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Investing At The Right Time Using Elliott Waves

A clock and a chart pattern with the words Investing at the right time using Elliott Waves.

Success comes to those who do their investing at the right time, and using Elliott Waves gives these investors an edge. This article aims to illustrate the approach with the help of Hindalco, a stock that trades in the Indian stock market. You can use this same approach in your market as well.

When was the right time to invest in Hindalco

Let us start from the February 2016 low of 58.80. A lot of traders would have been reluctant to buy Hindalco when it was falling like nobody’s business. But in the short span of six months, Hindalco has already reached the 150 level, returning 150%. Such spectacular returns go only to the astute investor, who lies patiently in wait for the right opportunity and goes in aggressively. We shall now use Elliott Wave analysis of Hindalco to determe when was the right time to invest in it.

The careful investor

You don’t always have to be picking the bottoms to make money. You could have invested in Hindalco at the right time using Elliott Waves at many junctures on the way up. In my book “Five waves to Financial Freedom” , I have discussed the concept of reflex point. Once Hindalco went past the reflex point in a five-wave move, the careful Elliott Wave investor would have watched the stock on a daily basis to see when he could join in the upcoming third wave. The first chart below shows the reflex point as well as the five wave rally that took it past that point.

The chart of Hindalco shows wave 1 went past the reflex point. An arrow points out the reflex point.

You can see from the above chart that wave 2 was brief, falling only slightly below the 38.2% retracement level. When the explosive rush to the upside happened with a gap and an expansion in volume, you would have immediately committed some funds. That is because you now know that wave 3 is very likely underway.

Can we invest in the middle of a third wave?

I teach many strategies for real-time trading in my seminars and workshops. Today, you get a snippet. Don’t be scared of buying during an explosive third wave. Use the slightest pull back to commence your initial investment. You can’t wait for the right time that checks all the boxes during a wave 3. Consider the next two charts. They suggest that Hindalco could have potentially reached the end of an extended wave 3. Mark my choice of words! I try to remind myself every day that no matter how smart I think I am, the market is determined to show me my place! Also bear in mind that we can never be sure where an extension will finish!

Hindalco has potentially reached one possible target for wave 3

Here are the internal waves of Hindalco’s third wave to support my hypothesis.

sub wave iii inside wave 3 of hindalco at 161.8% projection target

sub wave iv inside wave 3 of hindalco at a Fibonacci retracement

Finding out Hindalco’s minor fifth wave target

As you know from FWTFF book, you can anticipate where the fifth wave will finish by measuring the distance from point 0 to point 3, and then computing some Fibonacci ratios of that. Here you can see that Hindalco’s minor fifth wave finished exactly at the 38.2% measure of 0-3. Not bad at all!

sub wave v finished exactly at the target as explained in FWTFF book

Using the guideline of alternation to time your investments

One of the advantages of learning Elliott Waves is you can anticipate the level of difficulty in an upcoming move by looking at what happened earlier. Since Wave 2 was a simple correction, we should expect wave 4 to be complex. This is as per the guideline of alternation. You will see this explained well in my Elliott Wave book, Five Waves to Financial Freedom.

The key point with respect to Hindalco is we should be patient now for a proper dip to at least the 38.2% levels. While we are waiting, there could be a brief period of a price over throw to around 155.50. Let that pass! If you are like me, you will rather miss a move than trying to chase a rally that is potentially near its end. This is different from jumping on to a running train as it is leaving the station. That analogy is for joining a wave 3 in its early stages.

The 38.2% retracement in Hindalco is our estimated target for wave 4

It is important to remember that because wave 1 and wave 3 were ‘normal’, wave 5 could be extended. That means, we sometimes turn higher as wave 5 earlier than the perfect turn point. You need to weigh this point and perhaps invest a little bit sooner than the 38.2% Fibonacci retracement level.

How high can Hindalco’s fifth wave go?

Well, once you have purchased Hindalco on a wave 4 dip, you can do some calculations yourself. This calculation is no different from what you did earlier for the minor wave 5 of the third wave! We compute the distance from point zero to point three. Then, we add this to the bottom of wave 4 to get the first possible target for an extended wave 5.These are all explained in FWTFF book in detail. So maybe you should give it another read!

Conclusion

In this article we explained the importance of making our investments at the right time. We saw with the help of Hindalco charts how it is possible to use Elliott Waves to give us the edge. We also discussed the concept of reflex point. We need to keep in mind the potential for the next move. That will allow us to plan whether our stop loss level offers a good reward to risk trade off.