An Insightful Interview

Elliott Wave International presents an interview with Roberto Hernandez, a maverick trader and "a true Elliott wave expert," as his mentor, Dick Diamond, calls him. Roberto spoke with us on the phone from his office in Mexico City and described his approach to trading markets. 

(NOTE: As you may already know, on December 5-8, Dick Diamond is teaching a 4-day trading course in Vero Beach, FL, with Roberto Hernandez assisting. Please note that the course does not focus on Elliott wave analysis. Diamond teaches his own methodology, which is extremely technical, but not Elliott-wave based.)

 

EWI: Roberto, your mentor, Dick Diamond, speaks very highly of your trading skills. Coming from someone like him, a 40-year market veteran, it says a lot. You also are a fan of Elliott wave analysis. Can you explain why?

 

Roberto Hernandez: I first heard about the Elliott wave approach back in 2000. I was working at the corporate finance office of Pemex, one of the world's largest oil companies, and one of my colleagues who followed crude oil futures told me about it. I was curious, but nothing more: I was a hundred percent "fundamentals" guy back then. I read company statements, balance sheets, spreadsheets, recommendations from investment banks, all that. In 2001, I tried to invest in tech stocks... which was the absolute worst time to do that, as you know. I lost a lot of money.

 

At that point, I said to myself it's time to try technical analysis. The first thing I read was John Murphy's famous book, "Technical Analysis of the Financial Markets." It had a section on Elliott wave analysis; that was my second introduction to the method. Then someone told me that there is this company called Elliott Wave International and gave me your website. So I started reading every free resource I could find there, and later got most of your books and took several of your online trading courses. (My first Elliott teachers were Tom Denham, who is now your European stocks analyst, and Wayne Stough.) Then I bought more of your books and took more advanced seminars.

 

EWI: Did it help?

 

RH: Well, after a while, I basically became an expert on the theory of Elliott wave. I could spot a wave pattern on a chart in a second, but it was all theoretical knowledge. At that point, I tried to invest money again, now according to my understanding of the Wave Principle. I lost again.

 

In fact, I was losing so badly that I was getting kind of desperate. I kept looking at charts of the DJIA futures -- 1-minute charts, my favorite timeframe -- and I was amazed at how well they followed the Elliott wave pattern. Yet here I was, able to see clearly the wave patterns in the markets, and still losing money trading.

 

That's when I saw that EWI was advertising Dick Diamond's seminar. It must have been about seven years ago. I knew Dick was a good trader with a 40-year experience and a friend of Robert Prechter, EWI's president, so I decided to take the course. To my surprise, Dick's seminar had nothing on the Wave Principle. Instead, it was heavy on the use of oscillators. And at that seminar, I had an epiphany: I realized that, paradoxically, being a good analyst and a good trader are two different things. With Dick's course, I "closed the gap" between the two.

 

If it weren't for my knowledge of the Wave Principle, though, I would have never gotten involved with Dick's organization. He liked me because of the Elliott wave forecasts I kept making at my first seminar with him. Dick, a 40-year trader, was amazed at how accurately I was able to predict the DJIA's intraday movements on a 5-minute live chart. So, we started talking, and soon I became a day trader. That's when my life changed.

 

(Learn how to "close the gap" between theory and practice at Dick Diamond's December 5-8 trading course.Details.)

 

I've always said that if you want to become a wolf, you have to run with wolves. Once I started working closer with Dick, I began combining his oscillator-based trading techniques with my own wave analysis, and my trades began to work out. I noticed that oscillators would confirm wave counts! I finally got that key that I needed. When I would track a trading opportunity on my favorite 1-minute DJIA charts, I would wait until the oscillators confirmed the trade, too. If they didn't, I would not pull the trigger.

 

Right now I'm still more of an oscillators guy, but I use wave analysis heavily from the market-timing standpoint. Sometimes, the wave count is not clear: too many interpretations. At those moments, you just have to wait. The count always becomes clear after a while, you know? But I find oscillators hugely important. When they become oversold or overbought, you can forget about the wave count: You must go with what the oscillators tell you.

 

But, I do think the Wave Principle comes in very handy when you need to identify the form of a market move, the price targets and the timing. For example, whenever you have a Fibonacci turn date window in the market and a completed wave pattern, that's when you have the best calls. Oscillators, however, won’t always be confirming this. That's why the balance in my use of Elliott and oscillators is always shifting. Sometimes its fifty percent Elliott, fifty percent oscillators, other times is 70/30; it varies.

