InvestIdeas

The Elliot Wave principle is a theory developed by accountant Ralph Nelson Elliott during the Great Depression. He concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.

In addition, the waves share a variety of features:-
1) wave two never falls below the starting level of wave one
2) wave three is never the shortest
3) waves one and five tend to be of equal length
4) wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.

over the years, i've attempted to learn the technicalities..without much success....

K,

Same here. I die die do not give up. Its kind of love hate. More like a sucker, still trying to call the top and bottom .

Adding to W's brief input, the standard EW labelling is summarised here:

Supercycle (I) (II) (III) (IV) (V) and (a) (b) (c)
Cycle I II III IV V and a b c
Primary {1} {2} {3} {4} {5} and {A} {B} {C}
Intermediate (1) (2) (3) (4) (5) and (A) (B) (C)
Minor 1 2 3 4 5 and A B C
Minute {i} {ii} {iii} {iv} {v} and {a} {b} {c}
Minuette (i) (ii) (iii) (iv) (v) and (a) (b) (c)
Subminuette i ii iii iv v and a b c

I have used the symbol, { } instead of a circle.

I find it helpful to complement other TAs such as CCI, RSI and MACD (and their divergence) to assess market extremes.

TOL in Wave talk:

When the primary trend is up or down, it moves in 5 waves, wave 1, 3 and 5 are down whilst wave 2 and 4 are up. In a counter trend move, the waves are in ABC ie wave A up, wave B down and wave C up.

Let’s put this in the context of SPX, the plunge from 1576 to 667 was in 5 waves. The counter trend bear market rally is in 3 waves of A,B and C. Wave A up from 667 to 956, wave B down from 956 to 869 and wave C is currently trading up to 1038. Would this extend further to 1079 (61.8% increase from 667) or the fibo 50% retracement level of 1122?

Within each of these wave are waves of lower degree. Hence, the complications and frustration in correctly interpreting ewaves and the need to re-label the wave counts.

by OE2008 » Thu Oct 22, 2009 10:53 pm

An e-wave practitioner, whom I have followed over the years, has been calling the top since SPX hit 956. All in, he had called 4 tops over the past 4 months since Jun 09.

Yesterday, he called a top again, this time at SPX 1101. His past track records have been mixed and he tends to have a bearish bias. Without doubt he has a huge ego to go alongside with the conviction of his calls.

With stringent money management and battled worn cut loss mentality, he is likely to remain solvent longer than the market can stay irrational.

Main stream e-wavers, including EWI, have been awaiting the start of Primary wave 3 which is devastating if it were to come about. Just imagine, Primary wave 1 was from SPX 1576 to 667.

In the meantime, many are frustrated and stressed and some have raised doubts on the validity of this long term count.

The Only Reliable "Cycle" in the Market By Brian Hunt

Many years ago, I came across a stock market phenomenon that looked like the "Holy Grail" of trading.

I came across the Elliot Wave Principle. And at some point in your trading career, you will too.

The basic idea behind the Elliot Wave Principle (EWP) is the market moves in cycles. An accountant named Ralph Nelson Elliot developed it back in the 1930s. According to Elliot's theory, upward market moves occur in a series of five small stairstep-like "waves" inside a larger cycle. Down moves occur in three small waves.

Traders swing between greed (buying) and fear (selling) like a pendulum, creating these cycles. And as theory goes, you can spot them and use them to time market moves for big money.

Elliot is long gone these days. But an analyst named Robert Prechter keeps the EWP torch burning. That's where most hear about these cycles. And when you read the marketing material from folks selling EWP information, it sounds like they've unlocked the mysteries of the stock, bond, and commodity markets.

Should you go after this "Holy Grail" of trading?

Well, Robert Prechter is an excellent analyst. He's written some of the most insightful stuff on crowd behavior I've ever read. And he's used EWP to make some great financial predictions, like the 1987 market crash and last year's crash. The billionaire supertrader Paul Tudor Jones is also known for using EWP to time trades. The "principle" has produced some major wins.

But years ago, I spent time studying this wave theory. I read the books. I read the newsletters. Most importantly, I asked a lot of smart, wealthy investors their opinion. I came to the same conclusion most of them did: Trying to pick out "waves" in a price chart – and trade on them – is too subjective to be of great use to most traders. Here's why...

It's just too easy for the average trader to fool himself when trying to pinpoint cycles in a chart. It's like checking the mirror a week after starting a diet. Your mind is going to play tricks on you. One day you see a wave, one day you don't.

So despite Prechter and Jones' success, my advice to the part-time trader is this: Don't spend much time studying predictive theories - like Elliot waves or lunar cycles. Some huge crazy event comes along and makes hash out of all predictive models. Life is just too random for them to work.

Sure, some market "predictor" will grab headlines for calling a few moves correctly. But his track record will probably reveal his accuracy is the same as a coin flip.

What you should do is spend a lot of time learning how to be a connoisseur of extremes. Learn that the only reliable "cycles" in the markets are periods of extreme pessimism toward an asset (when that asset gets dirt cheap)... and periods of extreme optimism (when the asset gets outrageously expensive).

This is the only kind of cycle that regularly occurs in the market over years and years. This is the only kind of cycle that investment greats like Warren Buffett and Richard Russell will tell you to rely on. These extremes regularly happen... and they're easier for most folks to spot, prepare for, and trade on than a series of waves on a chart.

Take money manager John Paulson's "Trade of the Century." Paulson made himself and his clients around $15 billion by spotting extreme optimism and overvaluation in the real estate market back in 2006.

Or take Rick Rule, who made himself and his clients incredible returns by spotting excessive pessimism and huge value in the mining sector in 2001.

And John Templeton made millions of dollars betting against Nasdaq tech stocks in 2000 by spotting extreme optimism and overvaluation there.

Unfortunately, while these sentiment "cycles" regularly occur in the market, they do not occur in an orderly, predictable fashion. You simply have to watch the market all the time and hunt for them. You have to be a "connoisseur of extremes."

That's the market's only reliable magic key.

http://www.growthstockwire.com/

For those interested in reading up more on Elliot Wave, EWI is releasing 10 free tutorials on elliot wave.


http://www.elliottwave.com/tutorial/

Ok, I have went through the free tutorials.

No take aways. Confusing and dry.

At the end of the day, EW is still not my cup of tea.

same here... i cannot fully appreciate EW as a technical tool....

without a clear understanding of EW concepts, i cant use it effectively...

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