Professional accountant Ralph Nelson Elliott kicked off a decades-long debate by publishing The principle of waves in 1938. His pattern recognition theory holds that market trends unfold in five waves as they move toward a primary impulse and 3 waves opposing this impulse. This theory further states that each wave is subdivided into three waves towards the trend and two against it. Finally, this explains a fractal market in which each wave produces similar models in increasingly shorter time frames.

Elliott Wave Theory (EWT) occupies an odd position in market lore, with its followers taking years to master its secrets and its skeptical observers dismissing it as voodoo, favoring a more traditional approach to price prediction. Wall Street has been particularly dismissive of the practice over the years, but conspiracy theories persist, such as unconfirmed reports that major players often consult wave theorists to make key exposure decisions. at the market.

Fortunately, we don’t need to join a secret society or spend a decade memorizing a thousand rules and exceptions to benefit from the great power of EWT. In fact, we can apply three easy-to-understand wave principles to a popular phenomenon. burst strategy now and watch how they improve market timing and profit production. We will look for specific Elliott Wave criteria after a major low appears and after a financial instrument tests a key breakout level.

Aetna (AET) reached nearly 86 in July 2014, after a long rally. He corrected in a typical manner ABC model this ended at 72 in October. The stock returned to resistance at the summer high in early November, creating two rally waves and stalling until mid-month. Three EWT principles helped us predict what happens next, as the spike in buying into resistance showed the outline of waves 1-4 of a 5-wave Elliott rally set.

We will test this thesis by applying the first two of our three principles.

A. The bottom of the 4^th (2^sd selloff) the wave cannot exceed the top of 1^st wave.

The first wave ended at 79.64 on October 27. After a rapid fall to 76, the stock hit resistance just above 85. It stalled at that level, creating a potential 4.^th wave that found support near 82. So far at least, there is plenty of space between the two blue lines denoting the top of the 1^st wave and bottom of 4^th wave. This increases the chances that we will consider a 4^th wave consolidation which will give a 5^th escape from the waves and bullish trend.

b. A continuation space often lines up perfectly with the center of the 3^rd (2^sd rally) wave.

When rising prices print a large gap and continue moving, doubling the length of the wave before it appeared, this is called a continuation gap, as defined by Edwards and Magee in the 1948 book. Technical analysis of stock market trends. Aetna hit a hole on October 31^st (red circle) and continued, this level marking the halfway point of the 3^rd wave. This is vital information in our trade analysis because it further increases the chances that sideways price action at the resistance level will result in a breakout and even higher prices.

With this information in hand, we can purchase the instrument within 4^th vague, in anticipation of escape. We can also place a stop below the trading range to minimize our losses in case of an error. This brings us to our third and final principle.

C. Two of the three primary waves will likely be identical in terms of price increases.

We identified and entered a 4^th wave trade pattern that is likely to produce an uptrend equal in length to the first wave, which added 7.84 points, or the third wave which added 8.81 points. Applying the third principle, we split the difference and add 8.30 to the bottom of the 4^th wave at 81.93, setting a minimum reward target just above 90.

The essentials

The title broke in 5^th the wave recovered in mid-November and posted a high of 91.25, even higher than our Elliott target. Strong risk management then comes into play, as there is no point in selling just because the price rise has reached a hypothetical end point. In fact, many Elliott wave rallies are breaking higher and higher, especially over the last 5 years.^th waves, as buy signals trigger and momentum traders flock into positions.