Using Elliot Wave Theory to Analyze the Stock
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.
Now 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.
Meanwhile 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 well.
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