 

EWI: How often do you trade?

 

RH: I look for opportunities every day. And I always come in "flat" -- that's another thing Dick taught me. I always come to the office in the morning having no bullish or bearish bias about the market. I try not to let the market news before the open sway me -- instead, I look at what the wave patterns and oscillators are telling me. Usually, I trade 4-5 times a day, but sometimes none at all. You have to pick your moments.

 

When I see oscillators moving into an extreme territory, for me it's like a dark cloud on the horizon: I know the "rain" is coming, and I get extra cautions and extra patient. But when oscillator readings are confirmed by the price, I know it's going to be a good call. And if the wave pattern kicks in, that's even better. In fact, Dick often calls me and asks for Fibonacci turn windows to time his trades.

 

When I first started working with Dick, I began making my own market calls and producing my own analysis. That's when I truly came into my own. That made me even more reliable as a trader. You should never rely on someone else's work. Make your own mistakes and your own good calls.

 

EWI: You mentioned you trade the DJIA futures. Do you trade anything else? And why the DJIA and not the more popular S&P futures?

 

RH: I follow the S&P, but I prefer to trade the DJIA futures. For me, the S&P's 1-minute charts just don’t work the same way as the Dow's. For some reason, the S&P's 500 stocks move less clearly than the Dow's 30 -- which move with an amazing clarity, from Elliott wave standpoint. In that timeframe, the Dow rarely breaks the rules. I know most people trade S&P and not the DJIA… but for me, it works. As for other markets, commodities, I find, are harder to follow with wave analysis and oscillators. But the euro trades beautifully.

 

EWI: Anyone can have a lucky streak in the market, but statistically, only about 5% of all traders make money consistently. Interestingly, most of those guys say that the way they trade is very simple -- what separates them from the pack is the mental toughness to stick with their chosen system, whatever it is. Do you think trading aptitude is something you're born with, or can you learn it?

 

RH: You can definitely learn trading -- if you are born curious. When I was a kid, my uncle told me that in life, you have to find something you love and do your best at it. If you have curiosity, you will find that thing. Elliott wave works for me, and I love it, and I can spend hours looking at wave patterns.

 

But it's not all about oscillators and wave counts. If you have no discipline and control over your emotions, forget it. You can have no control over your emotions and be a good analyst, but you'll never become a good trader until that happens. That, by the way, is also something Dick teaches in his course. He's done it for 40 years, he should know, right? Even now, I sometimes look at the Dow and get excited, but Dick tells me to stay calm. Wave analysis doesn’t teach you emotional control, but Dick in his course does. But let me tell you, like anyone else, we have bad days and good says, and Dick sometimes has to put me back together at the end of a tough trading session.

 

Like I said, that's what his course if good for: to close that gap between your being an analyst and a trader. I know many of your subscribers are already EW experts, they follow the rules and everything, but they haven't "closed that gap."

 

EWI: How many months in a year do you trade? Is your mind on your trading 24 hours a day, or do you purposely take time away from the office to relax?

 

RH: I do try to relax. Since 2001, I've taken 1-2 regular vacations per year. But once you learn the waves and find your trading method, following the markets becomes a pleasure. I consider myself the "son" of two guys: Bob Prechter, the grandmaster market analyst, and Dick Diamond, the grandmaster trader. Like I said, if you want to become a wolf, you have to run with wolves. My "wolves" are Dick and Bob.

 

(Courtsey : EWI )

Trading Pattern in Nifty

After a relentless rise in a non congestion zone Nifty finally faced resistance around the 6200 level. Looking back we can see that highest weekly closing has been 6274. This week Nifty crossed that level for moments and then slumped back rapidly below 6100. And while doing so made a very bearish reversal candle (check inset). Though this is no confirmation of a trend reversal as we are high above major moving averages as well as trend lines, but the fact is very clear that sustaining at these levels would be very tough for Nifty.

Lets take a look at the trading pattern that has developed in the 5500 - 6000 area. If we look at this region before the Jan 2008 top, we see large sell and buy candles, signalling confusion in both buyers and sellers. The region after the "Top" doesn't even need explanation, as foreigners put an end to all valuation debate in just 2 weeks. There was virtually no trading in this region, let alone the creation of a value area.

So in my opinion Nifty crossed the 5500-6000 zone two times, without having any substantial trading. The reason I am emphasizing this is because time spent by a stock or an index at a particular level states the fact that traders find value at those levels and not a bunch of FIIs having free money chasing returns.

