The Application Of Technical AnalysisIn the

Financial and Commodity Markets

Robin WilkinGlobal Head of FX and Commodities

Technical Strategy

JPMorgan Chase Bankrobin.wilkin@jpmorgan.com

0207 777 1345

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The JPMorgan FX Technical Team

LondonLondon

Robin Wilkin Robin Wilkin –– 0207 777 1345 0207 777 1345

New YorkNew York

Niall O’Connor Niall O’Connor –– 001 212 834 5108001 212 834 5108

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Popular misconceptions of Technical Analysis

Technicals are a stand alone system only

Not True – Technicals can and are widely used in conjunction with fundamentals.

Technicals are merely a reaction to the fundamental outlook.

Not True – More often than not the markets have topped or bottomed way before the fundamental picture is evident.

Market commentators use Technicals as an excuse when the driver is unclear

True – When it is not clear about why a market is moving it is put down to technical buying or selling.

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EURUSD – a base developed at the end of 2000, but fundamentals didn’t become bullish till late 2002

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The greatest misconception…

It doesn’t work! - Untrue

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What makes a good technician?

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OBSERVATION

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We combine Elliott Wave with a number of other tools available

– Predictive techniques• Elliott wave• Pattern Analysis• Candlesticks

– Mechanical techniques• RSI• Stochastics• Moving Averages

We combine all these methods into a powerful predictive tool that can be applied across all the markets.

“If you don’t know where you are going , you’ll probably end up somewhere else”

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The Elliott Wave Principle

“Elliott waves are visible measures of the ebb and flow of investor psychology that repeat themselves as patterns. They allow us to anticipate the next move more accurately than anything else.”

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Predictive techniques

Elliott Wave Theory:– Background

• Method developed by Ralph Nelson Elliott which argues that social or crowd behaviour trends and then reverses in recognisable patterns.

• Technique further developed by Robert Prechter after Elliott’s death

– Details of the principle• Trends are identified by a sequence of waves termed impulse waves,

which are numbered 1-5, and a shorter corrective sequence of waves which are lettered A-C

• There are also 9 different ‘degrees’ of scale, spanning short and long term, from ‘Grand Supercycle’ to ‘Sub-minuette’

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Basic Tenets

Movements in the direction of the trend develop into Movements in the direction of the trend develop into five wavepatternspatterns

CounterCounter--trend movements display trend movements display three wave structuresstructures

Elliott Wave Analysis assesses Elliott Wave Analysis assesses probable outcomes by outcomes by determining the current position within the larger patterndetermining the current position within the larger pattern

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The Structure of the Wave Pattern

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5 51

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cB

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Vocabulary

Impulse Waves ---- movements in the direction of the trendmovements in the direction of the trend

Corrective Waves ---- movements against the trendmovements against the trend

Fibonacci Ratio ---- a mathematical ratio that often occurs between related a mathematical ratio that often occurs between related waves.waves.

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Three Rules of Elliott

Wave 2 Wave 2 CANNOT retrace past where wave 1 retrace past where wave 1 began.began.

CORRECT

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Three Rules of Elliott

Wave 2 CANNOT retrace past where wave 1 began.

Wave 3 can Wave 3 can NEVER be the shortest.be the shortest.

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CORRECTThree Three is notis not the shortestthe shortest

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Three Rules of Elliott

Wave 2 CANNOT retrace past where wave 1 began.

Wave 3 can NEVER be the shortest.

Wave 4 Wave 4 NEVER ends in the price territory of Wave 1.ends in the price territory of Wave 1.

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CORRECT:iv does not overlap i

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Know when to break the rules

Diagonal First and Fifth Waves

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Diagonal Fifth Waves

Diagonal Fifth Waves

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Guidelines - True most of the time

EQUALITY

When 3 is longest, 5 will approximate 1When 3 is longest, 5 will approximate 1

Guideline of Equality

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5(1)

Wave 3 is the longesttherefore wave 5 equals wave 1

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Guidelines - True most of the time

EQUALITY

When 3 is longest, 5 will approximate 1

ALTERNATION

If 2 is sharp, 4 will be sidewaysIf 2 is sharp, 4 will be sideways

If 2 is sideways, 4 will be sharpIf 2 is sideways, 4 will be sharp

Guideline of Alternation

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Two is sharp, so...Two is sharp, so...

