to pull up those charts that you haven’t looked at for three or four months and see that it’s moving along in the same wave pattern that you were projecting.
JF: Yeah.That makes a lot of sense, especially when you’re talking about companies that are just reporting earnings and we obviously usually see a lot of volatility around those announcements.
So it’s definitely a good time to watch those stocks.Now I know we’re getting into the weeds a little bit here but — and feel free to talk about this as much as you like or as little.And what would you say constitutes a good setup?
GP: The ideal setup, if you are familiar with Elliot Wave theory at all, is the one to start to an impulse.So actually, at this stage of the market, there’s few and far between, at least on the higher degrees, one, two setups out there, because we’re kind of in the late stage of the economic cycle right now.
But that would be kind of the Holy Grail setup, if you can catch what is the strongest portion of a trend, which is the third wave of an impulse within Elliot Wave theory.But obviously, again you can’t always find those specific setups.
So we’re often trading within other patterns as well.But anything that has been — has an established trend has been moving nicely for a period of time, as pulled back into support and looks ready to continue within that larger trend again.
ZM: I think as Garrett was saying also, we’re pretty — we feel like we’re pretty late stages of a longer bull market, or maybe that might have even ended and we’re in the middle of the first corrective bounce.So we’re much more selective and careful with the things that we’re looking at least certainly for the long side.
But anything that’s made a move, has come into support at one degree and then made a move in the next direction off of that support, and then is holding a retrace.And that works for any direction in the market, whether it’s a retrace to a lower high or retrace back forming a higher low.
And we’re going to look in at the different degrees and make sure that all of the equations balance as far as all of our Elliott Wave sub waves.But in the most general terms, it’s that move off of support and a retrace that gives us a setup.
ZM: I think that context of Elliott Wave gives you some very, very clear parameters in terms of support levels and invalidation levels and a target, then since you’re putting all of that into context, where you can use that to define some very clear risk reward parameters.
GP: That’s one of the advantages of Elliot Wave theory compared to say, fundamental analysis.You can certainly have a bullish or bearish view on a company based on the fundamentals.But that doesn’t really provide you with the parameters for a trade setup necessarily, what’s a good entry point? What’s a good exit point? Where should I stop out if I’m wrong, these sorts of things that are provided by Elliott Wave Theory, because we have specific targets based on those patterns, and invalidation levels, where we know that we’re wrong, and we should get out of a trade.
JF: Right, that makes a lot of sense.And Elliott Wave is actually something that I’ve been incorporating into my analysis as well.And that’s definitely one of the strong points is like you say that they’re very clear, kind of invalidation point or very clear setup.
Now you guys have talked a little bit about the idea that we’re in the late stages of the economic cycle, I’d love to know what your guy’s outlook is for the next three, six months.Obviously, there’s been a lot of a – a lot of movement lately with all those regional banks all that stuff.
Now we have, of course, the debt ceiling talks.I’d just love to know how you feel about the next three to six months, maybe key levels that you’re looking for in the inserts and indexes maybe like the S&P or the NASDAQ.
ZM: So I think it’s interesting that you mentioned three to six months as the timeframe because the way – the degree that I think Garrett and I are viewing the market in terms of the potential top that’s forming now that could be over the next few weeks that we actually form what people would call the orthodox top.
But over the next three to six months, we could have a move down to the 3,800 region on the S&P, and then have a corrective bounce that basically puts us right back in these 4,000 to 4,100 region.And so maybe that’s forming the rounded top that really then starts to drop more precipitously from there.But when you look at it, when you zoom out on a chart, we might look like we really haven’t gone anywhere over the next three months or so.
GP: And just to add to that, again, not getting too deep into the specifics of Elliot Wave theory, but the current expectation is that from the beginning of this bull market back in 2009, that we have completed a full five wave impulsive structure off of that 2009 low into the January high that was made last year.
So that initial pullback that we got off of the January high last year into the October low last year and then the bounce since has the potential to be just the start of a large degree correction.So potential for this to be a bear market rally off of that October low and ultimately turning back down to head below that low.
JF: Yeah, that’s definitely like you say three to six months.I think it’ll be an interesting time.So if I’m understanding you guys correctly, you do kind of see a big, kind of long-term top being in for the time being.
