Besides understanding the theory of the Elliott wave, traders also need to learn the market sentiment at each wavelength since Zig-zag price swings represent investor optimism or pessimism.
Below is a psychological analysis of the typical 8-wave pattern of a bull market. In a bear market, we will analyze the opposite.
Elliott wave No. 1
This first wave has its origin in a bear market (recession). Therefore wave 1 is difficult to recognize at the beginning. At this time, the basic information is still negative information. The direction of the market before wave 1 occurred was still mainly a recession. Trading volume increased slightly in the direction of the price increase. However, this increase is not significant. Therefore many technical analysts do not recognize the presence of the 1st wave.
Elliott wave No. 2
The main wave 2 will correct wave 1. But the low point of wave 2 never surpasses the first starting point of wave 1. The news for the market was still not good. The market went down at the end of wave 2 to do a “test” of the market low. The bears are still convinced that the market is still under the control of the selling crowd and that prices will continue to fall. The volume will be less than wave 1. The price will be corrected down and usually between 0.382 and 0.618 of the Fibonacci from the high of wave 1.
Elliott wave No. 3
Usually, this is the biggest and strongest wave of an uptrend. At the beginning of wave 3, the market still received negative information. Therefore, many investors are not prepared to buy in time. When wave 3 was in the middle, the market started receiving positive fundamental information. Although there were small corrections in the middle of wave 3, the price of wave 3 increased at a fairly fast rate. The high of wave 3 is usually higher than the high of wave 1 by 1.618% or even 261.8% of Fibonacci.
Elliott wave No. 4
This is indeed a corrective wave. The price tends to go down and can sometimes create a long jagged pattern. Wave 4 will usually correct from the top of wave 3 with levels 0.382 – 0.618. The volume of wave 4 is lower than the volume of wave 3. This is the time to buy if an investor realizes the potential for a continuation of wave 5. However, recognizing the stopping of wave 4 is one of the difficult things for Elliott wave technical analysts.
Elliott wave No. 5
This is the last wave of the 5 “master” waves. Positive news spread throughout the market and everyone believed that the market was bullish. The trading volume of wave 5 is quite large, but it is usually still smaller than wave 3. It is worth mentioning that “non-professional” investors often buy near the end of wave 5. At the end of wave 5, the market quickly diverged. The highest point of wave 5 is usually higher than the high point of wave 3 with a Fibonacci ratio 161.8%.
Corrective wave A
This wave starts the correction wave A – B – C. During the A wave, the basic information is still very optimistic. Despite the downtrend, the majority of traders still think that the market is in an uptrend. The trading volume grows quite steadily following wave A. Wave A usually returns from 38.2% to 61.8% when you draw Fibonacci and compare it with wave 5.
Corrective wave B
The price rises again and at a higher level than the end of wave A. Wave B is considered an extension of the bull market. For those who follow the classical school of technical analysis, point B is the right shoulder of the Head and Shoulders chart pattern. The trading volume of wave B is usually lower than wave A. At this time, the basic information does not have new positive points, but it has not turned negative. Wave B usually reverses 38.2% to 61.8% of wave A.
Corrective wave C
The price tends to fall faster than previous waves. Trading volume increases. Almost all investors can clearly see the dominance of the bear market at the latest in the 3rd minor wave of C. Wave C is usually as big as wave A or usually expands 1,618 times wider than wave A or more.
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