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Friday, August 20, 2010

The Elliott Wave Description

The following 5 waves description applies to a market moving upwards. In a down market there are generally the same types of behavior in reverse:

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 feel that the previous price of the stock was cheap and therefore worth buying, causing the price to go up.

Wave 2: The stock is considered overvalued. At this point enough people who were in the original wave consider the stock overvalued and start taking profits. This causes the stock to go down.

Wave 3: This is usually the longest and strongest wave. More people have found out about the stock, more people want the stock and they buy it for a higher and higher price. This wave usually exceeds the tops created at the end of wave 1.

Wave 4: At this point people again take profits because the stock is again considered expensive.

Wave 5: This is the point that most people get on the stock, and is most driven by hysteria. People will come up with lots of reasons to buy the stock, and won't listen to reasons not to.

At this point is where the stock becomes the most overpriced. At this point the stock will move into one of two patterns, either towards a correction (a - b - c) or it will start over again with wave 1.

A correction (a - b - c) is when the stock will either go down or up in preparing for another 5 way cycle. During this time volatility is usually much less than the previous 5 wave cycle, and what is generally happening in the market is taking a pause while fundamentals catch up.

"On a moderately philosophical level, the Wave Principle suggests that the nature of mankind has within it the seeds of social change." * (*

Prosperity ultimately breeds reactionism, while adversity eventually breeds a desire to achieve and succeed. The social mood is always in flux at all degrees of trend, moving toward one of two polar opposites in every conceivable area, from a preference for heroic symbols to a preference for anti-heroes, from joy and love of life to cynicism, from war to peace, from love to hatred, from a desire to build and produce to a desire to destroy.

Most important to individual investors, portfolio managers and investment corporations is that the Wave Principle can sometimes indicate in advance the relative magnitude of the next period of social progress or regress.

Living in harmony with those trends can make the difference between success and failure in financial affairs.