Question of the Week: 5/27/2011
With all, major world markets open around the clock, could you please explain why it is so important to use "cash data only" for wave analysis?
Whether a futures market is traded "around the clock," or just 5-6 hours per day, nearly all suffer from the same problem - premium decay. That decay is the result of storage costs or interest rates or the effect of time on value. Consequently, most futures markets experience continuous value deterioration. If memory serves correct, in the Gold market, that deterioration amounts to about $1 per month of lost value for those who hold Long (that's $12 per year or $1,200 per contract per year). Such value decay creates distortion in price structure over time, which causes patterns to break rules and makes long-term, accurate wave analysis difficult, if not impossible.
When you focus solely on cash charts, you avoid premium decay, which means you have a chart that never has to be redrawn (futures charts must constantly be redrawn as each contract expires). When using cash charts you'll find your wave counts are more likely to be accurate from the start and less likely to change with time, avoiding the need to restructure past patterns (a phenomenon many wave analysts deal with regularly because they insist on using easier-to-obtain, deteriorating futures data).
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