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Impulse Wave Pattern: An Elliot wave pattern to study Stock Market Behaviour in Indian context.

Sibanjan Mishra Email- sibanjan@gmail.com Lecturer, Institute of Business and Computer Studies, Siksha O Anushandhan University, Bhubaneswar, Odisha Dr.Bimal Chandra Mishra Reader in Commerce, DD College, Keonjhar, Odisha

stock market. Academicians have tried to model the Elliot wave concept with advanced programming and computing techniques like neural networks. Fibonacci sequence. In this paper an attempt has been made to incorporate the rules mentioned in Neely’s “Mastering Elliot Wave” regarding the Impulse Wave without trying to model them. Span of data is from June 1996 .Impulse Wave Pattern: An Elliot wave pattern to study Stock Market Behaviour in Indian context. Abstract This paper aims to study the presence of Elliot wave pattern (Impulse Wave) in Indian Stock Market. Nifty JEL Classification: G12. however the inferences stay poor. Using reversal amount methodology of various levels an attempt is been made to study the market behavior and explore trading opportunities. The results shows that if we strictly follow the rules specified. Elliot wave pattern (in this paper only Impulse Wave) are evident and a trader can easily guide his trades in the direction of mass psychology.December 1998. as the Elliot wave principle is based on a highly structured rule base and the researchers might not be able to incorporate all the required rules to conclude at a wave pattern. thus achieving trading success. fuzzy logic. G17 . genetic algorithm. Keywords: Elliott’s theory. The data relates to the NSE’s Nifty. technical analysis.

However the downward impulse starts at. The study of Elliott Wave Principle is an exercise in probability. wave development in stock markets takes place in two modes: motive/impulse and corrective. It reveals that mass psychology swings from pessimism to optimism and back in a natural sequence. a major low and trend’s upwards in the direction of the dominant trend prevailing in the market. An impulse is characterized by five waves. (or corrections) moving against the larger trend. creating specific and measurable patterns. or just after a major high and trend downwards in the direction of the major trend. or just after. . three of them moving in the direction of the larger or dominant trend and two retracements. It helps in identifying repeating patterns in prices. where changing investor psychology is recorded in the form of price movements. As per the Elliot wave theory. figure’s out where we are in those repeating patterns today and predict where we are going next. Impulses may be in the form of upward impulse or downward impulse.Introduction The Elliott Wave Principle is a detailed description of how investors and traders behave in the stock market. A upward impulse will always start at. It occurs in the financial markets.

they can expect wave 5 to be a strong move up. the strongest move for a downward impulse is wave 3.The most common shape of an impulse wave varies considerably. These variances are the result of an entirely different trading psychology of the trading public. the trader would expect wave 5 to move down a similar price distance to wave 1. waves 2 and 4 are very similar in price and time and wave 1 is generally a short. waves 3 and 5. Wave 5 is generally steeper than wave 3. Note that in both rising and falling markets. in a falling market. A upward impulse has two strong moves. similar to wave 3. considering that one market is rising and the other market is falling. Psychology of the traders behind each of the Wave . However. sharp move with the larger trend. depending on the time frame and the direction of the pattern (upward or downward). In comparison. which makes sense. When a trader has identified the first four waves of an impulse in a rising market. Waves 1 and 5 move a similar price distance.

by . However. This wave tends to be weak because there are usually more people who are still bullish on the stock and are waiting to buy in the valleys. At this point. People take profits because the stock is considered expensive again.Wave 1. which starts the ABC pattern. Wave 3. This is the point that most people get on the stock and is most driven by hysteria.This is usually the longest and strongest wave. so it is a perfect time to buy. This causes the stock’s price to go higher and higher. This causes the stock to go down. This is when the stock becomes the most overpriced. This wave usually exceeds the high created at the end of wave 1. Wave 5. The stock makes its initial move upward. Wave 4. enough people who were in the original wave consider the stock overvalued and take profits. This is usually caused by a relatively small number of people that all of the sudden (for a variety of reasons real or imagined) feel that the price of the stock is cheap. Wave 2. The stock has caught the attention of the mass public. the daily high and low values of NSE’s Nifty from June’1996 to December ‘1998 is considered. Contrarians start shorting the stock. Research Methodology To study the existence of an upward or a downward impulse pattern. The values are then smoothed on a daily basis. Objective To study existence of Elliot wave majorly Impulse pattern in Indian stock markets. More people find out about the stock and want to buy it. the stock will not make it to its previous lows before it is considered a bargain again. This causes the price to rise.

