It's all psychology

R. N. Elliot was the creator of the Elliot Wave Theory. He began his career as an accountant. He was forced to retire that exciting career after obtaining an illness in the early 1920's. He then dedicated his remaining 20 years to studying the stock markets.

What he discovered is that price movements are caused by natural laws based on basic human emotions. It is known in sociology that humans as individuals are capable of making many complex and unpredictable decisions. Yet when humans act as a group, their decisions become much more primative. Some call this group think. Anyway after dissecting 75 years of stock market history Elliot discovered that there existed some of these same primative recurring patterns in stock trading.

The fundamentals of his Elliot Wave Theory are based on how humans react to fear and greed as a group. These primative emotions have been played out for years in certain cycles. Some investors have used his theories to profit for decades.

If it is so easy why doesn't everyone quit there jobs and trade stocks accroding to EWT? Because EWT can ALWAYS show us why things happened, but it is difficult to predict exactly how things will play out.

The strength IMO of EWT is to give an investor a general idea of which direction is most probable for prices to trend and to give some price targets.

For example I had based my forecast of SPX prices in the 600's when the market was in the 900's in Dec and Jan based on EWT. I forecasted a bounce to 750-850 when the market's were sub-700 in early march based on EWT. As prices began to rise I was able to adjust my upper targets to well over 900 based on EWT.

What I need to improve on is trading successfully based on my price targets. It takes time and practice. One must use the EWT to look at all of the possible price movements and then set probabilities to each based on price structure and momentum indicators.

So where are we right now? According to the EWT The move from 666 to 930 was either a complete wave or the first leg of three off of 666. In EWT periods that we are in now are called "corrective" waves. These waves are the period where profits are taken off of a major move. The move from 1450 to 666 on the SPX is being consolidated, that is profits are being taken and new bull posiitions are being established. These periods can take a long time and can take many patterns. It are these periods that discourage many from using the EWT.

We should be able to determine if the move from 666 to 930 was the entire move or the first of three by how prices act in the next couple of weeks. If the move was complete then we will begin the scariest move down of the entire bear market. If not then we will get a small (100-150 point) correction and then another move back up. If prices in the coming weeks act choppy and we trade in ranges then we are preparing for another ramp up. If prices trend down steadily with little overlap then P3 has begun.

Since 930 on May 8 we've traded in a range with much choppy overlap. This is evidence for the probability of higher prices this summer.