However, true surfing enthusiasts know that if they paddle beyond the break and wait, eventually a “set” wave will arrive to offer a larger, more powerful, and thrilling ride.   

Similarly, as market participants buy and sell, the feelings and emotions of millions of traders combine to create huge psychological waves that move the market.  And as we all know, the market is anything but "rational" in the short term.  It doesn't matter how correct you may be on a company or sector's fundamentals - when a wave of selling hits the market, good news is bad news and bad news is disastrous.  Falling prices create fear - fear creates panic!  So much for fundamentals when your capital is getting creamed, and your money dead for months thereafter.

Elliott Wave Theory

Traders have long studied methods to provide market insight, even predict future market direction and force.  One of these methods was developed by R.N. Elliott, and is called Elliott Wave Theory [EWT].  EWT contends that the same underlying forces of nature that explain the size and movement of ocean waves, the perfect symmetry of a nautilus shell, the structure of galaxies and even our own body  - can also explain and predict market direction.

According to EWT, it appears PM Stocks are producing such a “set” wave, one that Traders and Investors can ride for incredible price gains over the next 9 – 12 months.  Please bear with me here - if you are not familiar with EWT, please allow me to share some basic EWT principles so that you can appreciate the chart provided below.  Please click on the following link for the basic structure of the EWT wave sequence.

http://stockcharts.com/school/doku.php?id=chart_school:market_analysis:elliott_wave_theory 

Senore Fibonacci & "Sacred Geometry"

As mentioned in the link, EWT is based upon the Fibonacci number series, which mathematically captures the underlying force of nature itself: 

http://www.mathematicianspictures.com/FIBONACCI/Fibonacci.htm

Within the Fibonacci number series, each successive number is 1.618 larger than the previous number.  This ratio is called "Nature's number", the "Golden Number", the "Golden Mean", "Divine Proportion", and "Sacred Geometry":

http://www.world-mysteries.com/sci_17.htm

OK - so how does EWT and Fibonacci relate to the market?  Because investing and trading are human endeavors and humans are bound by human nature!  Besides fear creating panic, for another example of human nature in action, please consider that "people want what other people want".  This holds true regardless of utility, as in fashion or style - so if other people want something - people want it!  Now then, let's take a look at a long term chart for PM Stocks - the exchange traded fund [ETF] for miners - GDX - and compare it to the classic EWT wave pattern:

PM Stocks ETF - GDX Monthly

Wave 3 of 3

So we can observe from the chart above that the “set” wave I am referring to is the commencement of wave 3 of a 5 wave set [green numbers] that will ultimately comprise an even larger Wave 3 [large blue numbers]!  From Elliott Wave Principle at Wikipedia.com:

“Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.”

Equilibrium = Consolidation

Please also note, with respect to the GDX chart above, the indicator immediately above the price shown as "BB", which stands for Bollinger Band Width.  BB measures price volatility.  When buyers overpower sellers and price explodes upward in such a short timeframe, it is natural for investors to question such a dramatic move, requiring more time to accept the substantially higher price.  That's why these vertical, "parabolic" rallies ultimately end in a "waterfall" type selloff!  These intense emotional swings define price extremes, but as time draws out investor emotions level, opinion and price swings narrow as the market seeks "equilibrium".  Now "equilibrium" does not denote a lack of action - in fact it is the equal application of energy and power between two opposing forces - buyers and sellers.

This process of price adjustment and consensus building towards equilibrium is known as "consolidation".  For GDX, consolidation patterns continue to appear in the form of a Symmetrical Triangle.  As the price approaches the triangle apex, energy is building.  Thus, a low the reading in the BB indicator typically signifies a release of energy and major price move is eminent.  Symmetrical Triangles are considered a "continuation pattern" within the larger trend.  Therefore, if the long term trend is bullish, then traders should "anticipate" an upside breakout.

Ruben T. Varela

Ruben Varela is an independent trader.  Ruben attended California State University, Long Beach State, majoring in Economics and Information Systems.  After a successful 15-year career in commercial and investment real estate, Ruben's trading success led him to retire from real estate in January 2006 in order to trade full time.  Ruben is presently in the process of launching a website [TheGoldenBull.net – not live yet] focusing on trading the Precious Metals sector.  Look for the website launch and additional insight from Ruben in the coming days ahead.  In the interim, if you are interested in receiving regular investing & trading updates, essays, and reports free until the website launch, please feel free to contact Ruben at:

rvarela@socal.rr.com

-- Posted Monday, 15 October 2007 | Digg This Article