The reversal amount is the amount of price movement required to shift the trend either upward or downward in a chart. Three of the five segments must be thrust in the same upward or downward direction. . We can modify it to a ten percent shift also. Impulse behavior of the market action can be considered only if the following set of rules is satisfied: 1. The fourth segment must never retrace all of the third. 4. Five adjacent segments must be present which meet the structure series requirement of a trending impulse pattern. For example. using the formula (High+Low)/2.2% of the fourth segment pricewise. Once a zig zag line is fitted to the price chart we can group them into five monowaves (a monowave is the movement of a market starting from a change in price direction until the next change in price direction occurs) to observe whether an impulse pattern exists or not. The idea behind taking the average values is to filter out the entire anomaly’ present in the open or close values. 2. Immediately after the first segment. 6. a minor move in the opposite direction of the third and same direction of the second must take place (segment four). The fifth segment will always be longer than the fourth. the third does not have to be the longest but it can never be the shortest of the three segments. say five percent. 3. Immediately after the third segment. a zig zag line is fitted to decipher the price action in the market. The third segment must be longer than the second.deriving the average values of the index. a minor move in the opposite direction takes place. 5. This condition is used on charts that only take into consideration price movement instead of both price and time. the zig zag line will only shift its trend in either side. When the fifth is shorter than the fourth it is termed as a failure. With respect to the average values. third and fifth. When the vertical price distances are measured for first. if the previous price moves by. This segment can never retrace the entire first. but only has to be 38. The zig zag line is calculated using the concept of Reversal Amount. 7.

At 10% Reversal Amount Figure 1 Table 1 Impulse Wave Pattern June 96 – Dec 98 Conditi on 1 Satisfie d Conditi on 2 Satisfied Conditi on 3 Unsatisfi ed Conditi on 4 Unsatisfi ed Conditi on 5 Unsatisfi ed Conditi on 6 Satisfied Conditi on 7 Unsatisfi ed Table 1(a) Impulse June 96 – Dec 98 Condition 1 Condition 2 Condition 3 Explanation Five adjacent segments (Wave 1. 5) have thrust in the same downward direction.5) are present Three of the five segments (Wave 1. This segment can never .The software used for calculations and charting the data is Metastock.4. Immediately after the first segment (Wave 1). a minor move in the opposite direction takes place (Wave 2).3. 3. Chart Analysis and Interpretation.2.

but only has to be 38. To get trading opportunities with a 10% reversal amount. When the fifth is shorter than the fourth it is termed as a failure. Such situation describes a pessimistic social mood. The market is under some type of corrections (sideways movement). Thus traders shift’s focus on short term trading opportunities at 5% reversal amount. Wave 4 measuring 333points has retraced all of the 193points covered by the Wave 3.2% of wave 4 (333points) i. the fundamentals factors affecting markets need to be boosted. That means there will be no outburst in the price action.314points Wave 3 . a minor move in the opposite direction of the third and same direction of the second must take place (segment four). .193points Wave 5 . Wave 5 which is of 325points is more than 38. it is clear that the market pattern is certainly not a trending impulse. Condition 4 The third segment must be longer than the second. Wave 2 (355 points) however has retraced all of Wave 1 (314 points). whereas Wave 3 needs to be the longest. The fifth segment will always be longer than the fourth. For an Impulse Wave all the conditions need to be satisfied. second and third.2% of the fourth segment pricewise. When the vertical price distances are measured for first.325points Condition 5 Condition 6 Condition 7 Implication: From the above analysis of the chart at 10% reversal amount and its characteristics. 127points. Wave 1 . The fourth segment must never retrace all of the third.retrace the entire first. Immediately after the third segment. Under this scenario there is no scope to generate trading opportunities in intermediate to long term ranging from six months to two year. measures only 193 points. the third does not have to be the longest but it can never be the shortest of the three segments. Wave 2 measures 355points. It is a 5th wave failure.e.

