elliott wave theory of wave 1 2 3 4 5 in a nutshell
markets in a nutshell
Let me explain this a little. Indicators such as MACD and EWO are momentum indicators and RSI is a strength indicator (it's in the name Wink )
As the price is rising through wave 1, the market is hesitant about a rise, so selling pressure is still present and early buying pressure is beginning to show itself. This creates a small bump in the underlying indicators.
Then wave-2 starts and people who think it's only a correction sell hard. This is why wave-2's are usually much deeper corrections. This also makes the indicators return to where they came for the most part.
Enter wave-3.. This is where many people begin to see the buying pressure, and in fear of missing the train they panic buy "before it's too late". The causes a large spike in the indicators and is resposible for the massive power of 3rd waves.
Wave-4 begins, and with a reluctance to sell, the market meanders sideways for a while. Sometimes twice as long (in time) as the wave-2. The stability makes some less experienced traders sell, and the lack of buying (after all, we must be at the top, right?) allows the indicators to return to a more neutral state, EWO returns to the zero line which by this point, is way down there.
Once we break up from the 4th wave, those who sold are essentially tricked into buying back. By this point, asks are pulled in search of higher selling points. The price moves very easily with much less force, and the volumes are much lower compared to the 3rd wave. This keeps the indicators from making that big spike we saw in the 3rd wave. That combined with the lower starting point and weaker momentum creates the divergence that signals a topping situation (higher price high with lower indicator high). Then when the smart money has squoze all they can from this run, they hammer the price lower in the larger degree wave-II and it all cycles like that... In both directions, over and over and over...
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