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Surfing RN Elliott's waveFeb 19 '00 Write an essay on this topic.Elliott wave theory is a common type of technical analysis used by investors. Technical analysis involves searching for predictable and recurring trends in stock prices; being able to predict a stock trend would lead to profits. Other commonly used methods of technical analysis are the Dow Theory and Kondratieff waves. The basic idea behind Elliott waves is that stock prices can be described by a series of long-term and short-term cycles. Ralph Nelson Elliott contended in the 1930s that the sociological behavior of investors could be used to model stock prices. Each pattern consists of 8 total waves (5 'impulse' waves which move with the general trend and 3 'corrective' waves which move against the general trend). Within each of these waves lies another set of 8 waves (again, 5 impulsive, 3 corrective). Within these smaller waves lies another set of 8 waves (kind of miniature versions of the larger set). Basically, the waves are superimposed on top of each other, following a Fibonacci sequence. For most analysts, the smallest waves are of little importance (since they generally do not affect price as much), so the focus becomes identifying the larger waves (which have the names Grand Supercycle, Supercycle, etc). The practical goal of wave theory (or any financial theory) is to make money. No matter if you believe in efficient markets, chart analysis or waves, the idea is the same: buy low and sell high. Elliott Wave analysis tries to identify market lows (for buying) and highs (for selling). Here's my two cents (take this with a caveat since I am from the bastion of efficient markets, the University of Chicago). If wave theory was indeed correct, why isn't everyone doing it? and why isn't everyone exploiting these patterns (are we all stupid or irrational?) Additionally, hindsight is 20-20: it's difficult to predict when the next wave will occur (this is where money is made), but easy to spot a wave after it has happened.  |
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