Would that be correct?
ZM: Yeah, I think so.And I think the risks skew is certainly to the downside.And so, while you can’t predict the “Black Swan events” I think that there is certainly risk there that something unexpected can surprise the market and accelerate and act as a catalyst for that potential bearish move.?
GP: Right.
And despite that expectation or opinion, we’re not just blindly shorting stocks.In fact, a lot of our recent waves setups have actually been on the long side.And it is the side of the market that I actually prefer trading most of the time, over shorts.It’s usually just a more forgiving trade, because the markets trend higher over time.
But we are looking for specific opportunities to short individual stocks, as well as some of those sector ETFs when the opportunity presents itself.
JF: Now in terms of actually executing some of these trades, what is your preferred method? Do you guys like to use options? Do you just buy and sell? How do you guys go about that?
GP: Personally, I use both options and just individual shares of that stock.But as far as how we present those wave setups to our membership, we provide those specific trade parameters saying this is support.This is a good entry point.This is where you should set a stop as far as validation.And this is our target, as well as some initial resistance that price should clear in order to provide some confirmation that that trade setup is following through.
So we don’t necessarily say, hey, this is an option strike and an exploration that you should be buying.
They can make that decision as far as how they want to trade it personally.But we provide the parameters for that setup, so they can make that decision.
ZM: And I think the bottom of all of our charts certainly does have a time axis.But the right side of the chart that has the price axis is, what as you know James, Elliot Wave is far more accurate at predicting specific price levels.And we have a general idea of the shape of the subway patterns that the bigger moves that we’re projecting should take.
And we can use some other tools in terms of Fibonacci fans and other kinds of timing methods to get an approximate idea of timing, but it can be one of the most frustrating things in the world to get the exact move correct, but to have been a little bit off on your options timing, and have that not trade play out as successfully.So, I think options add a whole another degree of complexity that people really need to understand separate from just what the stock should be doing, or whatever underlying instrument that it is.
So – and we try — we also, because we have such a diverse population of members that we’re presenting our analysis to, we try and structure it in a way that it can — that many people can apply it to their own methods of trading.
JF: That makes a lot of sense.
Like you say, Elliott Wave, not necessarily so concerned with the timing.So obviously another element there.Now we’ve obviously talked a little bit about markets in general equities.There is a general consensus like you say that we could be heading down.
Now are there any other sectors that you are interested in more bullish on maybe in the long-term?
ZM: Well, as Garrett mentioned, we look for those rotation opportunities in our weekly webinar, where we’re delving into a particular sector or doing a review of all the sectors, we just presented at the MoneyShow on sector rotation.And as Garrett mentioned, some of the more recent wave setups that we posted, have actually been bullish, because as he said things — it’s usually an easier way to view charts and to trade and a lot of people may not have the ability to outright short some things.
So we have been looking.We like (
XLV), ( XLU), ( XLP) if they can hold some support here as more defensive plays to benefit from some of that rotation maybe as the tech sector and other parts of the market start to weaken.And we’ve been watching this consolidation in energy stocks since over the last year, when we were looking for a nice ABC consolidation for a larger degree fourth wave, and that’s getting very close to an end.
And we’ve started to post some bullish charts on some energy names while we look for a few others to try and make that one more low.
GP: Right.Yeah, regarding your question as far as the long-term sectors that we’re bullish on, given what we discussed earlier about the potential for that larger degree top in the broader market, most sectors are probably going to follow to the downside if we do get that move in the S&P 500.But as Zac mentioned, energy stocks kind of similar to what they were doing last year, could decouple from that and head higher when the rest of the market is dropping.
So that would probably be the one area of the market that as far as longer-term potential, I think, has the best odds of being bullish.
JF: Right.I find myself agreeing…
ZM: I didn’t know if you know that the Garrett and I also run in addition to StockWaves, a service on
ElliottWaveTrader.net called Metals, Miners and Agriculture.
And we’re also seeing a lot of opportunities in precious metals as well as some base metals and the miners as well as some other commodities that look like they could benefit from declining stock prices, maybe or just a shift in capital flows.
JF: Okay.Well, I did not know that Zac.So thanks for telling me.
