Purely market sentiment. When sentiment is strongly bullish, it moves in predictable patterns starting with finding support at a major low (the bottom). Majority of participants are very bearish and looking lower, but price starts to recover. That's a Wave 1. Then it resumes selling. Fear starts to step in again. But it holds the bottom. That's the Wave 2. It then builds up again above the higher high Wave 2 bottom and Wave 1 top. Once it breaks through, you see the market start to pile in. Volume increases. The move turns very impulsive printing new high after new high. That's Wave 3. It eventually tops. Most participants are in. Some who got in near the lows take profits or sell out completely. Some late entries start to move in. There's a massive fight between bulls and bears but it eventually holds support above the Wave 1 top. That's Wave 4. That's why it can be frustrating trading correction, especially 4th waves. It's a huge tug of war. There is no reliable pattern. Only ones that are more common than others. But truly any shape can happen. And it can go sideways for quite a while. Eventually, it breaks resistance of Wave 3 top. This is when you see the majority of the retail traders pile in. When your barber is telling you to buy a certain stock. This is the exuberance phase. It can match the length of the 1st wave, it can match or exceed the length of the 3rd wave. It can also be the shortest wave and finish in truncated fashion looking like a failed rally. It can also continue to extand as exuberance becomes irrational. This is the 5th wave. And once it tops, you are likely to see a 50-61% correction. The first move down will be denial. Buy the dip. But it won't make a new high. It will hold under the top. Once that 3rd leg starts and the previous low breaks, you will see a rush to exit. You see it on earnings reports alot, and not always bad earnings. It's merely sentiment resetting.Texaggie7nine said:
Quick question from an absolute noob. You can ignore if it's too stupid to bother answering.
I appreciate all your enlightening posts but I can't help but wonder what it is these patterns identify. I understand they are reading tea leaves in a way but do you think the patterns being recognized are legit market forces? Or could it be that so many trained investors follow the same type of pattern identifiers that it becomes more like a self fulfilling prophecy?
"H-A: In return for the flattery, can you reduce the size of your signature? It's the only part of your posts that don't add value. In its' place, just put "I'm an investing savant, and make no apologies for it", as oldarmy1 would do."
- I Bleed Maroon (distracted easily by signatures)
- I Bleed Maroon (distracted easily by signatures)
