Below is one of my long-winded write ups. If you don't care about Elliott Wave or learning a strategy I've employed countless times, go ahead and skip.
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It's not always easy identifying good setups before they take off. That's why FOMO is so strong amongst retail investors. At best, they have about a 20% hit rate on knife catches and essentially get lucky. At worst, they simply never find stocks, much less buy them, in the early stages of a buildup prior to breakout. Usually limited to the names they know, or ideas that others provide (no problem with that at all BTW), they almost exclusively act too late, or flat out miss. I've been one of those. And sometimes, I still am.. because trading and investing is hard if you're trying to outpace the market. Believe it or not, the S&P doesn't always outpace your day job. And often times, you will end a year scratching your head.
This is one of the best use cases for Elliott Wave. The goal is to find a 5-wave setup that then retraces down to a higher low support zone. From there, you know you have a potential first wave of a larger structure in place, and you can place your stop immediately below it to limit risk. You can also wait for a 5-wave structure to form within the buildup under the high point of the preceding 5-wave structure. This is what we call nested bullish waves. Since the odd numbered waves in a 5-wave move break down themselves into 5-wave structures, the best confirmation of a budding explosive breakout is that nested smaller structure under the high of the larger structure.
A 5-wave structure is nothing more than price moving from either an exhausted bearish state, or a consolidation state. The non-overlapping nature shows bulls continually beating bears as it moves up. Once it tops, bears try to bring it back down, but bulls ultimately hold in a 2nd wave bottom showing that there just isn't enough bearish left to take it any lower. That's why it's a phenomenal indicator. It tells you when sentiment is gaining and when it is exhausting.
Below is a stock I found just perusing some random lists. I know nothing about the company. It IPO'd in the low $20's, had a very short stint up before bears creamed the **** out of it for 2 years. They eventually exhausted themselves at $1.21. I bet you could look up news from September 2023 on the company, the industry, the sector, and the broader market, and find no reason to put your money in this POS. Yet within 5 months it was back to nearly $7 and within a year it was back over $9. Bears got another chance and brought it back to $2.18. Sentiment was probably more negative than ever. Yet, again, it reversed back upward.
Is this confirmed bullish? No. But if you look at the structure of the move off the September 2023 low, you see 5 very clear waves that become the "potential" larger Wave 1. Using the recent low as the "potential" Wave 2, I can now use the Fibonacci Extension tool to project the "potential" next levels. For this to confirm, it has some build up left. I want to see a 5-wave structure into the 61.8% $7.61 level or even higher into the 76.4% $10.22 level. After that, I expect another retrace that catches another higher low. At that point, it's just a matter of time before it bust upward.
But given where the stop levels would be, it's a price right now that provides pretty limited risk and could allow me to form a starter position. So I would buy tomorrow with my stop at $2.18. I would then buy at key levels, accumulating shares (and maybe removing some risk along the way if I can get some doubles) under the previous high of $9.14. Eventually, I hope to have a limited risk position set to capitalize on the "potential" bullish structure ahead, where I would go completely net free at the first target of $16.50 area around the 100% fib extension level, moving my stop to the 61.8% $7.61 area.
And during the accumulation phase, I let my stop work. If I get stopped, it's because the setup likely broke. So I trash the name and forget about it. But what if it doesn't engage a larger 5-wave move, yet doesn't get stopped? Well I have my alternate, which shows that what I labeled as the "potential" Wave (1) was actually just an (A) wave in an upward correction. If that's the case, I have my stop to limit my risk, and I still have the 100% target for the (C) wave, and worst case, I can play for the previous high of $9.14.
All of this analysis happens right now. The parameters are set and I don't have to second guess anything. I will track the progress as time goes by and adjust if something materially changes. I don't worry about the many other potentials that the market might do, or what the fundamentals will do. The parameters I've set protect me from significant loss and set me up for potential success. My money is aligned with something that is structured to build up, break out, and profit immensely.
