Applying Elliott Wave Theory: Predicting NVDA Example

Stay Informed and Stay Ahead: Technical Series, June 24th, 2024

Core Principles of Elliott Wave Theory

Elliott Wave Theory helps us understand how prices in the stock market move in patterns. It was created by Ralph Nelson Elliott. This theory says that market trends happen repeatedly in certain ways that we can recognize, though unexpected news or events can change forecasts/results.

Here are the main ideas:

• Wave Structure: Markets move in patterns called waves. There are two main types:Impulsive Waves: These move with the trend and have five parts labeled 1, 2, 3, 4, 5.Corrective Waves: These go against the trend and have three parts labeled A, B, and C.
• Wave Degrees: Waves come in different sizes, from big movements (like Grand Supercycles) to small ones (like Subminuettes). Each size includes smaller waves, making a pattern that repeats.
• Fibonacci Relationships: Elliott noticed that waves often follow Fibonacci numbers like 0.618 and 1.618. These numbers help predict where prices might go next.

Practical Uses of Elliott Wave Theory

1. Identifying Wave Patterns:Impulsive Waves have five parts, with Wave 3 usually being the strongest.Corrective Waves help balance out the big moves, with Wave A starting the correction, Wave B partly reversing it, and Wave C finishing it.
2. Using Fibonacci Tools:Retracement Levels: Traders use these levels (like 38.2%, 50%, and 61.8%) to find where prices might stop falling during corrections.Extension Levels: These levels (such as 127.2%, 161.8%) show where prices could go after a big move, like Wave 1.
3. Adding Other Tools:Moving Averages: These show the average price over time and help confirm if a trend is real.Relative Strength Index (RSI): This helps see if prices are too high (overbought) or too low (oversold).Volume Analysis: This looks at how much trading is happening to see if a move is strong or weak.

Flaws in Elliott Wave Theory

• Elliott Wave Theory has several key issues. It depends heavily on individual interpretation, so analysts often disagree on wave patterns. Waves can overlap, making it challenging to identify complete cycles accurately. Additionally, predicting future market movements based on past trends is unreliable because markets are unpredictable.
• Elliott Wave Theory can help identify market trends but should be used with caution due to its subjective nature. Different analysts may provide different answers using this theory. It is not ideal for short-term predictions, and large events can impact the market unpredictably.
• The theory works best with highly active stocks or markets where prices are less likely to be manipulated. It is less effective for less active parts of the market, which make up about 65% of the total market.

Elliott Wave Analysis of NVDA as of June 24, 2024 (for example only)

Current Wave Structure

1. Long-Term Trend:NVDA has been in a prolonged uptrend, suggesting it is in a larger-degree impulsive wave cycle.It is plausible that NVDA is in Wave 5 of a primary cycle, with Waves 1 through 4 already completed.
2. Intermediate-Term Analysis:Within the larger Wave 5, NVDA is likely completing an intermediate impulse wave, which is subdivided into smaller waves.

Identifying Wave Patterns

1. Impulsive Waves:Wave 1: A significant rally from the previous low.Wave 2: A corrective pullback.Wave 3: A strong upward move surpassing the length of Wave 1.Wave 4: A smaller correction.Wave 5: The final upward move, potentially in progress.
2. Corrective Waves:After completing the larger Wave 5, NVDA might enter an ABC corrective phase.

Applying Fibonacci Tools

1. Fibonacci Retracement Levels:If NVDA is in the final stages of Wave 5, retracement levels from the start of Wave 3 to the end of Wave 4 can indicate potential pullback levels. Common levels to watch are 38.2%, 50%, and 61.8%.
2. Fibonacci Extension Levels:To project the completion of Wave 5, use Fibonacci extensions from the start of Wave 1 to the end of Wave 3, then back to the end of Wave 4. Levels like 127.2% and 161.8% are key targets.

Summary for NVDA on June 24, 2024

• Current Price Movement: NVDA closed at $118.11 today, indicating it may be in the final stages of an impulsive Wave 5.

Key Levels:

• Support: Watch for support around Fibonacci retracement levels at 38.2% ($110), 50% ($105), and 61.8% ($100) if a correction starts.
• Resistance/Target: Potential resistance around Fibonacci extensions at 127.2% ($125) and 161.8% ($130).
• Next Steps:If NVDA completes Wave 5, expect an ABC corrective wave to follow.Monitor volume and momentum indicators to confirm the wave count and validate the trend.

Conclusion

• Using Elliott Wave Theory, NVDA appears to be in an advanced stage of a larger impulsive wave cycle, potentially nearing the end of Wave 5. Traders should watch for key Fibonacci levels to identify potential reversal points and prepare for the ensuing corrective phase. While it's not a perfect tool, combining this analysis with other technical indicators can provide valuable insights for making informed investment decisions.