Retreat: To move back or withdraw; or a quiet, secluded place where one can rest and relax. (DTN photo by Darin Newsom) |
But what about markets? How does a
collective system of millions of different opinions regarding price take
a breather? It's called "retracements," and something we not only see,
but anticipate in every market trend.
So, what is a retracement? Think of it as a
combination of the two noun definitions above. It's a time period when a
market moves back against its trend, usually taking the heat off of
boil for a short time. How far a market moves back has a lot to do with
its real fundamentals, those indicated by its futures spreads, allowing
us as analysts to establish possible price targets.
Those of you familiar with my analysis know I
have developed a method of analyzing trends (price direction over time)
based on the simplest application of Elliott Wave Theory. Recall from
previous discussions that a complete 8-wave cycle consists of a 5-wave
uptrend and 3-wave downtrend. In an uptrend; waves 1, 3, and 5 are up
with the third wave being the strongest. Waves 2 and 4 or down. In a
downtrend waves are given letters to differentiate with A and C being
down, B being up.
These retreating waves (2, 4, and B) are
often read as major changes in price direction, but are nothing more
than retracements. Go back to my Technically Speaking blog from July 1
and look at "Monthly Grain Analysis." There you'll see a long-term
monthly chart of one of my favorite markets (from a technical point of
view), the DTN National Corn Index (NCI.X, national average cash price).
Note that Wave 1 (first faint green arrow staring in October 2014)
peaked in late December 2014, leading to the market retreating (Wave 2,
first red arrow) through early June. Notice that Wave 2 bottomed out at
$3.29, near (enough for me) its expected target of $3.31, a price that
marked the 50% retracement level of the Wave 1 range from $2.81 to
$3.80.
Again, those of you following along with my
analysis over the last year (at least) will recognize the significance
of the 50% retracement level. If a market has bearish real fundamentals,
its futures spreads showing a strong carry (contango in the world of
energies and metals), then we would expect a retracement (particularly
during Wave 2) of at least 67% to near 100%. If a market's real
fundamentals (spreads) are only neutral to bearish, the expected
retracement range would be 50% to about 67%. Neutral to bullish real
fundamentals tend to result in retracements of 33% to 50%, while bullish
real fundamentals generate retracements of 33% or less.
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