The investors usually prefer to use stock market technical analysis, in an attempt to predict the viability of the financial markets. Technical analysis is an exercise of predicting the future worth of the securities in light of the past market data, price and volume being two significant yardsticks for making anticipations. Stock market technical analysis is carried out through a number of different indicators. Elliott wave is one such indicator. This article is written to suffice the information desire of the investors on the concept of Elliott wave. The article will discuss at length how the idea is applied in the stock markets having implications for both long term and short term investors.
The proposition of the Elliott wave theory was put forward by an accountant R.N Elliott. Later, Robert Prechter played its part in massive popularization of this theory. The gist of this theory is derived from the assertion stating that investor’s behavior follows a recurrent activity of decline and regrowth, occurring through a paradigm of vivid trends. The pattern, thus, helps in specifying an edifice of price fluctuations in stock market technical analysis.
To put it simply, the financial market trends proceed in repeated cyclic fashion. Through careful analysis of the stock market behavior, Elliott revealed that although stock markets are characterized as chaotic in nature, but, in fact they trade in repetitive cycles. These natural cycles are a by product of the investors’ response to external stimuli. Being designated on how long they last, Elliott analysis is broken down around nine cyclic trends. These include the following:
|Grand Super Cycle||the longest wave taking over many centuries|
|Super Cycle||Cycle this wave keeps going from one to several years|
|Cycle||This wave keeps going from one to several years|
|Primary||resting from one month to couple of years|
|Intermediate||This type of wave lasts from few weeks to few months|
|Minor||It occurs only for few weeks|
|Minute||Continuing for only a few days|
|Minuettee||Lasting for few hours|
|Subminuettee||Lasting for few minutes|
The importance of Elliott wave can be judged from the following assertions having implications for both short term and long term investors:
In stock market technical analysis, the concept is used by both types of investors to forecast the movement of stock prices.
The knowledge gained through the movement of stock prices and commodity markets will help investors in making long term investment decisions.
The trends in the stock market are predictable because of the investor’s psychology of buying and selling.
The idea facilitates in taking short term investment decision, as stocks and commodities are bought and sold to generate short term profits from share markets.
How does Elliot wave is applied in stock market technical analysis? The main thought behind the invention of this indicator is to make investors earn from the stock market. Fibonacci structure is used to build the investment charts which are based on waves, called impulsive waves. The theory reinstates that the prices of the stock moves in wave of 5 trends taking the stocks or commodity prices. After this pattern there will be a correction in the market, lasting for the last three waves. Grand Supercycle is the biggest wave called the long term waves. It is interesting to note that the speculators particularly are interested to trade through short term waves without looking at the long term prospects of stock or commodity price.
For accurate prediction of the market, it is really important for the analysts to comprehend the wave formation process and the process of wave identification. The market is characterized by the presence of two main waves namely, impulse and corrective waves. The first five waves constitute the impulse waves leading stocks markets to greater high than before. After reaching the fifth wave, correction pattern will start, activating correction wave cycle.
Elliott wave analysis is an important method in stock market technical analysis. The technical analysts need to understand the procedure in its true spirit. The framework is helpful for investors in ascertaining the market entry and exit for profit and losses. A large number of investors are using this analysis on stocks, futures and derivatives market.