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Elliott Wave Theory

 

Why stock market exits?

Business is the cornerstone of any economy. Almost every large corporation started out as a small, mom-and-pop operation and through growth, became financial giants. Wal-Mart, Dell Computer, and McDonald’s had combined profits of $10.34 billion this year. Wal-Mart was originally a single-store business in Arkansas. Dell computer began with Michael Dell selling computers out of his college dorm room. McDonald’s was once a small restaurant no one had heard of. How did these small companies grow from tiny, hometown enterprises to three of the largest businesses in the American economy? They raised capital by selling stock in themselves.

When a company is growing, the biggest hurdle is often raising enough money to expand. Owners generally have two options to overcome this. They can either borrow the money from a bank or venture capitalist, or sell part of the business to investors and use the money to fund growth. Taking out a loan is common, and very useful – to a point. Banks will not always lend money to companies, and over-eager managers may try to borrow too much initially, wrecking the balance sheet. Factors such as these often provoke owners of small businesses to issue stock. In exchange for giving up a tiny fraction of control, they are given cash to expand the business. In addition to money that doesn’t have to be paid back, “going public” [as its called when a company sells stock in itself for the first time], gives the business managers and owners a new tool instead of paying cash for an acquisition, they can use their own stock.

 

What is technical analysis?

Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is "likely" to happen to prices over time. Technical analysis uses a wide variety of charts that show price over time

Technical analysis refers to the use of price patterns and volume to predict future valuations and trends within the stock market. Pure technical analysis ignores fundamentals, or the underlying economic conditions of the companies themselves. This strategy reasons that stocks are influenced by the behavioral patterns of investors, which have become predictable over time. Technical analysis, like all theories related to the stock market, will always spark controversy.

Technical analysts are traditionally referred to as chartists, who gauge price action and predict future movement by analyzing charts. Further, volume is used as an additional indicator to support these predictions. Volume refers to the amount of shares or capital that trades hands related to a particular investment and time frame. Price charts, combined with heavy volume, will produce and confirm familiar geometric patterns.

Typical chart patterns may be described as head and shoulders, flags and pennants, hammer, shooting star, engulfing, piercing, wedges and triangles etc. These patterns always feature lines of resistance or support that behave as barriers for share prices to cross over and are used to predict trend.

The Trend is Your Friend

Technical analysis is used to identify trends and set off signals to investors whether to sell or buy into the market. Trend relates to the pattern of investments moving in one general direction. Assets that are behaving with a bullish trend are set to gain value, while assets following a bearish trend will lose value. Stock charts featuring higher highs and higher lows characterize bullish trends. Investments making lower lows and lower highs against resistance points are demonstrating a bearish trend.

Investments will not continue upwards towards infinity, neither will investments fall to zero with regularity. Followers of technical analysis will also use the technique to identify "reversals" in trend, which mark switches between bullish and bearish sentiment.

Investor Behavior

Technicians believe that charts, trends and patterns are the end result of predictable human psychology. For example, support levels at Rs.50 per share for Company X occur because individual investors reason that they will buy "if this thing drops to Rs.50." Meanwhile, resistance levels emerge when the very same investors target Rs.100 to sell out at a profit. Technicians reason that the stock market is controlled by irrational, yet regular investor behavior that repeats itself historically.

Investor behavior is deemed to be irrational because making a decision to buy or sell at a certain price point, irrespective of fundamentals, makes little economic sense. Further, investors always panic and liquidate at the bottom of a market, which is the worst time to do so.

 

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