Stock market forecasting indicators

I have created this chart to give you a clear picture of where we are in the cycle. I think this will help you manage your exposure. Sometimes I give a trade signal but it is not always the best time to trade. If I give a trade signal it is because the Elliott wave pattern is complete, but sometimes it is not confirmed by other indicators like sentiment. This chart will hopefully help you determine you trade size based on the probability of a successful outcome.

For example today I think the stock market is a sell, the wave count is complete. Now if we look at the indicators:

Sentiment is positive : the BTI is rising so this is not bearish. However, very often a new downtrend will start when sentiment is bullish, this is why we go short. If the wave count is clear and I believe we are at the start of a decline, bullish sentiment will not put me off. A good example is January 20th sentiment was bullish when the decline started.

The Elliott wave is complete, we have seen it is wave (ii) in the S&P and wave ii (circle) in the FTSE

The trend is up: this is given by the BTI when the BTI is rising and when the current wave is up. Here the trend is up because sentiment is positive but we have limited upside because the Elliott wave is complete. Another indication of limited upside is when the 34-day BTI is at 400 or higher (overbought), Right now the 34-day BTI is at 71 so not near overbought.

Probability of a trend reversal: this is based on the wave count and the 34-day BTI. The wave count is complete but the 34-day BTI is not overbought, this is why the probability of a trend reversal is medium. If the 34-day BTI was overbought (at 400 or higher), this would confirm the wave count and in this situation the probability of a trend reversal would be high.

So the bottom line is, these are not perfect conditions to go short, in this situation you need to reduce your trade size. Perfect conditions to go short would be: sentiment is negative, wave count is complete, next wave is down and 34-day BTI is overbought (above 400).

Having said that I still believe we can go short, nothing is perfect in the stock market. Sometimes the market will turn down while the conditions for a turn are not perfect. We saw this on January 20th when sentiment was positive and the 34-day BTI was not overbought (it was near overbought at 364) yet the FTSE started a long decline. At least this analysis can help you decide to increase or decrease your trade size.

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