Elliott Wave Basics Elliott Wave Basics http://stockcharts.com/school/doku.php?id=chart_school:market_analysis:elliott_wave_theory Basic Sequence
The chart below shows a rising 5-wave sequence.
The entire wave is up as it moves from the lower left
to the upper right of the chart. Waves 1,3 and 5 are impulse waves
because they move with the trend. Waves 2 and 4 are corrective waves
because they move against this bigger trend. A basic impulse advance forms a 5-wave sequence. Wave 1 The stock makes its initial move upwards.
This is usually caused
by a relatively small number of people
that all of the sudden
(for a variety of reasons, real or imagined)
feel that the price of the stock is cheap
so it’s a perfect time to buy.
This causes the price to rise. Wave 2 At this point,
who were in the original wave consider the stock overvalued and take profits.
This causes the stock to go down.
However, the stock will not make it to its previous lows
before the stock is considered a bargain again. Wave 3 This is usually the longest and strongest wave. The stock has caught the attention of the mass public.
More people find out about the stock and want to buy it.
This causes the stock’s price to go higher and higher.
This wave usually exceeds the high created at the end of Wave 1. Wave 4 Traders take profits
because the stock is considered expensive again. This Wave tends to be weak
because there are usually more people that are still bullish
on the stock and are waiting to “buy on the dips.” Wave 5 This is the point that most people get in on the stock,
and is mostly driven by hysteria.
You usually start seeing the CEO of the company
on the front page of major magazines
as the Person of the Year. Traders and investors start coming up with
ridiculous reasons to buy the stock
and try to choke you when you disagree with them. This is when the stock becomes the most overpriced.
Contrarians start shorting the stock
which starts the ABC pattern. Extended Impulse Waves One thing you also need to know about Elliott Wave Theory
is that one of the three impulse waves (1, 3, or 5)
will always be “extended”.
Simply put, there will always be one wave
that is longer than the other two,
regardless of degree. According to Elliott, it is usually the fifth wave which is extended. http://www.babypips.com/school/summer-school/elliott-wave-theory/the-5-3-wave-patterns.html