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Technical Analyses Fundamental analyses focus on fundamental elements of the economy, companies, leadership, products and services, types and prices, marketing strategy and so on to determine the valuation and performance of a business or a country. This approach to market analyzes is similar to our behavior when we go shopping to buy a pair of shoes. We have time and money, and we may check a few shops before choosing what we really want. Then, we have the choice of buying the shoes immediately, a day, a week, or a month later. We know that the price of the shoes remains relatively stable for a foreseeable period. This approach to buying removes nearly totally the constraints of competition and the pressure of timing when purchasing goods and services. Under such conditions, the purchasing process takes place with a cool head and with relatively little amount of stress. In contrast, the market technical analysts focus mainly on the real-time price fluctuation of financial assets in an environment similar to that of auctions. Someone offers an asset for sell at a given price. We know that the competition is always present and could overtake us at any time. Therefore, traders must take decisions and actions in real-time, often under extreme stress and time pressure. They know that if they do not act immediately, the opportunity may be gone forever. Welcome to the world of technical analyzes. Here the investor’s sentiments and the crowd’s emotional states are the driving force. The price fluctuations are the result, effect, and consequence of the trading crowd’s sentiments and emotions, most of the time. Technical analyzes of the Money Printing Strategy are partly based on the Elliott Wave Principles. Additional technical tools are used to enable close to real-time prediction of the market trends. Ralph Nelson Elliott discovered the Elliott Wave Principles in the 1930s. Robert Prechter, the President of “Elliott Wave International Corporation," resurrected the Wave Principles in a book called “Elliott Wave Principle”. This book is used as the "reference book" for part of the technical analyzes of the Trend-Prediction Strategy. The fundamental analyzes consider that the market participants are acting based on objective and rational decisions and actions. However, the Elliott Wave Principles use technical analyzes with the belief that in free markets, traders' psychology is the driving force behind traders' actions in such a way that the aggregated subjective and irrational actions of traders lead to produce a set of predefined and recognizable chart patterns. The recognition of chart patterns is precisely what makes the market future trends predictable. It is worthwhile mentioning that the Elliott Wave patterns can be observed only in economies under the rules of free markets where the price of financial instruments is freely determined only by free will of the market participants. Some traders will be freely willing to sell a financial instrument at a given price and some others, freely to buy In western countries, though, the massive intervention by politicians and central bankers', insiders’ actions, and news agencies influence the price of the financial instruments. As a result, the quality of the charts may differ substantially from the natural Elliott Wave patterns. The degree within which a wave operates may also affect the quality of charts. For example, the form of a daily chart, one bar per day, tends to be relatively closer to a natural wave pattern than the one of the 15-minute bars. This understanding is true because the short-term charts are more prone to market manipulations than longer-term charts. Furthermore, the advertised prices are in US dollar for the US markets. We all know that the buying power of the US dollar some forty years ago was much more than today. However, the charts cannot include this factor unless they are adjusted with realistic and objective rates of inflation. The inflation figures, as reported by statisticians, may not always reflect the actual rate of inflation. We know that under permanent pressure from politicians, the quality and level of trust in official statistics degrades progressively over time until they become insignificant, irrelevant, or useless. Furthermore, there are no objective means to measure the buying power of the US dollar accurately because it is a fiat currency. Nevertheless, the level of freedom in the Western world free markets is luckily still sufficiently good enough to produce recognizable chart patterns. In countries run by dictators, the prices are fixed arbitrarily by the rule of politicians. Therefore, the associated charts may not enable the prediction of market future trends accurately. From a psychological viewpoint, the price of financial instruments does not progress linearly as most people would wish and imagine. They progress according to the Elliott Wave patterns with a cycle of eight waves 1, 2, 3, 4, 5, A, B, and C. Each time this cycle is completed, the next cycle of the same degree or a new cycle at one-degree higher kicks in. In free markets, the aggregated irrational actions of the market participants under stress produce the Elliott Wave patterns. Traders tend to follow a pattern of the so-called “herding.” This means that once a few influential traders decide, for example, to buy a given financial instrument based on rational or irrational facts, the remaining traders tend to follow without knowing the reason behind the moves. We can observe the behavior of herding when the animals perceive a sudden threat. The ones who do notice a given threat first, start to run away in a certain direction, and the rest of the herd, even if they do not know the reason why, will follow blindly. By exhibiting the pattern of herding, the animals perceive that they are less in danger of predators in a group action than by staying alone. Humans can also succumb to the behavior of herding in situations of panic such as a fire in a theater. Fires create stress and panic, and lead everyone to escape immediately and at the same time, often through the same door. As a result, some may get injured or even killed while attempting to escape. In the financial markets, the same behavior happens when all of a sudden everyone wants to sell or close a financial instrument at the same time. As a result, some may have to suffer big losses and others, even bankruptcy. The behavior of herding is irrational and subjective. This is different from the rational behavior of buying a pair of shoes. In the opposite scenario, the pressure of time in the financial markets is of essential importance and the root-cause of the emotional and irrational behavior of traders' herding. The wave patterns are the pure product and result of the aggregated herding actions of traders. Herding requires a situation of stress as a prerequisite. Without stress, there would be a kind of relaxed herding. In turn, very relax herding conditions would be equivalent to the behavior seen in buying a pair of shoes rather than in trading financial instruments. As a corollary, the more stress and herding are involved in the development of waves, the better is the wave's quality for prediction of the market future trends. It is worthwhile mentioning that many animals and plants also grow with recognizable patterns of Elliott Waves. You will find a brief description of the philosophical issues related to the Elliott Waves concepts in chapter 16.
