Another Perspective

Sometimes its best to forget about everything in your trade rules and book and go back to a very basic view. As some of you know I use Elliott Waves quite a bit, never as a only mean for a trade or direction but as a confirmation. I wanted to quote something that is readily available online via Wiki.

Wave 1: Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.

- This move here is off the march lows. As everyone knows news was very negative and we all thought we get a small jump to move even lower. Instead we continued rallying all the way to 930-956 before we had any type of correction.

Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

- Perfect explanation of our moves from 956 towards the 880 range. Many thought the bear market would finally take over again and volume continued to decline. Interestingly enough this retracement was based on a 3 wave corrective pattern.

Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

This pretty much explains our moves since the 880 lows and the rally into the 4 digits. Is it possible we could be at the wave 3 midpoint now? and move a lot higher still? You tell me.

For more information here is the link http://en.wikipedia.org/wiki/Elliott_wave_principle