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One of the only tools that can give you an idea in which direction the stock price is going to move next, is the use of Elliott waves.
With short, medium and long term Elliott waves trend analysis we can have a pretty good indication if price has a better chance going up or going down in those different periods. In addition it can give us price targets.
Your Elliott wave count does not have to be perfect. You most probably will have to review counts regularly. What is important at the end is that when you expect an up move, price makes an up move.
In my book "Capturing Profit with Technical Analysis", there is a small tool that will help you making Elliott wave counts.
During an illness in the mid-1930s, Ralph Nelson Elliott discovered the correlation between human emotion and trend patterns contained within price charts.
Elliott discovered different patterns that repeated themselves in form but not necessarily in size or length of time; these patterns could always be subdivided into smaller waves within the framework of certain rules. He called this phenomenon the “wave principle.”
There are two basic waves in Elliott wave theory: a five-wave impulse pattern in the direction of the main trend and a three-wave correction pattern against the main trend.
In a later stage, Elliott used Fibonacci numbers together with the waves to predict target prices.
The Elliott wave principle gained wide attention in the 20th century during the 70s thanks Frost and Prechter, who published the legendary book, Elliott Wave Principle: Key to Stock Market Profits, 1978. During the economic crisis of the seventies, this book forecasted the big bull market of the eighties.
A trend signals the main direction in which prices are moving; corrections move either against the main trend or sideways.
In Elliott wave terminology, these are called impulse waves and correction waves.
Figure 7.1: An impulse wave consists of five waves.
In figure 7.1, you can see that an impulse wave consists of five waves: three in the direction of the trend (waves 1, 3, and 5) and two against the trend (waves 2 and 4).
The correction wave consists of three waves: A, B, and C. Impulse waves are identified by numbers; correction waves are identified by letters.
Figure 7.2: Impulse wave in a downtrend. Figure 7.3: Impulse wave in an uptrend.
Figure 7.2 is an impulse wave in a downtrend and figure 7.3 is an impulse wave in an uptrend.
Figure 7.4: Waves 1-3-5 in the direction of the trend.
In figure 7.4, waves 1, 3, and 5 moving in the direction of the trend are impulse waves and, therefore, consist of another impulse wave of a lower degree.
Figure 7.5: 3-wave correction waves in an uptrend and in a downtrend.
Figure 7.5 shows correction waves in an uptrend and in a downtrend. The correction wave has three waves. Waves A and C point in the direction of the correction; wave B is moving against this direction. Waves 2 and 4 in an impulse wave also are correction waves. Waves A and C in a correction wave move in the direction of the correction trend and are therefore impulse waves, again consisting of five waves.
Figure 7.6: 5-wave triangle corrections in an uptrend and in a downtrend.
Figure 7.6 shows triangle corrections in an uptrend and in a downtrend. A triangle correction consists of five waves.
IMPORTANT! A triangle correction is part of an ABC correction wave.