Questions & Answers.

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Carl Malmberg
Carl Malmberg
Technical Analyst at EWT Investing
Carl has analyzed and traded the financial markets 13+ years.
Developer of the Extended Elliott Wave Theory, an extension made to the original Elliott Wave Theory.

Q: What is a technical chart breakout?

A: There are several types of technical breakouts. A breakout refers to a process of the market pushing through a support or resistance level previously established, and often reinforced by anticipatory trading behaviour close to a certain price level.

A trading range usually has experienced traders taking reversal trades on either side of the trading range, which tends to perpetuate it, and attract more traders to participate in maintaining the trading range.

Eventually, something causes the one of the boundaries of the trading range to no longer hold as a support/resistance level, causing the market to break through the level. Usually, stoplosses are placed around and slightly beyond the broken boundary price level, which can then reinforce the break, adding further strength to the break through.

A failed support level might trigger stoplosses just below it, strengthening the break through of the support level, causing a further drop in price with strong momentum. And conversely, a resistance level can have an aggregation of short covering stoploss orders placed around and just beyond it, causing an upwards breakout from the trading range to be reinforced by short-covering buying into the breakout, possibly resulting in a violent rally upwards.

Breakouts in the financial markets are typically caused by 3rd waves,  5th waves, C waves or G waves. See our basic Elliott Wave Theory Guide for more information.

Q: How is a preferred stock valued?

A: Preferred stocks pay dividends on a regular basis, usually quarterly or semi-anually.

The dividend is a fixed amount of money per share. To calculate a valuation of a preferred stock, you divide the dividend with the “Required Rate of Return” (RRR). RRR is different for different investors, and is calculated taking many factors including estimated inflation and other fundamental analysis, into account.

The valuation of a Preferred Stock is easiest to calculate on a yearly basis. The formula is:
V = D / r
Where V is Value, D is Dividend and r is RRR (see above).

If you know the current stock price of the preferred stock, and its total annual dividends, you can calculate the market estimate of the RRR.

Example: A preferred stock trades at 400 SEK. Its annual total dividend is 30 SEK. Given these two variables, we can then calculate the current market RRR of the stock to be 7.5%. The formula is D / V = r -> 30 / 400 = 7.5%.

One more thing regarding preffered stock valuations: the minimum price at which the stock can be bought back and annulled by the issuing company. This is not always specified in the contracts regarding the issuance of the preffered stock series.
If you buy a preffered stock below the price at which the preffered stock must be bought back by the issuing company should they wish to cancel the preffered stock series, you are likely to get a good direct yield, and also some degree of protection against price declines; other investors, seeing the price drop down below the minimum buy-back level, might decide to support the price by entering. Please note that this would only be valid as long as the market determines the company to be safe and sound fundamentally. If not, there won’t be any strong support based on a buy-back level alone.

Q: Is the abnormal rise in the stock market a sign of flickering candle like October 1929?

A: “Abnormal rise” is not a very helpful characterization of any market move, since it locks you into an adversarial relationship with the market conditions. That said, sometimes the markets are indeed acting far away from ones expectations, and it’s almost impossible to remain neutral and objective at all times. However, if you use overly adjective-laden descriptions of market conditions, you run a significant risk of clouding your judgement.

Q: What is the difference between debt, equity and liquid funds?

A: In terms of a company’s capital structure, here are the distinctions:

  • Debt & Obligations are a part of a company’s capital structure. They occupy the highest seniority in the capital structure compared to other categories.
    Seniority determines in which order capital is wiped out in case of a bankruptcy. Higher seniority is only touched after categories and tranches with lower seniority have been wiped out.
    In case of a bankruptcy, the company’s liquid funds and equity tranches are wiped out first in case of a capital shortfall, before the debts and obligations are touched.
    However, debt obligations also do not carry any ownership or votes in the company. Debt obligations need to be paid on first, before any dividends can be paid on stocks that are part of the equity category.
  • Equity is another category of a company’s capital structure, and it has a lesser seniority in the capital structure compared to debt obligations, and so equity is impaired with losses before debt, in case of a bankruptcy.
    The equity category and tranches equal ownership and voting power, and possible dividends.
  • Liquid funds a company may hold are usually held in bank accounts, physical cash (as is the case nowadays with many banks in Europe, that are hoarding physical money to shield from negative interest rates imposed by the ECB), or short-term debt instruments that are considered cash equivalents, such as the US 4-week and 13-week Treasury Bills.
    Cash is not particularly interesting on its own when considering a company’s capital structure, because it’s the expenses of the company in terms of debt payments, and operating expenses and dividends, that dictate what the company can actually use the liquid funds for and when.

