The Elliot Wave Cycle–also called Elliot Wave Theory or Elliot Wave Principle–is something one finds referenced in the news or technical section of an investment research page. Understanding Elliot wave theory can help you make more sound decisions when investing.
Let us examine the information in the image below. The stock Tegna is identified as being in Wave 5 of the cycle. But what does this mean?
First let us get one thing established, nothing is standard in the stock market. If it were predictable, everyone would be doing it and succeeding. But they are not because the market is not predictable.
There are many subtleties and intricacies that most people will never understand. Experts have the best chances of understanding market movements.
If you are not an expert, what do you need to know about this technical indicator? You need to know when not to invest.
At certain points in the Elliot Wave Cycle, you will want to avoid investing. If you find a good stock that is predicted to take a downward turn, consider adding it to a watch list.
Watch lists are great for keeping track of a stock before buying. You can watch the ebb and flow of that stock’s price before buying. This will give you a better idea of when you want to buy.
Some people call this “timing the market” but in this case it is not so much timing the market as learning about that particular stock.
There is a lot to consider when learning about a stock. Does it have dividends? How frequent are they? What kind of fluctuations has it had in the past year/2 years/5 years/10 years? Will it grow? How healthy are the company’s finances?
Dollar cost averaging is a great plan. But there are moments when you want to hold off in investing in a promising stock. This is where we get to the Elliot Wave Cycle.
The Elliot Wave Cycle has a pattern of rising, as illustrated above. During a period of growth the waves are measured numerically. Five waves are identified that alternate between rising and falling. Wave 1, 3, and 5 are associated with rising stock prices. Waves 2 and 4 are falling prices but they are occurring during an overall period of growth.
The rising numerical phase is followed by a trend of falling prices. During a period of contraction or correction, letters are used to identify a downward trend. Similar to the growth trend, the falling price trend has a phase of falling, then a period of growth, followed by more price decline. The overall trend is one of a falling price.
If you find a stock that is in a lettered phase of the Elliot Wave Cycle, consider holding off on buying that stock.
Let me reiterate that these trends are not fool proof. The market does not always follow the same patterns and the choices of traders as well as company activity can impact whether a stock follows the Elliot Wave Cycle.
Hindsight is always 20/20.
The Elliot Wave Cycle in reality follows slightly over 20 different patterns. These patterns are best known by a professional.
The idea behind this theory is that the market is somewhat predictable because there are periods of growth followed by periods of contraction, within each period are rising and falling price trends.
The image above depicts a five wage growth period followed by a three wave contraction period. This raises the important quality of 5- and 3- wave movements over time. Both happen with frequency, but the 3-wave movement of rise and fall is more common today.
These price movements and overall stock market trends provide some semblance of preditability. Again, remember those predictable qualities are just as unpredictable. Take this information with a grain of salt. It is both solid advice and tentative.
Always remember, humans will never have perfect knowledge. Even the best of investors and traders. The Elliot wave cycle is a pattern, but it is not entirely predictable.
The moral of the story when it comes to the Elliot Wave Cycle is twofold.
First, there are two overall phases happening in the market. For any stock, it likely will be moving with the general trends of the overall stock market. At any given moment there will be a macro-trend of growth or a macro-trend of contraction.
Second, within these macro-phases any given stock will experience periods of growth and contraction that follow the overall macro-trends for that stock and likely the market as a whole.
When you come across commentary on the Elliot wave cycle, consider waiting to invest if it is in stage 5, a, or b. My recommendation is if it is labelled C, check out the long term trends and measure where it is at today with its past. Then, if you are confident in the rest of the company profile invest.
One thing to consider is that capitalism is a growth based system. The market should ALWAYS be growing. Call it the longue durée trend. The longue durée trend is even bigger than the macro-trends and extends further back in history.
As long as we live in a capitalist civilization, there will be market growth over the long term. So don’t get scared and pull your money out of the market during a down fall. Keep it in the market and it will come back, as long as civilization doesn’t collapse.
Civilization collapse is possible these days. We are experiencing a confluence of crises–economic, political, social, climatic, environmental, ecological. These are things to be aware of. In being aware of how the market is responding to these crises you can also learn about where to invest your money. But remember, there is always risk.
Finally while the market is never predictable, there is some level of predictability to be known through Elliot Wave Theory.