At 5% Reversal Amount Figure 2 Table 2 Impulse Wave Pattern June96Dec96 Dec96Conditi on 1 Satisfie d Satisfie Conditi on 2 Satisfied Satisfied Conditi on 3 Satisfied Satisfied Conditi on 4 Satisfied Satisfied Conditi on 5 Satisfied Satisfied Conditi on 6 Satisfied Satisfied Conditi on 7 Satisfied Satisfied .

When the fifth is shorter than the fourth it is termed as a failure. Immediately after the first segment (Wave 1).3% of Wave 1 (219 points). This segment can never retrace the entire first. Wave 4 measuring 79points has not retraced all of the 171points covered by the Wave 3. 5) have thrust in the same upward direction. whereas Wave 3 measures 171 points. The third segment must be longer than the second. but only has to be 38.219points Wave 3 -171points Wave 5 .2. Immediately after the third segment. a minor move in the opposite direction takes place (Wave 2). The fourth segment must never retrace all of the third. Wave 2 (60 points) however has retraced 27. Wave 2 measures 60points. Wave 1 . Thus It is not a 5th wave failure. The fifth segment will always be longer than the fourth. a minor move in the opposite direction of the third and same direction of the second must take place (segment four).3.Dec98 d Table 2(a) Impulse June96Dec96 Condition 1 Condition 2 Condition 3 Explanation Five adjacent segments (Wave 1.152points Condition 4 Condition 5 Condition 6 Condition 7 .2% of the fourth segment pricewise. third and fifth. When the vertical price distances are measured for first. 3.5) are present Three of the five segments (Wave 1.4. the third does not have to be the longest but it can never be the shortest of the three segments. Wave 5 which is of 152points is longer than wave 4 (79points).

When the vertical price distances are measured for first. Table 2. .2% of wave 4 (200points) i.3. Immediately after the third segment. 2. This segment can never retrace the entire first. Wave 1 . Wave 2 (76 points) however has retraced 30. It is beneficial for the investors. Wave 5 which is of 96points is more than 38.4. 5) have thrust in the same downward direction. whereas Wave 3 measures 321 points. second and third. Immediately after the first segment (Wave 1). Wave 2 measures 76points. The market strictly follows the highly structured model of Elliot Wave Principle. It is a 5th wave failure.250points Wave 3 .5) are present Three of the five segments (Wave 1.96 points Condition 4 Condition 5 Condition 6 Condition 7 Findings: 1. When the fifth is shorter than the fourth it is termed as a failure. (at 10% reversal amount the market has no trading opportunities.Table 2(b) Impulse Dec96Dec98 Condition 1 Condition 2 Condition 3 Explanation Five adjacent segments (Wave 1. 3. however at 5% reversal amount.e. who do not want their money to be idle for a longer period of time. but only has to be 38.5% of Wave 1 (250 points).2. Evidence of Elliot Wave Pattern at 5% reversal amount (Impulse Wave). The fifth segment will always be longer than the fourth.2% of the fourth segment pricewise. the third does not have to be the longest but it can never be the shortest of the three segments. The fourth segment must never retrace all of the third. clear tradable impulse pattern were witnessed). The third segment must be longer than the second. 76points. Wave 4 measuring 200points has not retraced all of the 321points covered by the Wave 3. a minor move in the opposite direction takes place (Wave 2). 3.321points Wave 5 . a minor move in the opposite direction of the third and same direction of the second must take place (segment four).

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