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- Elliott Wave Theory - Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s. Elliott believed that stock markets, thought to behave in a somewhat chaotic manner, in fact, traded in repetitive cycles.
Elliott proposed that market cycles resulted from investors' reactions to outside influences, or predominant psychology of the masses at the time.
He found that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns, which were then divided further into patterns he termed "waves".
He then took the next obvious step and began to look at how these repeating patterns could be used as predictive indicators of future market moves.
Elliott made detailed stock market predictions based on unique characteristics he discovered in the wave patterns. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves, five waves can again be found. In this smaller pattern, the same pattern repeats itself ad infinitum. These ever-smaller patterns are labelled as different wave degrees in the Elliott Wave Principle.
Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these "impulsive" and "corrective" waves.
Some good sources to know more are at:-
Introduction to Elliott Wave Theory - at Investopedia.com
Introduction to Elliott Wave Theory - at StockCharts.com
Elliott Wave Basics- at StockCharts.com
Elliott Wave Principle - at Wikipedia
Guidelines for Applying Elliott Wave Theory - at StockCharts.com
Elliott Wave Theory - at Elliott Wave Forecast
Elliott Wave Theory - at BabyPips.com
3 Cardinal Rules of the Elliott Wave Theory - Basic Sequence of Impulse Waves and Corrective Waves - see 'Basic Sequence' topic at StockCharts.com
- 3rd Wave - Elliott Wave 3 is an Impulse Wave and is usually the largest and most powerful wave in a stock's trend. The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As Elliott Wave 3 starts, the news is probably still bearish, and most market players remain negative; but by Wave 3's midpoint, "the crowd" will often join the new bullish trend. Wave 3 size is often 1.618 or 2.618 or 4.25 times the Wave 1 size.
Wave 3s are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns.
Wave 3s usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence.
Such points invariably produce breakouts, "continuation" gaps, volume expansions, exceptional breadth, major Dow Theory trend confirmations and runaway price movement, creating large hourly, daily, weekly, monthly or yearly gains in the market, depending on the degree of the wave. Virtually all stocks participate in third waves.
Personality of third waves produces the most valuable clues to the wave count as it unfolds. - 5th Wave - Elliott Wave 5 is an Impulse Wave and is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish.
Unfortunately, this is when many average investors finally buy in, right before the top.
Volume is often lower in Wave 5 than in preceding Wave 3, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed.
Fifth waves in stocks are always less dynamic than third waves in terms of breadth. They usually display a slower maximum speed of price change as well, although if a fifth wave is an extension, speed of price change in the third of the fifth can exceed that of the third wave.
Similarly, while it is common for volume to increase through successive impulse waves at Cycle degree or larger, it usually happens below Primary degree only if the fifth wave extends. Otherwise, look for lesser volume as a rule in a fifth wave as opposed to the third.
Market dabblers sometimes call for "blowoffs" at the end of long trends, but the stock market has no history of reaching maximum acceleration at a peak. Even if a fifth wave extends, the fifth of the fifth will lack the dynamism of what preceded it.
During fifth advancing waves, optimism runs extremely high, despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective wave rallies.
For example, the year-end rally in 1976 was unexciting in the Dow, but it was nevertheless a motive wave as opposed to the preceding corrective wave advances in April, July and September, which, by contrast, had even less influence on the secondary indexes and the cumulative advance-decline line. As a monument to the optimism that fifth waves can produce, the market forecasting services polled two weeks after the conclusion of that rally turned in the lowest percentage of "bears," 4.5%, in the history of the recorded figures despite that fifth wave's failure to make a new high! - Fractals: Elliott Waves Within an Elliott Wave
- Beta - Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Conversely, if an ETF's beta is 0.65, it is theoretically 35% less volatile than the market. Therefore, the fund's excess return is expected to underperform the benchmark by 35% in up markets and outperform by 35% during down markets.
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