Elliot Wave Approach to Forecast The stock Price

After extensive research on the Elliot wave theory with an objective to simplify it to an maximum extend  so that  it can be understood by the trader community I have come across with many issues and some simple and gentle solution. I have developed this calculator based on those achievements however this tool only attends the limited logical part of the wave theory.

The wave approach of analyzing the price of stock, index or commodity starts with the cycle. This debated word “cycle” means the occurrences of similar kind of trend in future. In wave approach the cycle is again simplified by the way of classifying it in time frames. For example the grand super cycle is the name given to a trend which happened or reoccurs once in a decade.

Why cycle is so important for us? Answer is so simple. Say the average lifespan or life cycle of human is 70 years. This means the older generation dies or disappears in every 70 years and new generation having the similar behavior, life style, habits fill that gap. Many such examples we are experiencing on cycle every day in our life. Hence I can conclude with at present what ever we are experiencing in nature was being experienced by our ancestors some time in past. This may be the literary definition of cycle and sounds much philosophical.

The 2nd principle followed by wave principle is “Every price action in a cycle is harmonic in nature”. Based on these two principles Elliot gave a set of rules and guideline for constructing the price waves in a harmonic cycle. The price trends never follow all the guidelines given by Elliot. However it follows all the rules. The price and time action rules to form a wave pattern are derived from the Fibonacci ratio. Totally 8 different waves are being classified grouped into two categories

1. Impulsive waves: In this category 5 waves are placed and named as 1-2-3-4-5 .
2. Corrective waves: in this category 3 waves are placed and named as A-B-C .

The confirmation or completion of wave 2 and wave B are used by the traders to take a long and short position in a particular counter. However during the process of this journey of completing the “Impulsive harmonic cyclic” pattern the wave pattern meet with many guide line or rule violations.  These are called wave failures. Many times you would have heard from the analysts that fifth wave failure happened in so and so counter. Some time some waves used to stretch beyond its permissible guideline parameter. This phenomenon is calls wave expansion .

In our Elliot wave calculator you need to enter the high, low and current price of a stock in any time frame. It May be the intraday high, low and current price or weekly high, low and closing price or monthly or yearly high, low and closing price. The calculator will find the construction and termination points of different waves in impulsive or corrective price cycle. Based on the midpoint method of W.D.Gann it will suggest you which cycle (impulsive or corrective) is currently enforced by the market and what will be your buy or sell entry with stop loss and target. However this calculator will not give you the wave count in a particular cycle. This feature we will add it in future. Few experiments i have conducted for your understanding.

Experiment 1: on 18th September 2009 at at 11:30 a.m. I have recorded the high, low and current price of  SBI as   2161.70,2080 and 2132.50. Calculator advised me to buy at 2111.21 with stop loss 2092 for target 2158.  The current price was also at the starting point of the 4th wave expecting a correction up to 2107. At 12:04 I got a chance to enter long at 2111 and stock price have moved up after completing the 4 wave in this case the 4th wave was expanded up to 2100.

You may get the surprise to see that at 3:28 p.m. the stock touched 2157 and last trade recorded as 2154.

Experiment 2: In the trading week 7th September to 11th September  2009 reliance industry recorded  high 2239.90 on 10th September 2009  low  1976.50 on 7th September 2009 and on 11th September the closing price recorded is 2140.85.

Based on the above data the calculator suggests that current price is in impulsive cycle and buying at 2077 with stop loss 2015 for target 2227. However the current closing suggests that the price is in the 4th wave and correction till 2064 is expected. Anticipating this I have waited and got the long entry opportunity only on 17th September 2009 and 18th closing was 2102 now let us see whether the 5th wave will complete or retrace back.

Experiment 3:  in august 2009 ACC recorded high 928.80, Low 752 and closing price was 801.20. Based on this information the calculator suggested the stock is in the corrective cycle and Selling is Advisable at 887.06 with stop loss 928.80 for Target 801.17. Since the current price suggests the corrective cycle is almost over and expanded till 778 is possible. In this case taking the midpoint of wave-c as stop loss (844) one may sell for target 778. you may reconstruct the wave structure once the 844 stop loss is triggered.