I will be sure to check that out.I didn’t know that you will on ElliottWaveTrader.I will ask you guys to talk about that before we go off just to let everyone know where you are.I do find myself agreeing with you guys, to that extent, I do think energy and commodities could offer some upside here.
Now moving on, I wanted to ask you a question — actually, sorry.Before we get into other stuff, I recently had the pleasure of talking to
Ryan Wilday, who is on also an ElliottWaveTrader, right? He runs Crypto Waves.
He does Elliott Wave analysis on crypto currencies.So I know that’s kind of what you might call quite controversial, crypto currencies kind of either you love them or you hate them.Where do you guys stand on those?
ZM: We love working with Ryan in his analysis.So just like Ryan has his crypto service on ElliottWaveTrader and also replicates that service on the Seeking Alpha’s Marketplace, I think they changed the name recently to Investing Groups.
We do the same with StockWaves.
So we first grew the service on ElliottWaveTrader.And in the last year or so, or two years, I think started offering a version of the service on the Seeking Alpha platform.
We try and shy away from overlapping too much of the coverage in StockWaves with Ryan’s cryptos.We have added in some coverage and talk about a couple of the mining, crypto mining stocks, like Marathon (
MARA) and ( HUT) and ( RIOT) and a couple others.We really try and avoid posting too many charts on like ( OTC:GBTC) and things like that, that are meant to be more of just a version of trading actual cryptocurrency because that’s part of Ryan’s wheelhouse.But I think in a certain sense, there’s potential that a similar degree top was struck in in Bitcoin itself.
And that’s kind of the big bellwether for most of the crypto world.And I think there’s too many of the smaller coins that really needs to — a lot of those need to die and condense and a lot of it was just created to have because there was a market for it and people were super bullish on anything crypto.
So it was like a just — all the IPOs or other things that just blossomed and took off in FTEs and all that.So a bigger consolidation that probably sends a lot of those to zero would probably be healthy for the overall blockchain and cryptocurrency world and certainly for the two big guys like Bitcoin and Ethereum, which in a lot of ways, are kind of the digital versions of gold and silver.
JF: Right.
Anything to add Garrett?
GP: I mean, Zac covered it pretty well there.As far as my personal opinion on Bitcoin and cryptocurrencies, I share a similar view as Zac that’s it probably at the moment is not going to decouple too drastically from the broader market.We go risk off on the broader markets and you’re probably going to see some downside on cryptocurrencies as well.So the same potential for this bounce off of earlier lows.I think it was September and Bitcoin to be corrective to the upside and set up another drop that takes price back below that low.
JF: Right, that makes a lot of sense, too.Now I did want to know fundamentally though, because you did talk about having, obviously, that service surrounding miners and maybe being a bit more bullish on maybe gold and some of the precious metals.Do you not subscribe then to the idea that Bitcoin kind of is like digital gold.
GP: In respect to being an inflation hedge, as Lyn Alden has put it in her personnel articles, she views it more as a hedge against real rates rather than inflation necessarily.So you have to take a look at those interest rates being adjusted for inflation.
And in that case, yes, it can be a hedge against that similar to gold.
Does it necessarily replace gold for a lot of investors? I’m not so sure that it does.And if I would say that any of those cryptocurrencies is going to potentially decouple from the broader market and trade based on its own price patterns and fundamentals, and Bitcoin probably has the best odds of doing so, compared to a lot of the other smaller cryptocurrencies.But again, so far it hasn’t proven itself to really be any different during a risk on or risk off environment from a lot of other equities.
JF: Right.Yeah.
I love the way you put it, as you say, as Lyn says, that kind of hedge more against the real rates.Now just to wrap up, I wanted to know, from a personal standpoint, and I’m sure some Seeking Alpha contributors with Investing Groups might be wondering, what is it like running an Investing Group with another person or with multiple people? Do you ever find yourself, you guys disagreeing? Do you think perhaps that it enriches your content, since you’re always kind of bouncing ideas off each other, keeping each other in check? What’s that like?
GP: For the most part, the majority of the time, I would say, 90% of the charts, at least, that we’re looking at Zac and I are going to come to the same conclusion, even though we’re not discussing beforehand.
