Elliot wave theory
Waves 1, 3 and 5 represents bullish investor sentiment or the impulse wave.
Waves 2 and 4 are corrective waves fueled by profit takers or short sellers,
at the peak of the 5th wave comes a major bearish wave labeled A and C while
B is a minor trend reversal caused by investors with a little hang over from
that strong bull market picking up false bottoms.
Markets are somewhat chaotic when looking at the charts they produce, they can
go up in a second and then fall dramatically the next as if it can't be tamed
and just goes at random directions like a ricocheting bullet across a room full
of pipes. However, these random movements are actually caused by human emotions.
Nobody could stay at an extreme emotional state for so long and it will eventually
go back to normal, If that is the case, then markets should have a pattern since
it is associated with human emotion. This is what Ralph Nelson Elliot observed
that led him to the development of the Elliot Wave Theory. His theory states
that markets does not behave in a chaotic manner but instead, they follow a
pattern in accord with the dominant psychology of the people who moves them
based on a relevant event.
Elliot stated that a trend whether
up or down, consists of 5 alternating waves headed in one direction and 3 alternating
waves going in the opposite direction which completes a cycle. A wave headed
upwards are called motive or impulse waves while a downward trending wave is
called a corrective wave. Each completed cycle would form a wave which is a
part of a much bigger cycle. The order of scale of these cycles starts from
the smallest series of waves called a sub-minuette, followed by Minuette, Minute,
Minor, Intermediate, Primary, Cycle, Supercycle and then the Grand supercycle.