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Sunday, March 28, 2010 6:49:39 AM
The first leg up shows conviction on the part of the buyers. They were all willing to buy heavily, based on whaever they saw as the underlying reason(s). They are the first time BIG BUYERS.
The second leg up, isa a combination of both the first and second time buyers coming in to the stock, so the stock gets a multiplying or pyramid effect.
Usually, the second leg up, as described under "ELLIOTT WAVE Theory", is the biggest, or tallest move up in the 3-legs, or waves structure.
The 2nd leg or wave up, is a accumulation of buyers who are hopping aboard the train that is leaving the station.
The 3rd wave up is the last wave, when all the doubtors and late comers come on board. The pay the highest prices for the stock, and are the ones that usually get burned.
http://www.optionsoutlet.com/trading_technicals/images/improv31.gif
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 enough people 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
People 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 on the stock, and is most 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. People 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.
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