Four is sidewaysFour is sideways

And vice versa

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Guidelines - True most of the time

EQUALITY

When 3 is longest, 5 will approximate 1

ALTERNATION

If 2 is sharp, 4 will be sideways

if 2 is sideways, 4 will be sharp

CORRECTIONS

Often end in the area of the previous wave 4Often end in the area of the previous wave 4

Guideline of previous fourth wave support

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5

a

b

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(1)

(2)

Span of 4th waveof previous degree

Previous 4th wave

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Popular Corrections……….

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5 A

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cB

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5C

ABC Zig Zag

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B

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Regular Flat or Irregular Flat is when wave Bmakes a new low/high

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b

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Triangle

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Trading with Elliott Wave

Initial 5 wave rally breaks the sequence of lower highs

First buy opportunity occurs on the pullback in wave 2. FX the last couple of years has more often than not been a shallow and quick correction

Take profits at ideal target - 1.618 x wave 1

4th wave typically retrace 38-50% of wave 3 -provides 2nd buying opportunity

Exit all longs and look to initiate small shorts

Wave A typically overlaps the top of wave 3

Wave B fails to test the wave 5 high - add to short positions

Wave C targets at least the previous 4th wave lows

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USDZAR – a walkthrough example

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v 3

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USDNOK – another example

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USDNOK EURNOK

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GOLD – why were we bullish?

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Mechanical Techniques

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Mechanical techniques

Oscillators– RSI - (Relative Strength Index)

• Uses an average of period’s higher and lower closes to provide anumber which shows extremes of market buying/selling power by using deviations outside of a ‘band’.

– Stochastic -• Comprises 2 lines, one leading (the %K) line and one lagging (the %D

line) that provide buy and sell signals through deviation outside of a ‘band’. When the 2 lines cross, at the outside of the band, then this is a strong signal. Numbers are derived from measuring the latest, lowest and highest closes within 5 periods.

– Confirmation• Both indicators give a similar reading.

– Divergence• Condition where prices register a further extreme print, while the

oscillators do not make a similar extreme reading.

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Stochastics in a range trade environment

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RSI – Use them to get into the trend

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Japanese Candlesticks

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What are the candles telling you…price action!

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Markets are generally driven by

EMOTION

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Remember the Cycle of Psychology in Mike’s presentation

ConfidenceConfidence

Greed

* The Trade ** The Trade *

HopeHope

ComplacencyComplacency

FearFear

Anger?Anger?

PanicPanic

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“Jedi” trading – The 3 key words are:

Greed

FearFear

AngerAnger

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What’s your edge ?

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The checklist………Plan your Trades. Trade your plans

Keep records of your trading results

Keep a positive attitude, no matter how much you loose

Don’t take the market home

Continually set higher trading goals

Successful traders buy into bad news and sell into good news

Successful traders are not afraid to buy high and sell low

Continually strive for patience, perseverance, determination and rational action

Limit your losses - use stops

Never cancel a stop order after you have placed it

Place your stops the time you make the trade

Never get into the market because you are too anxious because of waiting – beware of “into wishing” over “intuition”

Avoid getting in or out of the market too often

Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action

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The reading List………Technical Analysis of the Financial Markets – John J Murphy (The Bible – A little bit of everything)

Trader Vic – Methods of a Wall Street Master – Victor Sperandeo (A market wizard tells all)

Trader Vic II – Principles of Professional Speculation – Victor Sperandeo

Elliott Wave Principle – Robert Balan (great for examples at the back)

Market Wizards 1 and 2 – Jack Swager (Straight from the horses mouth)

Reminiscences of a Stock Operator – Edwin Lefevre (the classic)

Technical Analysis of Stock Trends – Edwards and Magee (The best for patterns)

Backgammon for ……. - Bill Robertie (wanna learn about probabilities and luck versus skill this is the game)