Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What Does the Elliott Wave Theory Say About Small Cap Stocks?

By

After a typical Fibonacci retracement from October through March, here's where we are in the cycle.

PrintPRINT
The IWM ETF represents the Russell 2000 small cap growth index. This ETF peaked at 84.66 this spring and has fallen in 74s before the recent two-day bounce. What we are looking at is a possible 5 wave rally from October into March, and now a possible 3 wave correction (Wave 2) of 38% - 50% of that entire 5 wave rally. Elliott Wave Theory is broken down into 5 wave and 3 wave movements in the markets and individual stocks, where a full 5 wave pattern in a bull market is obviously bullish and a 3 wave pattern is corrective of the prior 5 wave rally.

The small cap index peaked with the reset of the market in March of this year, interestingly about three years into the bull market. The first low so far was a typical 38% Fibonacci retracement of the rally from October through early March. The next low pivot would be a 50% pullback. This would place the IWM target around 72.10 plus or minus some pennies.

In the 72s, that would represent a C wave decline that is equivalent to 161% of the A wave decline in the chart below from the 84.66 highs. ABC declines are common in a bull cycle and are designed to throw investors off the back of the bull. Normally the C wave is where investors finally throw in the towel near the bottom, as we saw in early October 2011. I wrote an article on October 3, 2011 last year (see Are Silver and Copper Prices Predicting a Global Recession?), one day before the bottom, outlining the reasons why a massive rally was about to ensue. Will we see the same thing now?

Well, this correction could indicate one more possible decline of 4% - 5% in the worst case should this projection in the chart below be fulfilled.

That said, the 38% retracement we have had so far would also qualify as a Wave 2 low last Friday. Therefore, this outline is to give you some indications of what to watch in case we drop further and pierce those lows. If we can hold this rally and rebound smartly again, then the C wave of the ABC is likely over and we can get an all clear to be more aggressive.


Click to enlarge

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE