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Most analysts have missed the fact that QE3 has already started in earnest. Of course, it would have been easy to miss. Ben Bernanke has not made any grand pronouncements. He hasn’t done some public thinking out loud, as he did among friends at Jackson Hole, Wyoming last August. It is not even called “QE3”. Think of it as a “stealth QE3”. But make no mistake. A new variety of quantitative easing has already begun in a big way, and is generating its desired effect.

http://www.zerohedge.com/article/qe3-has-already-started

http://www.forexlive.com/blog/2011/06/01/china-pboc-rate-hike/

Here is my Elliott Wave chart of the last 2 days action on the Dow.

I bought near the bottom today and am holding that long overnight. I was called "brave" in the chat area for this trade - especially as everything including the EUR.USD was heading rapidly south, but from an EW perspective it was simply a case of understanding what was happening, following the EW rules, setting an appropriate stop and of course hoping I was right!

For anyone who is not familiar with EW, here are some basic rules and guidelines:

Rules:

1. Wave 2 cannot retrace beyond the start of wave 1

2. Triangles will only occur in waves 4 or B

Guidelines:

Wave 2 will often retrace almost the whole of the wave 1

Wave 3 will often extend. Wave 3 is usually an extremely powerful move, much more so than wave 1 and will defy divergence and oversold/overbought (depending on direction) indicators to keep going

Firstly there was a clear 5 wave move up yesterday to form a possible bigger wave 1 (shown in red). Note the smaller wave 2 (shown in black) retraces very deeply into the territory of wave 1 as per the guidelines.

The sell off this morning (marked B) had a triangle half way down (triangles must be in either wave 4 or B). Therefore there was a good probability that we were seeing the wave 2 correction (shown in red) and about to see the start of wave 3 upwards.

Taking the trade was simple, buy as low as possible but above 12310 (the start of wave 1). The stop would be placed just below 12310 (wave 2 cannot retrace below the start of wave 1) and going below 12310 would invalidate the setup. This gave a low risk (approx 20 pips) opportunity to take a long position where the upside should be at least 300 pips. The minimum 300 pips is based on a final 5 wave move up.

Lastly it looks like we have a bull flag at the end of the day finishing with CCI oversold at -200 plus divergence on RSI which encourages me that we will see more upside to come.

I hope this brief article might encourage some fellow traders to take a look at Elliott Wave and understand how it can give low risk entries with a high risk-reward ratio.