And coming to that conclusion through that discussion, we will both look at a chart and come up with the same count.Because we’re applying the same methodology as far as Elliot Wave theory, but also overlapping that with Fibonacci Pinball, to come up with our targets and help support those individual counts.
But during those situations, where we might end up disagreeing, as far as our expectation for an individual chart or company, I mean, that just kind of is a good indication that that’s probably not something that is a good trade setup, because we do it differently.
ZM: And I just to add to that, I think, not only are we applying the same methodology, but because of the way that Garrett and I are forming our views on a lot of things from the bottom up by looking at so many of the different sectors and individual stocks, it kind of gives us a breadth of view of the market that we share, that’s different from people who might only be looking at the S&P or the Dow.
And those – some of those times where we do come to something that’s a little bit different.A lot of it might be well, the way that I’m viewing it as a primary view is the way that Garrett is also considering it, but maybe he’s kind of leaning to that a little bit more as like the backup or alternative count in the same way the way that he’s viewing it is also the way I see it.But I’m trying to lean a little bit more bullish or something for the time being.
And very rarely are we seeing things drastically different.But it’s a great check to when that happens and saying, hey, Garrett sees this really differently, what’s going on? And so, bouncing those ideas off of each other.And also, if those the situations where we are seeing things drastically different, maybe it’s a good warning for people to kind of steer clear because it’s not as certain.
JF: I appreciate that, guys.
So please go ahead.
GP: To add to what Zac was saying about what his primary count might be versus an alternative count that might be my primary or example, like that.Often when there are two potential counts that we see as viable for a chart, there is usually overlap within, typically the near-term expectation for both counts.And then there’s a specific juncture or point where they should make a decision between those two potential paths.
So a lot of time, it’s not really consequential for trading purposes, even if we do have a slightly different view, because more often than not, it’s the same expectation near-term until we get to that specific point where price should either go one way or turn down from that support or turn out from that support to determine between those two paths that we’re seeing.
JF: All right, appreciate that, guys.
Now I’m picturing some of our listeners right now.
You’ve made very good points.They might be wondering, wow, this Elliott Wave thing sounds great.How do I get started with that? So what would be the first steps for someone sitting at home wanting to get started with Elliot Wave and this kind of analysis? And then just to add on to that, what can people expect from your services, and where can they find you and all that stuff?
ZM: I think that the textbook for Elliott Wave is the Elliott Wave Principle written by Frost and Prechter.It’s a pretty thin book, but it’s difficult for some people to get through it on the first read.But two or three reads of a small and it really starts to click and make sense.And you can skip over the whole section on Fibonacci’s background and read that at your leisure later.
It gives you some really good overview of the characters of the different waves, and when you see those types of things, and how some of those different patterns present.And we also have a lot of great educational materials at ElliottWaveTrader.net, or in the getting started section of StockWaves on Seeking Alpha.Some webinars and articles that were written and some other educational materials that can all be accessed for free.
And we really try and present in addition to the wave setups and things like that that we present as far as the actionable analysis that Garrett was talking about, we try and focus a lot on education.
We have videos three days a week, in addition to our webinar that’s on Thursdays.Because it’s a lot — there’s a lot of like nuance and sometimes it’s difficult to type out about a chart.And if we can point to that, while we’re talking about it on a GoTo meeting webinar, then it can make it a lot easier for people to understand what’s going on.
GP: Yeah.And on top of that, at
ElliottWaveTrader.net, we do have weekly what we call a beginner circle webinar.So our newer members are encouraged to participate and join those webinars and ask any questions they may have, since joining the sites regarding Elliot Wave Theory or technical analysis, or any of the services that we offer, and how to use the site, et cetera.So that’s a good resource for newer members who might not be as comfortable or familiar with Elliot Wave Theory and with how we’re presenting our technical analysis to answer any questions that they may have.
JF: All right, guys, appreciate that.
It’s been a great pleasure talking to you guys.Like I said before, I use Elliott Wave, and I’ve been following you guys’ work for some time, as well as
Avi Gilburt’s.
So it’s been a real pleasure, real treat for me getting the chance to talk to you guys.I really appreciate you guys coming on the podcast.And I hope we can do it again sometime.
ZM: Thank you, James.
We hear you.Absolutely.
GP: Yeah, definitely.Thank you for hosting this, James.
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