September data suggest the target 778 was very much penetrated on the following days and only on 18th September the close above 845 was recorded. This suggests buying at 820 levels for the target of 920 with stop loss 778 is advisable in current trend.

How to use the calculator more efficiently?

You must have the basic understanding of the wave principle to use this calculator efficiently. However without having the same if you will follow the below mentioned procedure then also you will be in a position to follow it more efficiently.

Example: say I have taken 16th September to 18th September Nifty future price on closing basis to analyze the future movement of Nifty from 22nd September onward  keep in mind my analysis will be valid till nifty maintain within the high low range of the observation period. 16th September low 4917.30, 17th September high 5011 as my prior swing and my observation points.  18th September closing 4982 is my current price. Based on this data on the calculator I will get following output.

Elliot Wave Calculator

High

Low

Current Price

Impulsive Wave Pattern

 Wave Name Construction Termination Wave 1 4917 4952.91 Wave 2 4952.91 4930.72 Wave 3 4930.72 4976.39 Wave 4 4976.39 4948.16 Wave 5 4948.16 5006.26

Wave-5 Expansion will continue till 5022.06

Corrective Wave Pattern

 Wave Name Construction Termination Wave -A 5011 4952.91 Wave- B 4952.91 4988.81 Wave- C 4988.81 4943.14

Wave-c Expansion will continue till 4930.72

Buying is Advisable at 4952.91 with stop loss 4930.72 for Target 5006.26

Analysis of the above result: This says the uptrend will continue till 5006 and it may extend till 5022. However the current closing is 4982 which is well within the 5th wave. Then I will watch out for the 22nd Nifty opening price which was 4975. You may fee this was the starting point of wave-4 and in this cycle Nifty may fall till 4948. However this cycle of wave-4 is already completed on 18th September when Nifty future made low of 4942. Why I say so? go to the initial part of my experiment where in I have clearly say my experiment period is from 16th September to 18th September 2009. Hence I cannot ignore the event which has happened on 18th September. Since 18th September is also a part of my experiment. Now it is clear to me that I am in the 5th wave and I will buy it with target 5006 and it my extend till 5022.  On 22nd September I have achieved the target and Nifty made new high of 5048 and settle at 5023 which is the termination point of my 5th wave. Now what next?  Since my objective is achieved now I will hunt for another high and low point. In this case I will take my new high 5048 and the low which make this 5th wave to complete (i.e. 18th September low 4942) as my observation points and the closing price 5023

Elliot Wave Calculator

High

Low

Current Price

Impulsive Wave Pattern

 Wave Name Construction Termination Wave 1 4942 4982.49 Wave 2 4982.49 4957.47 Wave 3 4957.47 5008.98 Wave 4 5008.98 4977.15 Wave 5 4977.15 5042.67

Wave-5 Expansion will continue till 5060.49

Corrective Wave Pattern

 Wave Name Construction Termination Wave -A 5048 4982.49 Wave- B 4982.49 5022.97 Wave- C 5022.97 4971.47

Wave-c Expansion will continue till 4957.47

Buying is Advisable at 4982.49 with stop loss 4957.47 for Target 5042.67

Analysis of the above result: this data I have got using the 22nd September closing price. 23rd opening was 5020. This also in the 5th wave a target till 5060 is possible. After initial hour I have observed that nifty fall to 4990 which is very much near to my stop loss point. To test it whether I have entered to the corrective wave cycle I have changed my current price to 4990 keeping the high and low unchanged. This has informed me that the price is in the corrective cycle in the Wave –C. a target of 4971 and maximum till 4957 is a possibility. The wave –C completed successfully with low as 4951. since this low is not a new low I may continue with the  same high and low price.

Conclusion: In order to give an effective conclusion I will enhance this calculator in due course of time and new features will be added to it. However to make this process simpler I need your feedback, comments and your difficulty etc. feel free to post your queries to admin@smartfinance.in .