Friday, January 22, 2010
Elliot Wave Theory
For the second time in my investing life, an esoteric "inside-knowledge" investment fund ended badly and was liquidated with heavy loss to the investors. Paying 5% up front commission was a bad decision. The eternal lesson is re-learned again and again. Those smart looking people sitting in the corner office of the bank know less than you do, dont give them your money to manage. They are out to steal your money. Anyway, now I have to think what to do with the surplus greenish thingies that have turned liquid.
Elliot wave theory predicted the 2008 bear market. Now the same people is saying that "2010 is the year when the bear market in stocks returns in full force." The situation is like the short-lived rebound after the initial break in 1929, and "a meaningful close" below 10,489 should see a similar collapse to new bear market lows.
What is the Elliot Wave Theory? It is a model of how human mass behaves. It reveals swings from pessimism to optimism and back in a natural sequence, creating specific and measurable patterns. Elliott Wave Principle measures investor psychology, which is the real engine behind the stock markets. When people are optimistic about the future of a given issue, they bid the price up.
Wave 1 : The stock makes its initial move upwards. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap so it’s a perfect time to buy. This causes the price to rise.
Wave 2 : At this point enough people who were in the original wave consider the stock overvalued and take profits. This causes the stock to go down. However, the stock will not make it to its previous lows before the stock is considered a bargain again.
Wave 3 : The stock has caught the attention of the mass public. More people find about the stock and want to buy it. This causes the stock’s price to go higher and higher. This wave usually exceeds the high created at the end of wave 1.
Wave 4 : People take profits because the stock is considered expensive again. This wave tends to be weak because there are usually more people that are still bullish on the stock and are waiting to “buy on the dips”.
Wave 5 : This is the point that most people get on the stock, and is most driven by hysteria. Contrarians start shorting the stock which starts the ABC pattern. We are now in a pessimistic phase of the cycle, a bear market.
Learn and Think, J, what is to be done!