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Technical Analysis
Elliott Wave theory and Fibonacci Numbers
Elliot Wave theory and analysis, Dow theory, waves in technical analysis of
indexes and exchanges to predict stock market trend based on the NYSE, AMEX and
NASDAQ Composite indexes as well as on main market movers - S&P 500, DJI and
Nasdaq 100. Fibonacci numbers in waves theory.
The concepts of the Elliott Wave Theory were developed by Ralph Nelson Elliot
in the 1930s. The main principle of the Wave Theory is that by Ralph Nelson
Elliot's statement, market prices unfold in specific patterns (similarly to Dow
Theory), which technical analysts now call Elliot waves. According to Elliot's
view of the market,
price movements are
rhythmical and these movements can be predicted in rhythms, too. The explanation
of price's rhythmical patterns, according to Elliot Theory, is the result of
human nature, human activities and human's decisions, which are rhythmical as
well.
The Elliot Wave theory reveals that pessimism and optimism of traders (bullish
and bearish sentiment) swing
backward and forward in natural sequence and these swings are reflected in
specific wave patterns of price movement. Each price pattern (of the market) has
specific indications that can be recognized and used to predict future price
movements.
By its nature, the Elliot wave analysis could be considered to be a unique form
of market analysis that is created by technical
analysis and of behavioral economics with the purpose of defining extremes
in traders' psychology - tops and bottoms in markets. According to the Elliot
wave analysis, price patterns are the result of (human) socio-economic processes
that repeat themselves in a constantly recurring series of similar waves of
specific number and pattern.
The technical analysis of wave theory describes price movement as a series of
either five or three waves. The dominant trend can be divided into five waves
where the first, third and fifth waves are considered to be "motive" waves and
can be subdivided into another five waves by themselves. The second and forth
waves are considered to be "corrective" waves and can be subdivided into another
three waves. "Motive" waves always move with the trend and "corrective" waves
are corrective moves against a dominant trend. If dominant trend is bullish,
this trend can be described by five waves up and three waves down. A dominant
bearish trend can be described by five waves down and three waves up.
One of the main aspects of Elliot wave theory is the use of
volume behavior as a key
factor in recognizing momentum and investors' sentiment. Volume helps to
understand why and how the waves develop. If, in the 1930s and 1970s, the volume
of indexes was not available and the Elliot wave theory had certain
implementation difficulties in relation to the entire market when the
NYSE and
AMEX exchanges were
analyzed. It was easier with the Dow Jones Industrial Index (a small number of
stocks), yet, the S&P 500
remained behind the scenes. Today, the volume of the
S&P 500, DJI,
NASDAQ 100, NYSE Composite and
NASDAQ Composite indexes
help to define sentiment and understand the nature of price waves.
In technical analysis, Fibonacci numbers are
used to mathematically describe waves' structure.
V. K.
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