Taken from the book "Elliott Wave Principle":
Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakeable. Increasingly favorable fundamentals enter the picture as confidence returns. Third waves usually generate the greatest volume and price movements and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence. Such points invariably produce breakouts, breakdowns, runaway gaps, volume expansions, exceptional breadth, thrust, major Dow theory trend confirmations and large hourly, daily, weekly, monthly or yearly moves in the market, depending on the degree of the wave. Virtually all stocks participate in third waves. Besides the personality of "B" waves, that of third waves produces the most valuable clues to the wave count as it unfolds.
1) It would seem to the casual observer that the fundamentals have been improving since last summer as all of the major market indices have gone to new highs. It would be highly unusual for any stock pattern to make new highs, and especially by such a wide amount, without some sort of fundamental basis behind it. As far as those who continue to suggest that either the economy is slowing, or have just recently decided a "soft landing" is possible, these are the very same people (fundamentalists, economists) who have used this same excuse of staying out the market during this same time and have thereby missed much, if not all, of this same advance. You can decide for yourself who will be eventually right in all this - money on the barrel or misguided emotional (political) fundamentalism.1. Are fundamentals improving? Most think economy is slowing now. People are expecting SOFT LANDING, not raging expansion.
2. There's no exceptional breadth in NASDAQ.. quite contrary.
3. Dow theory says transports should be making new highs.. not.
4. Not all stocks seem to be participating, especially semis and small/mid caps.
2) As has been shared many times in the past, the NASDAQ exchange is generally made up of inferior companies that are in need of working capital, and because of this, many go out of business before they're able to generate any earnings at all. This is why the NASDAQ advance/decline line has been in a overall downtrend since its inception in the early 1970's, and certainly can not be compared in anyway to the NYSE group of stocks. And you can be very sure that anything that you have read in the "Blue Book" only used the NYSE as its basis, and any comparisons with the "secondaries" referred to those stocks on the Value Line index or something comparable. Oh, and by the way, the NYSE advance/decline line is now within a whisker of the all time highs on a ratio adjusted basis. Going by the 3rd wave definition given by Bob above of "exceptional breadth", this kind of thing goes a mighty long way in confirming that a 3rd wave is in progress (if the raw NYSE A/D line hasn't already convinced you of this when it broke to new highs back in 2003).
3) We have been on a long term Dow Theory buy signal since 2003, and continue to be on one on a short and intermediate term basis as well. And with the price of energy taking a dump of late, I wouldn't just yet write off the Transports from making new highs again in the not too distant future. And if you're wondering when a longer term Dow Theory sell signal would generate, both the Industrials and the Transports would have to take out their 2005 lows concurrently. Happy waiting.
4) This continued obsession with the semiconductors, and the NASDAQ in total, has kept many from participating in this remarkable market advance from the 2002 lows. Because of this, it will probably be this one sector that will suck in the final unwilling buyers into the market before the eventual top as they throw in the towel. As far as the MID and SML are concerned, the last time I looked the MID closed at all time highs on Friday with the SML and RUT both within 2% of their all time highs. I would have to think that most would call this broad market "participation".
Now, if I may, I want to share my definitions of 3rd and 5th waves below. After taking a really deep breath, carefully consider the contents of these definitions, along with your total market experience over the last couple of years (or longer), and you decide for yourself where you realistically believe we are right now in the price pattern structure from the 2002 lows.
The full text definitions of the other Elliott wave structures can be reviewed by clicking here.
Fib
"3rd waves are ''wonders to behold'' - and for many good reasons. Technically, this is the time where most analysts throw in the towel as price is now confirming what the internals told the analyst during wave 1 - which was a change in direction was probable. This is also the time in which extremes in many indicators will show up - something in which I refer to as ''flags'' - which are used later on in approximating the termination point of the entire 5 wave sequence structure. In equities, these extremes will be in the raw data of both volume and breadth - and the strength or weakness of the indicators that use such information - as well as their relationship to each other. Price pattern wise, one will always be able to identify a third wave because of the fact that price patterns will break out of basic support or resistance areas that were previously controlling the pattern up until that time. Psychologically, this is when the mind set is that we remember how we all got burned before and that in no way is this the start of a major up move - also known as climbing the ''wall of worry''. Once the market gets high enough, people start throwing in the towel on their bearish mind set, and this continues to a point when all the ''willing'' buyers are in the market. 3rd waves are also never the shortest wave in a 5 wave structure - and more times than not - are generally the longest wave in either price, percentage gain, or both, to what will be the final 5 wave structure overall."
"5th waves are the most ''euphoric'' of the entire wave structures as both technicians and fundamentalists all come to the conclusion that the worse is behind us. This is where the media joins the party as well, and thereby causes the ''buy with both hands'' mass psychology that comes with this pattern structure. Because of this, the idea that ''this time it's different'', and that the market can go ''nowhere but up'', becomes the overall mind set and people buy just about anything just to say that they participated. Technically, the internals diverge with the "flag" extremes seen during wave 3 until all of the willing AND unwilling buyers come into the market at which time the price pattern structure terminates."
Edited by fib_1618, 13 January 2007 - 11:51 PM.
