One of the most frequent questions Elliott Wave International's readers ask is this: "Can I apply Elliott wave analysis to individual stocks?"
The short answer is – yes, but with one caveat: sufficient investor participation. As you probably know, what "paints" Elliott wave patterns on a chart are changes in investors' collective mood. With each new bar, you are essentially watching the shifts in their shared optimism and pessimism.
Penny stocks often don't have enough players to accurately reflect a true mass psychology, so in those markets you will rarely see consistent Elliott wave patterns. Small, mid and large caps fair much better, but even with those, at times investor participation can be too small to overpower the outside influences – e.g., what the competition is doing, government policy, whether the CEO is having personal problems, etc.
How do you apply Elliott to individual stocks, then? Bob Prechter, EWI's president and a recognized Elliott wave authority, gives this simple advice: Look for clear, unmistakable wave patterns. Don't act unless you see them.
You can also combine your wave analysis with other technical tools – for example, trendlines. To draw a trendline, you simply place a line across the top (or bottom) of a chart and connect the market's highs (or lows). And then, you watch. More often than not, after prices touch the upper or lower trendline, they will reverse and go towards the opposite side of the channel.
Trendlines work on any time frame, and they can work beautifully with wave analysis. Let's look at one example: Silver Standard Resources (NASDAQ: SSRI), a small cap stock. This is the exact chart EWI's Prime Stocks Flash service released to subscribers at 12:04 PM on November 6, 2007:
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As you can see, this chart shows multiple trendlines. But notice that almost every time the price touched one of the lower or the upper lines, the outcome was the same: the price reversed.
It's also hard to miss an obvious Elliott wave pattern screaming at you from this chart: five waves – or "impulse,' in Elliott wave lingo – up from the 2004 low. The rule of thumb is that any time you see a completed impulse like this, chances are, your market is ready for a pullback – maybe just a correction, or maybe something larger.
In case of SSRI last fall, it was indeed "something larger." When that Prime Stocks Flash alert went out on November 6, it said, "Five up from May 2004 looks complete, or at least very nearly so... a stiff dip is expected."
A correction following a five-wave impulse often takes the price back into the territory of the previous wave 4, typically towards its lowest point. Notice in the chart above that the lowest point of wave 4 was near $25. That level was Prime Stocks Flash's price target for SSRI all along.
And this week, price finally broke below $25, prompting Prime Stocks Flash to issue a closing alert today (Thursday, May 01): "Close Silver Standard Resources (SSRI) Gains Now."
Elliott wave analysis won't always work as perfectly with single stocks as it did in this example. No market indicator is perfect. But in the hands of a skilled analyst, Elliott can be a formidable tool.
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