Markets and psychology

This post covers a topic of interest to me, the stock market. I mentioned in a previous post, driving with the rearview mirror, about some basic concepts of the stock market. Several months have passed since my last market posting. Accordingly, I have been studying and stock trading resulting in both failure and success. The more I watch the market, the easier it is to understand that investor psychology drives the market.

One technique that I am studying is Elliot wave principle (EWP) developed in the 1930's by Ralph Nelson Elliot. Elliot observed that markets move in 5 distinct sets of waves according to prevalent market psychology. When in a bull market, impulse waves move the market up. In a bear market, impulse waves move it down. Waves 1, 3 and 5 are the impulse waves, while 2 and 4 are the corrective waves. Impulse waves are further subdivided into smaller sets of 5 fractal waves. Corrective waves have an a-b-c wedge like pattern and are also subdivided into smaller waves. The time span of the waves are from decades to hours on ticker charts. To be honest, the larger waves on the order of days (Minute) up to years (Primary) follow this pattern making distinctive patterns on ticker charts. Time spans greater than several years and less than several days tend not to fit into exact scenarios. It is just wishful thinking putting noisy or irrelevant data into such a pattern in my opinion. The take home message is Elliot wave principle follows what truly drives a market, investor sentiment.

Elliot wave principle is a loose theory, it has multiple outcomes during any given situation. Market timing and wave amplitudes are based upon Fibonacci numbers. Exact values fit into a range. Here is where EWP is useful, it tells us approximately when the market will turn and to the approximate degree a rally or sell-off will carry a market. It determines buying or selling windows ahead of time. I suggest using other technical indicators (MACD, stochastic and etc.) as complimentary tools when waves are not clear, which often waves are unclear. Investigation of the stock's price movement (who owns it and why) will further help an investor.

In practical application, I believe as of February 9, 2010 we are in a bear market at the following point in a Cycle. This means the overall market movement is downward.
Primary = 1 of 3
Intermediate = 1 of 5
Minor = 2 of 3
Minute (not sure)
Using this, I made a successful and unsuccessful trade. The unsuccessful trade occurred because of undesired price movement premarket. My blunder even as the stock moved in the desired predicted direction. This is why the system is not going to make anyone rich without following good trading practices.

I will post further on this topic to see if my evaluation and Elliot wave principle holds true.