This chapter introduces the fundamental principles of the Elliott Wave theory, whose wave patterns are sufficiently clear and recognizable to allow prediction of the market future trends. For a more thorough and comprehensive understanding of the Elliott Wave Principles, you are recommended to refer to the reference book of figure 1.1. Several charts of this book are presented here below.
The Elliott Wave Principles say that the market always follows a complete cycle pattern of eight waves. Figure 1.2 shows a complete cycle.
Figure 1.2 – Source: Elliott Wave Principle: Key to Market Behavior; © 1978-2014 Robert R. Prechter, Jr. Elliott Wave International, Inc., www.elliottwave.com
Elliott calls the waves 1, 2, 3, 4, and 5 motives, and the waves A, B, and C, corrective. He calls the waves 1, 3, and 5, motive impulse and the waves 2 and 4, motive corrective. The motive waves always trend in the same direction as the wave at one degree higher. Therefore, in bull markets, they trend higher and in bear markets, lower. The waves 1, 3, and 5 are called impulse because they are the ones that propel the trend toward the wave at one degree higher. At one degree higher, the subwaves 1, 2, 3, 4, and 5 become a wave (1), (3), or (5) and the subwaves A, B, and C, a wave (2) or (4). The waves 2 and 4 go in the opposite direction of the wave at one degree higher. Regarding the corrective waves A, B, and C, the direction of the waves A and C are the same as the wave at one degree higher. Wave B always trends in the opposite direction of the waves A and C. Therefore, wave B always trends higher in bull markets. The motive impulse waves 1, 3, and 5 will always go upward in bull markets and, downward, in bear markets. Likewise and within the waves 2 and 4 of the motive corrective waves, subwaves 1, 3, and 5 go downward. Within a bullish motive context, the following summarizes the wave's direction: Subwave 1, 3, and 5 go always upward, in the direction of the wave at one degree higher. Subwaves A and C of the waves 2 and 4 always go downward. Subwave B always trends in the opposite direction of waves A and C. Within the corrective waves, the following summarizes the wave's direction: Subwave A and C always go downward, so in the direction of the wave at one degree higher.
Figure 1.3a – Source: Elliott Wave Principle: Key to Market Behavior; © 1978-2014 Robert R. Prechter, Jr. Elliott Wave International, Inc., www.elliottwave.com
Figure 1.3a shows the Elliott Wave cycle as if we would see through a magnifying glass. It shows the subwaves inside each wave of figure 1.2, so at one degree lower.
Figure 1.3b – Source: Elliott Wave Principle: Key to Market Behavior; © 1978-2014 Robert R. Prechter, Jr. Elliott Wave International, Inc., www.elliottwave.com
Figure 1.3b shows the Elliott Wave pattern at two degrees lower. Please note the numbers at the highest wave degree “I”, and “II.” Therefore, 1 and 2 are the wave number at the highest degree. Then 3 is the number of subwaves A, B, and C of corrective waves. Thereafter, 5 is the number of waves within motive waves, and 8 is the number of waves in a cycle. The next number is 34 and represents the total number of subwaves at one degree lower. Finally, 144 represent the number of sub-subwaves at two degrees lower. All those numbers 1, 2, 3, 5, 8, 34, 55, 89, 144 are part of the Fibonacci sequence that will be introduced later on.
Figure 1.4 – Source: Elliott Wave Principle: Key to Market Behavior; © 1978-2014 Robert R. Prechter, Jr. Elliott Wave International, Inc., www.elliottwave.com
The names of the wave degrees are shown in figure 1.4. This book presents many examples of the waves at various degrees. To understand the examples, we consider a wave at a given degree, for instance, the Grand Super Cycle degree wave 4, then we name the subwaves at one degree lower, for example, subwave A, and again its sub-subwaves 1, and so on. The previous presentation describes in brief the subtle concepts of the Elliott Wave Principles. The following remarks are worth highlighting:
Numbers and letters within parentheses indicate the wave labels at one degree higher.
The wave number 1 to 5 of figure 1.2 has meanwhile become the wave number (1) at one degree higher. Similarly, the waves A, B, and C of figure 1.2 have become the wave (2) at one degree higher.
After the wave number (2), the waves number (3), (4), and (5) develop as shown in figure 1.3a.
Once the wave (5) is complete, the corrective waves (A), (B), and (C) start to develop as is shown in figure 1.3a.
