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Trend Waves
| The cult of Elliott Wave Theory intimidates the most
experienced traders. But don't let wave voodoo stop you from
adding important elements to your chart analysis. Sharp uptrends
routinely print orderly action-reaction waves. EWT correctly
recognizes these predictive patterns through their count of 3
primary waves and 2 countertrend ones.
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Wave impulses correspond with the crowd's emotional
participation. A surging 1st wave represents the fresh
enthusiasm of an initial breakout. The new crowd then hesitates
and prices drop into a countertrend 2nd impulse. This coils the
action for the sudden eruption of a runaway 3rd wave. Then after
another pullback, the manic crowd exhausts itself in a final 5th
wave blowoff.
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| Traders can capitalize on trend waves with very little knowledge
of the underlying theory. Just look for the 5-wave trend
structure in all time frames. Locate smaller waves embedded in
larger ones and place trades at points where two or more time
frames intersect. These cross-verification zones capture major
trend, reversal and breakout points.
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For example, the 3rd wave of a primary trend often exhibits
dynamic vertical motion. This single thrust may hide a complex
5-wave rally of the next smaller time frame. With this knowledge
execute your position at the 3rd of a 3rd, one of the most
powerful price movements within an entire up trend. While waves
may appear difficult to locate, the trained eye can uncover
these price patterns in many strong up trends.
Many 3rd waves trigger broad continuation gaps. These occur just
as emotion replaces reason and frustrate many good traders.
Since common sense dictates the stock should retrace, many exit
positions on the bar just prior to the big gap. Use timely wave
analysis (and a strong stomach) to anticipate this big move just
before it occurs.
4th wave corrections set the sentiment mechanics for the final
5th wave. The crowd experiences its first emotional setback as
this countertrend generates fear through a sharp downturn or
long sideways move. The same momentum signals that carry traders
into positions now roll over and turn against them.
As they prepare to exit, the trend suddenly reawakens and price
again surges. During this final 5th wave, the crowd loses good
judgement. Both parabolic moves and aborted rallies occur here
with great frequency. Survival of the last sharp countertrend
adds an unhealthy sense of invulnerability into the crowd
mechanics. Movement becomes unpredictable and just as the last
greedy participant places a bet, the uptrend ends unexpectedly.
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| Waves within Waves: In
1996, Worth Magazine declared that Isis Pharmaceuticals
would be the next Microsoft. That was all the greedy
crowd needed to hear. A powerful rally exploded and
prices doubled in the next month. Note the embedded 5
wave patterns, typical in surging uptrends. The 3rd of a
3rd identified an excellent momentum trade.
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