jueves, 14 de agosto de 2008

Elliott wave structure

Here is a breakdown of the bullish impulsive Elliott wave structure.

Wave 1: This wave is the least obvious when it begins building up.

According to the Elliott theory, the beginning of every bull market is characterized by a flow of negative fundamental news. Almost every trader is in a bearish mood and analysts keep downgrading earnings and stock price targets. The economy too looks in tatters.

Prices may move up with volumes, but not enough to give a trend-reversal signal to traders.

Wave 2: This wave corrects the upward movement initiated by Wave 1, but does not retrace the movement back to where Wave 1 began. It retraces up to 61.8% of the Wave 1 gains. The fundamental news is still negative and the sentiment still bearish.

Wave 3: This is the largest and the strongest wave in a trend. The news remains negative at the start of the wave, but turns positive by the time the wave reaches its midpoint, which is when analysts begin raising earnings and price estimates. Prices shoot up and the corrections are almost nothing. Investors who miss the boat do not get a chance to buy into the market. Wave 3 could reach 161.8% of Wave 1.

Wave 4: During wave 4, prices move sideways and correct themselves.

Wave 4 lasts for a longish period and the extent of the drop in Wave 4 is sometimes 38.2% of Wave 3. This period may present a good time to buy stocks.

Wave 5: This is the final impulse wave. During this wave, the news is all-round positive and the market is thick with bullish sentiment. The common man now has seen enough rise in stock prices and wants to grab a slice of the pie, so he begins buying too.

Volumes drop, which can be confirmed with volume indicators, and bears vanish from the scene. Wave 5's mid-point is like the peak of a bull market.