Now what happens when Nifty crosses 5500 again in September? As no value got created ever in this zone, the Index as well as a majority of stocks zooms through this region. Apart from that market participants also know what I am writing, there is no resistance in this range. So the market follows a path which it itself prophesies. You can see traders talk if 5500 is broken, next target is 6000. Which I believe will be true on the return journey as well, if 6000 is broken, next target is 5500!

For Nifty in an intermediate term, the value area is 4000-5500 and investors should be buying at the lower end and selling at the higher end. Over 5500 market is definitely overvalued and greed and liquidity rules.
From the chart you can see how when 4000 got broken, Nifty went into a free fall, the reason being the opposite of what we see over 5500, fear and lack of liquidity.

If last weeks candle is indeed a reversal one, we will see a sharp fall in near term to 5500 and then good support at multiple levels. Only a break of 4000 should alarm investors.

The very same logic can be applied in the range between 2500 to 4000. I would expect Nifty to hit 2500 again if 4000 is broken. I think I am looking too far, but who knows sometimes random ideas are the most simple and accurate ones!

FII Vs DII

These days there is a very strong news flow about the FII money flow! It definitely is interesting to see how DII and FII play the markets. Rarely we see them being on the same side and NEVER they both have emerged as net seller since April 2007 (lack of data make me put this disclaimer). So we can safely say whatever be the case euphoria or panic, these guys who make 95% of daily turnover are against each other.

September 2010 has just brought this age old truth in front of us again. You can see this continuous buying by FIIs and selling by DIIs since June '10. Obviously the buying has been far larger by FIIs and hence we are seeing positive closing for each month.

Lets try to summarize what some observations from the above table.

1. Last 1000 Nifty points gain since June has totally come due to FII buying. DII has been net seller for all 4 months. I would like to add here itself that "Dollar Index" has peaked in June. (Just a coincidence or there is some relation with this FII flow!!)

2. During the period Dec '07 to Mar '09, basically the entire collapse of Nifty, FIIs have been net seller with exception of a single month! Does this mean the FIIs are the driving force of our market? Is this why we tend to everyday see FII figures. To get an idea what they are doing, so that we can position ourselves the way they behave? Also note the DII were buyers during the entire slump! I am sure they must have been kicking themselves, as they tried catching the falling knives. But someone has to buy isn't it ?

3. The data is from Dec '07 when Nifty closed the month end at 6138 to Sep '10 when it closed on 6030, a difference of 100 points, but look at the last row. In this round trip FIIs are net seller of 41k crore, while DIIs a net buyer of 93k crore. A net increase of 52k crore! What does it mean, apart from liquidity sucked through new issues, we can argue money has flown into non-index names. If that does not justify the excess money into the market, could it be that the 3rd component of the market is playing the spoilsport. The 3rd component which in India can be categorized as Retail and HNIs? Is it that these guys are consistently getting out of the market (atleast from the big names in index)?

* I have read (with supporting data) that retail investors are in a sell mode in the US markets as well, they are not at all trusting the rally and consider the stock market as a one big "rigged" casino.

If that is the case (retail being sellers) can we expect a retail rush to come in and get fooled once again when they are dumped with all the junk at the costliest price tag? Or can finally retail investors get rid of the "dumb money" tag when the dirty game of FII selling to DII starts ?

4. Also to be noted is that FIIs are down 41k crore, which means they still have enough ammunition to take Nifty over 1000 points from here! (If you consider the earlier peak was when FIIs were fully invested). But I bet during this downturn India would have been fortunate and a larger corpus can be expected for it from the global players. Would certainly like to add the factor of bailout packages distributed to big banks who instead of lending them to businesses have started gambling with it.

5. As for the DII, they have been supplying the FIIs all the goodies till now, but 4 consecutive months of selling has a never seen before kind of feel. Will they finally give up and buy? I guess the DIIs are more difficult to assess kind of animal. They are a cunning lot and has done well to tackle the "brute force" operators which FIIs are. Look how they kept buying when the world was falling apart in Oct '08 and selling when Nifty went circuit up in May '09. It would be interesting to see what they do in coming months. 

I feel there is way too much bearishness about dollar and its time for it to rebound and clear some short. Which would force FIIs to sell and DIIs would be the most probable buyer. But can they buy at levels where only few months back they were net sellers? Will there be an unprecedented month when both FIIs and DIIs sell (kind of impossible!), but who knows?

There are a lot of questions which would be answered in coming months. And many more questions arising. One thing is for sure the FIIs make money and so do the DIIs. In a world of zero sum game who is losing them?