Impulse Vs. Correction wave: How to spot Market’s Next Move

Stocks market default move as all know is going up unless there is a correction move where prices will go sideways because people collect their profits or down when there is a problem in the company. But that is not the case in Forex Market where the move can be either up when the main currency is stronger than the secondary one or down when the opposite is true. In this type of market, traders who bet in the price action and its movement will find it hard to spot which move is the correct wave and which is the correction wave. It will be hard to know which one the actual direction of the price and which one is the correction of the actual move. The following is some tips that can be helpful for traders to spot which move of price is the impulse and which is the correction. Once these two movement have been identified trading will become more easier, because traders can stick to the original direction of price whenever an opportunity has been rises.

The first approach to identify the impulse and the correction is to use long time-frame such as weekly or monthly, and try to identify if the price in these time frame has multi[pl tested trend line. Once this trend line has been identified then the impulse will be always with the direction of that trend line, and the correction will be always in the opposite diction of that trend line. Like the figure below:

Multi tested down-trend line

Another approach to identify the impulse wave and/or the correction wave is using MACD. MACD has two lines, one of which is called the MACD line and the other is Signal line. When MACD line is above the Signal line and all above zero its an uptrend, and when MACD line is below the signal line and all below zero this is a downtrend. But what if the MACD is above the signal line but both below zero line, or MACD is below the signal line and all above zero line. In these two cases the market is in correction phase and once you identify the original trend you can wait until the correction phase end and the price start move with the impulse direction again . Here where you can use the MACD to see if the price impulsing or correcting:

 Above Zero lineMACD above Signal lineUptrend, impulse
Above Zero lineMACD below Signal line Correction in uptrend
Below Zero lineMACD above Signal line Correction in downtrend
Below Zero lineMACD below Signal line Downtrend, impulse
MACD and impulse and correction waves

As you can see in the below chart:

Note: MACD should be used as secondary confirming tool not as major tool. Never use it by its own, the only major tool that you can rely on is the price action and its movement.

Sometimes the correction wave has an impulse and strong wave where the impulse will be in the opposite direction of the general market, and the correction wave for this impulse is in the direction of market. Here where many traders loss their money in market specially in Forex where there is lack of volume. The only way that will help traders to avoid this types or trades is to make sure that they get in trade with the direction of general market impulse wave after the momentum of the correction wave is faded and that happened when the MACD line is crossing signal line or retrace back from it and all lines are either below zero( for Sell) or above zeros (for buy) which means that the market will resume in the main direction like the figure below.

One of the great tool that can be used to tell if the trend line (either was up or down) about to be broken and the correction wave which suppose to hit the trend-line and resume with movement of main trend line direction is about to become an impulse, is using a momentum tools such as (RSI). Once the price reached a down-trend such as the one in the figure below with high RSI that either at 70 or above , then there is a high probability that the price will valid break the trend line and move up in new up-trend and new impulse wave.

Price Hit Down Trend with RSI hit 70 or above

Those are some tips that might help traders in how to indicated which move is the correct one (impulse) and which one is the correction move. Trader need to stick to the original move and avoid trading in correction move especially if she is not experts. Because as I said before all money that traders make in the original move can be wiped of and more once the price get in a correction wave.

The new Bull Market: Get Ready

Many people missed the bull market that started at the beginning of 2009 and almost end at the beginning of 2020 due coronavirus crisis. That bull market took the DOW 30 index from its bottom which hit in March 2009 and was 7000 points and did not stop until it reached 30,000 in January 2020. This index moved about 23,000 points and made a profit of more than 328% in almost 11 years. The same is true for S&P 500 index which moved from its bottom that hit in the same date, which was 700 points until it reached 3400 points in January 2020, which means that it made 2700 points as a profit that almost 380%.

Both major indexes made a profit of about 320% or more, which means that if some one at that year of 2009 invested about 10,000$, then within almost 10 years she will made about 32,000$ as profit, and if she invested about 100,000$ then she will end up with about 320,000$ in profit. So what all of that is have to do with market toady and coronavirus crisis and 2020.

Coronaviruse Crisis hit the market so deep and started huge sell off pressure in February 2020, when all stocks have been drooped almost around 20% of its prices or more. This can be either one of two cases. The first of which is market starting correction phase which means the it will move in side-way for almost a year or so failed to make new highs as well as supported by investors whom prevent it from making new lows. While the second case is market staring new bear move which means that it will make new drops and not able to make new highs. Both cases will not last for long. The correction phase may become shorter than the bear market phase, but both of them are good opportunity for investing. Because both of them having an opportunity to by good stocks with cheap prices.

What should people who missed 2009 Bull Market do in order to take advantage of the Coming  opportunity?

There are two types of people based in their knowledge about stock market which are as following:

  • People who have no clue about stock market (Type I).
  • People who have knowledge about stock market and know how to invest and make fundamental and technical analysis (type II).

Type I people should not be worried about their lack of knowledge in financial market specially in stock market, because their lack of knowledge might be their strength. The reason is that a lot of expert in this field is trying to spot the bottom to ride the wave of new bull market and failed to do so. While those who has no clue about stock market they don’t need to bother them-self about market tops or bottoms. They can easily open an account in any fund that invest in DOW 30 and/or S&P 500 indexes such as:

  1. Fidelity ZERO Large Cap Index.
  2. Vanguard S&P 500 ETF.
  3. SPDR S&P 500 ETF Trust.
  4. iShares Core S&P 500 ETF.
  5. Schwab S&P 500 Index Fund.

Once they invest in these mutual fund, they will be riding the next bull market and this will happen when the correction phase or bear market finish and market start break the top that made in January 2020, and start moved up and make new tops that might be 60,000 or 90,000 or more than that. But to get rewarded properly in this investment, people who used this approach must hold their position for almost 10 years or so. And they should only invest with money they can afford and get no loans. Also they should use money they don’t need it for the coming 10 years.

Type II those are who know stock market and how to read charts and do some fundamentals and technical analysis regrading any company and its stock to know which stock is the best and when will be the good time for entering and exiting an investment, I have some tips for them – they might go for the tip that provided for Type I – and they are as below:

  1. If you know how to short stocks and familiar with this type of trade, then go ahead and do it, but you have to make sure to read candle properly and the volume that made it, in order to spot a good entry and exit and made some profit while the market is dropping.
  2. If you want to buy the market and go long, never do that until both Dow 30 and S&P 500 indexes made bullish candle in monthly time frame with higher volume than all precedent candles (specialty the red one).
  3. Do not buy good companies while there are best one, and to know which one is the best:
    1. Go to earning report and see which companies are able to make huge profit in the time of crisis.
    2. Companies that have perfect earning reports should move in advance of the index, for example if the index made the bullish candle in (2) and still did not break its MA(50), and the stock that you are willing to buy is already cross above MA(50) then this is a good sign that this stock is a leading one and it will be good if you invest in it since it might be the leader of the new bull market.

Both type of people should be prepared for the next bull market which might start after one year from now or so, and they should save some cash to invest in stock market because it’s the only place that can allow you to be shareholder in best companies in the world and provide you with more than 300% return on investment or more.