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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 Elliotwave theory were developed by Ralph Nelson Elliot in
the 1930s. The main principle of the Wave theory is that by Ralph Nelson Elliot
statement market prices unfold in specific patterns (similarly to Dow Theory) which technical
analysts now call Elliot waves. According to the Elliot's view on the market,
price movements are
rhythmical and these movements could be predicted in rhythms, too. The
explanation of price's rhythmical patterns according to Elliot Theory is the
result of the 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
back and forward in natural sequence and these swings are reflected in specific
wave patterns of price movement. Each price pattern (regarding the position of
the market) has specific indications that could be recognized and used to
predict future price movements.
In its nature the Elliotwave analysis could be considered as unique way of
market analysis that is formed by technical
analysis and of behavioral economics with purpose to define extremes in
trader's psychology, tops and bottoms in markets. According to the Elliotwave
analysis price patterns are result of (human) socio-economic processes which
repeat themselves in constantly recurring series of similar waves of specific
number and pattern.
The technical analysis of wave theory describes price movement as series of
either five or three waves. The dominant trend could be divided in five waves
where first, third and fifth waves are considered as "motive" waves and
respectfully could be subdivided into other five waves by themselves. The second
and forth waves are considered as "corrective" waves and could be subdivided
into other three waves. "Motive" waves always move with trend and "corrective"
waves are corrective moves against a dominant trend. If dominant trend is
bullish this trend could be described by five waves up and by three waves down.
Respectfully dominant bearish trend could be described by five waves down and
three waves up.
One of the main aspects of Elliotwave theory is using
volume behavior as a key
factor in recognizing momentum and investor's sentiment. Volume helps to
understanding why and how the waves develop. If in the 1930s and 1970s volume of
indexes was not available and Elliotwave theory had certain implementation
difficulties in relation to the whole market when
NYSE and
AMEX
exchanges were analyzed. It was easier with Dow Jones Industrial Index (small
number of stock), yet, S&P 500
remained behind the scene. Nowadays, 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.
Copyright 2004 - 2010 Highlight Investments Group. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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