What is Elliott wave about?

The elliott wave theory assumes that the markets is directed by mass psychology, or sociology. These massive groups of people force the market into certain patterns. No individual is powerful enough to break these patterns. The point is that if you know where you currently are in an elliott wave pattern, you can forecast the market and make money.

Elliott wave in relation to fundamental analysis and technical analysis

As described in the section about fundamental analysis, people who trade according to this principle believe that the fundamentals of a company will eventually be reflected in its value. The assumption is that future news will be positive when current fundamentals are too. The share price will rise when the news is published and the fundamental analyst who saw this coming is a winner. But sometimes prices do not rise on positive news because “other news caused a bearish counterforce”. It is hard to cope with these kinds of challenges as you are a fundamental analyst.

A technical analyst doesn’t look at the news. His opinion is that the news is already discounted in the price of a stock. But a chart reader cannot deny that it is quite common that a stock suddenly moves straight up after positive news. So what is the relationship between news and stock prices?

An Elliott wave practitioner has another opinion. He doesn’t look at the news, but he does not gloss over sudden price movements after news publications. The reaction of markets after news depends on mass psychology. This explains why stocks can boom after negative news or only fall slightly after very bad news. It also explains why there are all of a sudden “counterforce” newsitems which have much more power than expected. Robert Prechter of Elliot wave.com explains this very clearly in history’s hidden engine. The most important thing to know is to forget about the news right now and to understand the importance of the Elliott wave patterns.