Our article “Are the Stock Markets parasitic? A Rebuttal of commonly held negative beliefs about the stock markets and trading.” (link opens in new tab) might also be of interest with respect to this question.

Q: Where can I learn to trade stocks effectively?

A: In order to be able to trade stocks effectively, you need knowledge of general stock market behaviour, in addition to knowledge of the behaviour of a particular stock or stocks that you want to be particularly active in. Additionally, you need a deep understanding of your own psychology and typical reactions to outcomes the market presents you with.

The best way to learn, is to just start and get into trading now, because putting actual money at risk will provide continuous lessons, regardless of your chosen trading system, analysis methodology and risk management. Let the market – or rather, the results you are getting from it –  tell you more about what you need to learn, then go and seek that information.

Q: How do I determine an Elliott Wave 5th wave target?

A:  You can’t get a reliable Elliott Wave 5th wave endpoint target. There are too many 5th wave variations for that, including the possiblity for a failed 5th wave. However, 5th waves will usually make new highs in an uptrend or new lows in a downtrend. So a minimum 5th wave target can be established with a reasonable probability (usually, this taken to be a passing of the extreme of the previous 3rd wave).

Q: How can I learn and master the Elliott Wave Theory?

A: You can’t master any analysis or trading method, because the markets subtly change over time. The drawbacks of standard Elliott Wave Theory is its relative lack of post-pattern analysis requirements. EWT Investing uses the much stronger Extended Elliott Wave Theory (which we’ve developed) in our analysis work offered through our Global Elliott Wave Coverage subscription service, which per its requirements and rules is effective at detecting, and extracting new types of patterns or pattern variations from the financial markets, as they develop over time. However, our Extended Elliott Wave Theory it is built upon the standard Elliott Wave Theory, as linked above, and share its basic rules and guidelines.

Q: What is the Elliott Wave Theory / Elliott Wave Principle?

A: The Elliott Wave Theory (also known as the Elliott Wave Principle) is primarily a risk mangement system for managing risk in trading done in high volume securities, stock market indices, commodities and Foreign Exchange pairs. Secondarily, it is a predictive analysis system for the previously mentioned types of financial instruments, markets and securities. Please see our standard Elliott Wave Theory guide for more information.

Q: “Why should unsophisticated investors make long-term investments?”

A: The Bull Market of 2009-2018 in the US stock markets, has fooled a lot of people into thinking that the Buy-and-Hold-strategy is infallible. This is type of herding mentality, is exactly why the Elliott Wave Theory/Principle patterns keep manifesting over and over again, with minor variations and some complexity added in from time to time when active trading deviates from its average, and the amount of short-term traders all competing against each other is heightened.

Taking a long-term position in the Dow Jones Industrial Average on the 3rd of September 1929 just as the giant correction which turned into a crash started, meant you were underwater until the 24th of November 1954. At the bottom in 1932, you were down more than -95%.

What’s even worse, is that unless you owned an index product in the DJIA, you might have never recovered. Many of the stocks in the Dow Jones Industrial Average at the top in 1929, didn’t survive until 1954. So the chances are very high that you were severely decimated during the crash, and never recovered in your lifetime.

Q: Is investing in equities and stocks the same thing?

A: The term “Equity” refers to a category of a company’s capital structure. It means “ownership”. In the equity category, we also find other securities such as warrants, stock options, preffered stocks, aside from of course regular stocks.

So equities actually mean all types of securities that bestow ownership of part of the company, while stocks are only stocks, giving voting rights/ownership and a right to dividend payouts.

Q: Are the stock markets parasitic? Isn’t trading a non-productive activity?

A: This question has been answered in our article “Are the Stock Markets parasitic? A Rebuttal of commonly held negative beliefs about the stock market and trading.“. The truth is that trading stocks is a very ethically correct and morally upstanding thing to be involved in (at least as long as the corporations you are trading aren’t involved in criminal acts).

Q: Which indices are most suited for Elliott Wave Theory analysis?

A: Generally speaking, the broader an index with respect to amount of stocks in it, their total capitalization, trading activity/volume, diversity of included sectors,  the better the Elliott Wave Theory works.

Also see our article “Which indices are most suited for Elliott Wave Theory analysis?“.