For prediction of market trends, it is important to notice that each wave 5 or (5) or even better, subwave 5 of wave (5) of a bull market, is followed by three ensuing corrective waves A, B, C, or (A), (B), (C). Actually, subwave 5 of wave (5) is signaling the end of the current bull market and the beginning of the subsequent bear market. Therefore, investors could adapt their trading actions accordingly. Likewise and in bear markets, the five subwaves of the wave (C) or even better, subwave 5 of wave (C) announces the approaching end of the correction phase, and of the bear market. Therefore, the investors can get prepared to cover (close) the Short positions and open Long position as soon as subwave 5 of wave (C) has bottomed (see figure 1.3a). It is important to notice that the five-subwave correction of the wave (A) announces the market downtrend at one degree higher. Therefore, the correction will resume with the subwave (C) after the subwave (B) is completed. At the next higher degree, the aggregated subwaves (1), (2), (3), (4), and (5) becomes the wave number ① and the subwaves (A), (B), and (C), the wave number ②. To make the wave labeling clearer, wave ① subdivides into five subwaves (1), (2), (3), (4), and (5). In turn, each of subwaves (1), (3) and (5) subdivides again into five sub-subwaves 1, 2, 3, 4, and 5. Likewise, the wave ② subdivides into three sub-waves (A), (B), and (C). Again, the subwave (A) subdivides either into three sub-subwaves A, B, and C or five sub-subwaves 1, 2, 3, 4, and 5. The subdivision into three or five depends on the pattern of the subwave (A), a flat or a zigzag. The subwave (B) always subdivides into three sub-subwaves A, B, and C. Finally, the subwave (C) subdivides into five sub-subwaves 1, 2, 3, 4, and 5. This process of wave developing continues indefinitely up to the highest degree of waves that covers several thousand years of the human economic and financial activities. The wave patterns have the characteristics of fractal geometry meaning that waves always generate the same 8-wave patterns, whether seen at smaller or larger degrees. In other words, when you look at any of the eight waves with a magnifying glass, you would recognize similar wave patterns at lower wave degrees as well.
Each of the Elliott waves has a unique personality and message.
Figure 1.5 – Source: Elliott Wave Principle: Key to Market Behavior; © 1978-2014 Robert R. Prechter, Jr. Elliott Wave International, Inc., ww.elliottwave.com
Figure 1.5 shows the generic Elliott Wave Cycle. Wave 1 develops immediately after a correction phase under the shadow of the preceding general negative sentiments and over-pessimism. The general sentiment is negative because many optimists and crowds have already suffered substantial losses during the previous bear market. During the first part of wave 1, traders are anxious and anticipate the resumption of the bear market anytime soon. The pattern of wave 1 is frequently a motive impulse or leading diagonal.
Wave 2 typically corrects 61.8 percent of the gains of wave 1. During wave 2, traders tend to assume that the previous bear market could resume anytime soon. The pattern of wave 2 is typically a zigzag.
Wave 3 is generally the most powerful of all waves during which, the previously dominant and general pessimistic sentiments change progressively to general optimism. The pattern of wave 3 is a motive impulse. Wave 3 is frequently extended. This means that its subwave 3 tends to sub-subdivide into five subwaves, as well. It tends to last longer and displays generally amplitudes of 161.8 percent of the waves 1 or 5. During this wave, the economy is flourishing and the businesses and populations tend to become increasingly wealthier and more optimistic.
Wave 4 tends generally to correct 38.2 percent of the preceding wave 3. Its pattern is a zigzag, flat, triangle, or combination.
The pattern of wave 5 is frequently a motive impulse or sometimes an ending diagonal. The amplitude of wave 5 tends to be the same as wave 1 or 61.8 percent of wave 3.
Wave A is corrective. In the beginning, the general sentiments tend to remain optimistic and the majority of economists, financial experts, and the crowd tend to anticipate a rapid resumption of the preceding bull market. From the middle of this wave, however, many feel a certain level of pessimistic sentiments since substantial damages have already occurred. Toward the end of wave A, the pessimism is felt nearly everywhere.
Wave B goes in the opposite direction of the wave at one degree higher of wave 2, and the ones of waves A and C. This wave goes in the same direction as the one of the preceding wave 5. Although the market is in a normal correction phase, many interpret this wave as the eagerly awaited resumption of the previous bull market. They tend to behave again similar to what they did during the end phase of wave 5. At the end of wave B, many market participants display optimistic feelings again. The pattern of wave B is usually a flat, a triangle, a zigzag, or combination.
Wave C is the final leg of corrective waves. The pattern of wave C is a zigzag or an ending diagonal. The aggregated correction of waves A, B, and C generally corrects 61.8 Percent of wave 1 if it is a wave 2, or 38.2 percent of wave 3, if a wave 4.
Corrections are an integral part of the human societies in general and of its economic and financial actions, in particular. The purpose of the corrections is to force people to correct the inefficiencies tolerated during the previous bull markets. It is in times of crises that leaders, decision-makers, and the public are forced to ask new quality questions to find new quality answers.
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