Why This Wave is Usually a Market Downturn's Most Wicked
The progression of mass emotions in financial markets “tends to follow a similar path each time around”
by Bob Stokes
Updated: May 07, 2020
The Wave Principle's basic pattern includes five waves in the direction of the larger trend, followed by three corrective waves.
In a bull market, the pattern is five up, followed by three down. In a bear market, the pattern unfolds in reverse: the five waves trend downward and the correction trends upward.
Each of these waves sports its own characteristics.
As the Wall Street classic book, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter, says:
The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around.
For example, strong price advances on high volume typically happen during wave 3 in a bull market. Of course, in a bear market, the strong price action is downward.
Returning to Elliott Wave Principle:
Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series.
Let's review an instance of a third wave in a downturn from recent financial history.
Here's a chart and commentary from our Aug. 21, 2015 U.S. Short Term Update:
This week's sharp decline is clearly a third wave. It sports a steep slope with strong downside breadth and volume.
During the next trading session (August 24, 2015), the Dow fell nearly 1,100 points at the open.
Of course, even more price territory would be covered at a larger degree of trend, which brings us to the stock market's current wave structure.
The just-published May Elliott Wave Financial Forecast mentions a price target for the Dow Industrials next significant wave, and also describes what is expected to happen after that price target is reached.
This is "must read" analysis.
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Dow Industrials: “Wave Structure Indicates … an Even Higher Order”
The quote in the title is from our just-published May Elliott Wave Financial Forecast—it compares the 2007 stock market decline with what’s been unfolding in 2020.
In the entire 2007-2009 bear market, the Dow dropped 54%. No doubt about it, that’s a big decline.
Yet, consider that the fastest decline from an all-time high in the Dow’s 125-year history unfolded from Feb. 12 to March 23, 2020. Has this decline only started?
Learn what our Elliott wave experts expect next for the major U.S. stock indexes – plus, get their outlook for bonds, gold, silver, the U.S. dollar, the U.S. economy and more.
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