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ELLIOTT WAVE


QQQQ Set To Fall

03/04/08 11:20:25 AM
by Alan R. Northam

According to Elliott wave theory, a stock or market trends in a certain direction in five waves with symmetrical triangle patterns forming as wave 4. Once wave 4 is complete, the stock or market continues in the direction of the trend to complete the final wave, a fifth wave.

Security:   QQQQ
Position:   Sell

According to the Elliott wave theory, when a stock or a market is trending in a certain direction, it does so in five waves. Wave 1 will move in the direction of the trending stock or market, wave 2 will be a corrective wave, wave 3 will be a trending wave, wave 4 will be a corrective wave, and wave 5 will be the final trending wave. In addition, corrective wave 2 usually forms an ABC corrective wave pattern and corrective wave 4 usually prints out a different pattern on the chart from that of wave 2. Further, when a symmetrical triangle wave pattern appears on the chart, it usually forms as part of a wave 4 corrective pattern. One hard rule according to the Elliott wave theory is that the low of wave 1 and the high of wave 4 cannot overlap.

In Figure 1, I have shown the price chart for the technology ETF (QQQQ). QQQQ has printed out a textbook example of the first four Elliott waves. Wave 2 has formed a classic ABC corrective pattern and wave 4 has printed out a classic symmetrical triangle waveform. Elliott wave theory defines a symmetrical triangle as having five waves (a, b, c, d, and e). It now looks as if the symmetrical triangle waveform is complete and completes corrective wave 4. With wave 4 now complete, wave 5 down should now be under way. Therefore, I would expect QQQQ to immediately break down below the lower upward-sloping support line of the triangle formation and continue to move lower.

FIGURE 1: QQQQ, DAILY. This chart shows a symmetrical triangle pattern.
Graphic provided by: StockCharts.com.
 
Once QQQQ breaks down below the triangle pattern, this ETF should then continue to sell off to around the $38.00 area. This target price is calculated by subtracting the low of wave 1 ($48.80) from the late October high of $55.01. This difference is then subtracted from the high of wave 4 ($44.53) that results in a price target of $38.32. Another way to visualize this target price for wave 5 is that wave 5 falls in price by the same amount as wave 1. According to Elliott wave theory, there are other price targets for wave 5 as well. In some instances, wave 5 may only fall by 0.618 times that of wave 1 and at other times it may fall 1.618 times that of wave 1, among others. It is even possible that wave 5 could extend into five waves itself and that would take QQQQ to a much lower price. However, in the majority of cases the price change during wave 5 is equal to that of wave 1, and this is the highest probability of a price target for wave 5 until proven otherwise.

In conclusion, it appears that QQQQ has now completed four out of five waves, according to Elliott wave theory. Wave 5 now appears to be under way and is confirmed by a break down below the symmetrical wave formation. The expected target price for QQQQ is $38.32. However, the markets seem to like round numbers, so I would modify this target price to $38.00.



Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

Garland, Tx
Website: www.tradersclassroom.com
E-mail address: inquiry@tradersclassroom.com

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