- David Starr is a technical trader and teaches people about the market at Simpler Trading.
- Starr says he applied 90-year-old Elliott Wave theory in buying bitcoin and ethereum in September.
- He told Insider where he sees the cryptocurrencies going in the short term.
A lot of things have happened in markets that are never supposed to happen.
Markets hit record highs during a pandemic. Interest rates hit zero — and sometimes went lower. People bought stocks and cryptocurrencies as a joke and made a killing.
So there is often a sense that old tactics and old ways of thinking don’t apply anymore. After all, Jesse Livermore and Benjamin Graham didn’t predict any of this.
But time-tested methods can still prove useful. David Starr, the vice president of quantitative analysis for the educational stock market platform Simpler Trading, says one of the oldest technical types of analysis still holds up and helped him make a well-timed cryptocurrency trade this fall.
He told Insider how he used Elliott Wave Theory, a method developed by Ralph Nelson Elliott in the 1930s, to buy at some recent lows.
“Elliott observed nearly a hundred years ago now that when moves are going in the direction of trend, they have a five-wave structure,” he said, meaning that a longer-term surge can be interrupted by two downturns before an ultimate recovery — or a long-term slump might include two rallies that ultimately fizzle.
“When they go against the trend, they have just a three-wave structure or a combination of multiple three-way modes,” Starr said, meaning a move that goes against an asset’s longer-term trend will have that simpler structure.
The point of the Elliott Wave concept is that it can tell traders something about the psychology of investors in an asset or asset class, and their comfort levels at different prices. That can help a potential investor determine whether to get in or get out, just as it helped Elliott himself identify a major market low in 1935.
Starr made this chart, with his commentary, to illustrate how the severe sell-off in Ethereum this spring ultimately fit into that five-part pattern.
“Look for a dominant long-term trend, wait for a counter-trend pullback, and then enter a trade in the direction of the dominant trend,” he said. In this case that meant buying Ethereum and micro Bitcoin futures in late September. He told Insider he has sold most of the Bitcoin holdings.
“The moves up from September lows into new all-time highs in both Bitcoin and Ethereum to me, they don’t look done,” Starr said. “There’s nothing bearish about all-time highs … It looks to me like those moves have potentially a good bit further to go.”
The most common criticism of Elliott’s theory, Starr says, is that the waves are only obvious in hindsight and they can’t predict future price moves. He acknowledges they can’t give bulletproof forecasts, but says that combined with research and intuition, they can give an investor a sense of an asset’s most important support levels.
Starr deals with the backward-looking nature of Elliott Waves by applying a tool of his own that he calls Voodoo Lines, which he said “combines some of that Elliott wave stuff, some Fibonacci stuff, and other things.”
“What the Voodoo Lines do is they sort of say, ‘Let’s turn that problem on its head.’ Let’s just take the stuff from hindsight and try and project some current levels from it to figure out what level they’re going to be interested in today.”
Essentially, Starr was convinced that even if he was wrong about Bitcoin and Ethereum and they weren’t about to rally, the direction of their past moves showed that he had very little downside in late September. That gave him the confidence to buy when he did.
“When we had enough structure into that September low for it to be reasonably complete, that’s when I wanted to get in, because I had a good reason to think that the trend was continuing, that we ended a pullback in June and that we were headed back to new all-time highs and very possibly well beyond those new all-time highs,” he said.
Starr says that as long as Bitcoin stays above the $53,800 level, it should get to $66,500 and then beyond, while he’ll stick with Ethereum as long as it stays above $4,170. As long as it does that, its next big test will be at $5,134.
As of Friday morning Bitcoin was trading around $61,350 and Ethereum was at $4,480.
Starr says that applying Elliott Wave theory to crypto won’t tell an investor if one cryptocurrency is about to outperform another. And he’s cautious about using the concept for assets that aren’t as widely held, like newer cryptocurrencies, because the technique is more reliable when it’s used to evaluate the behavior of a larger crowd.