Using Elliot Wave Theory to Analyze the Stock Market
Some market technicians that use technical analysis to look for
a nearing market bottom or market top have noticed over the past several years
that the stock market will consistently move in a 5 wave pattern which is based
on concepts from Elliott
Wave Theory. When the stock market is trending upward a 5 wave pattern
consists of 3 separate moves upward and 2 separate moves downward before a top
occurs. Meanwhile when the stock market is trending downward a 5 wave
pattern consists of 3 separate moves downward and 2 separate moves upward before
a bottom occurs.
Let's take a look at the Nasdaq and
S&P 500 and analyze their one year charts using concepts from Elliot Wave
Theory. Notice how both the Nasdaq and S&P 500 made a bottom in late
July of 2002 (points A) and then made 3 separate moves upward (A to 1, 2 to 3
and 4 to 5) followed by 2 separate moves downward (1 to 2 and 3 to 4) before
topping out in late August after completing a 5 wave pattern.
notice what happened from late August until early October of 2002 as the Nasdaq
and S&P 500 made 3 separate moves to the downside (5 to 1, 2 to 3 and
4 to 5) and 2 separate moves to the upside (1 to 2 and 3 to 4) before making a
bottom in early October after completing a 5 wave pattern.
lets continue using Elliot Wave Theory an trace out the 5 wave pattern from
early October of 2002 until early December of 2002 when the stock market made a
top. Notice there were 3 separate moves to the upside (5 to 1, 2 to 3 and
4 to 5) and 2 separate moves to the downside (1 to 2 and 3 to 4) as
After the Nasdaq and S&P 500 topped out in
early December they formed another 5 wave pattern as they made a bottom in mid
March of 2003. Once again there were 3 downside moves (5 to 1, 2 to 3 and
4 to 5) and 2 upside moves (1 to 2 and 3 to 4) before the 5 wave pattern was
completed in mid March.
Now I'm not an expert in Elliot
Wave Theory but it looks to me that the Nasdaq and S&P 500 may be
nearing the completion of another 5 wave pattern with a potential stock market
top coming into play. Notice there have been 3 upside moves (5 to 1, 2 to
3 and 4 to 5) and 2 downside moves (1 to 2 and 3 to 4) since mid March through
late May of 2003.
Adding concepts from Elliot Wave Theory is another tool
investors can use to help predict when a stock market bottom or top is nearing.
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