TECHNICAL ANALYSIS & ELLIOTT WAVES THEORY

Technical analysis is commonly defined as the study of financial markets applied to charts, i.e. the studies’ of past price fluctuations (of a given security or index, or currency) in order to obtain projections of future price movements the more close as possible to the next oscillation. It does not take into consideration income statements, balance sheets, rumors and / or market news. The forecasting technique par excellence is the Theory of Waves RN Elliott (Elliott Wave Principle): this technique is not well known (and applied) in Europe but widely used in Anglo-Saxon countries, the home of technical analysis. Our forecasting is mainly based on the “Elliott Wave Theory”, applying the principles governing the theory and structures, indicating the strategy and the basic elements necessary for its operative application on several markets (Italian and foreign shares, indices, derivatives, commodities and forex …). On this theory much there is much talk but very little known; applied properly its precisely forecasting market movements and allows you to anticipate with precision target prices (either upward or downward) on different “time frames” (forecasts and projections can be implemented with the sole observation of the graph without the need for indicators, oscillators, news or anything else normally associated analysis techniques traditionally used). The technique is very unusual and puzzling in the analyst / trader personality suited to their assimilation … A technique that enable you “read” the market, the most precisely, achieving consciousness on magnitude and essential simplicity of market structures (the user helps to make the Theory big) . Applying this technique you will discover markets do not move randomly but – on the contrary – follows mathematical development of extreme precision and Beauty … *** Many of you will certainly wonder why market movements had an underlying regularities hidden by the apparent randomness, regularity which is often repeated in multiple scales. Such regularity is not traceable at first sight, intuiting the rules. The price dynamics are almost always interpreted according to the rules of logic and mathematics and classical dynamics (in some ways with quite satisfactory results although with different gaps and many uncertainties) that do not resolve doubts and indeed continually raise the possibility of “predict” future price movements. In all these dynamics, with events apparently related to that set of imponderables that improperly call ‘chance’, there are laws that create a close relationship between ‘early’ and ‘end’, between bullish and bearish dynamic. Noting the similarity between the market dynamics and various events in nature, it is simple to note that there are mechanisms that generate geometric regularities present in various forms of nature, in their molecular structures (DNA), in galaxies (spirals) … high functional efficiency and a considerable degree of adaptation: these can be understood by observing and studying them by the laws of irregular, harmonious and ordered chaos and not via the “old” rules of classical geometry. In the daily work of market research we have often had occasion to observe the precision that have most of the graphical structures: their seeming strange and disordered morphology, there is a logical order that goes beyond a superficial observation instant, with a distracted gaze. But that turn out to discerning eye (and trained) to recognize the various movements framing them with the classical technical analysis and then with the Elliott Wave Theory. Often even the financial events (oscillations) that sometimes we try to frame schemes, logical-mathematical and economic trends seem to present a totally chaotic and unpredictable, but instead it is constructed with rigid rules and high predictive ability. The first impact of fractal geometry, chaos ‘ordered’ and the complex dynamic systems often only resulted in a feeling of wonder and curiosity. Deepening and delving into this new mathematical science you realize that this is certainly the foundation and future of every scientific inquiry, not only in the purely mathematical sciences, but also financial ones, illuminating them with a new light.

<<FRACTALS >>

The new term fractal was coined in 1975 by Mandelbrot in his book :

“Les objects fractals: shapes, hazard et dimension” to describe certain behaviors that seemed to have a mathematical pattern “chaotic.” The term fractal is derived from the Latin fractus (broke, broken); the mathematical fact considers the fractal images as objects of fractional dimension (hence the name). Fractals appear in the study of dynamical systems and chaos theory, and are often described by very simple equations, written with the help of complex numbers (or recursive algorithms). There are fractal linear (whose generatrix equation contains only first-order terms, and therefore there is an algorithm of a linear type) and fractal non-linear (generating the equation is of order greater than 1; one of these is based on the quadratic transformation, and is very special as it can ‘produce many forms / variants from a geometric algorithm is rather simple and closely related to today’s chaos theory) [third type of fractal, random sayings are not covered in the application of Elliott Wave theory.

“PILLS on Elliott Wave Theory”

Ralph Nelson Elliott in the early 1900’s realized that the seemingly chaotic evolution of financial markets followed a trend instead of “mathematical” logic, a sequence that he was able to identify and define: the markets move with fluctuations due to a MODEL of development consisting of 8 waves (1-2-3-4-5 + ABC), a model that is repeated endlessly, the smaller time frames (tick-by-tick) the time frame further. Completed one cycle (1-2-3-4-5-ABC) a new sequence is ready to begin.

At whatever scale you look at it, the model will always have the same global character (the basis of self-similarity is a particular geometric transformation called dilation that allows you to enlarge or reduce a figure leaving unchanged the shape). Some of the many special features of the Fibonacci numerical series constitute the “structure” supporting the theory. Fibonacci numbers often used in the practical application of mathematical theory are: 0,236 0,382 0.50 0,618 1 1,382 1,618 2,618 4,236. Some of these numbers are used to determine the likely targets / objectives of the pulses (trend directions), others to determine targets / objectives of the corrections. These numbers are ALWAYS mathematical relations and proportions between the various waves. [The numerical sequence identifies the impulsive waves=trend direction, while the alphabetical sequence indicates corrective waves; the corrective waves are retracements of the entire preceding impulsive movement (numerical order)]. The main definition / identification of the mathematical relationships between the various waves are known as “Fibonacci numbers” and applied by RN Elliott Theory to financial market fluctuations in the dynamical system on different time scales becomes mathematical “fractal”, thus anticipating by about 40 years (and without the aid of computers and personal computers) the discovery of B. Mandelbrot on fractal geometry. Probably R.N. Elliott was aware (albeit indirectly and in a transient) studies of the French mathematician Gaston Julia who first described the fractal square in 1918 and research on the behavior of the transformation g (z) = z2 + c, g (z) made by the other great contemporary mathematician Pierre Fatou, studies and researches that were completely forgotten until the revision by Mandelbrot and then developed enormously with the advent of computers. The firm of Julia, Fatou and Elliott is significant and particularly impressive because there were no electronic calculators and then they could rely solely on their intellectual ability and mathematical visualization processing.

INTRODUCTION

All financial markets “liquid” and not regulated are nothing if not a manifestation of mass psychology operating in each market and that sways between optimism and pessimism, creating a sequence of “patterns” and oscillations – transposed on the graph – we will call “waves” (a practical example of a regulated market: EMS for currencies that was in effect in the years 1980/1995 …). The “Elliott Wave Theory” is based on the notation that human behavior follows clear trends / oscillations rhythmic, cyclical, and that is the HUMAN BEHAVIOR determining, for example, the performance of financial markets, leading to the conclusion that is mass psychology that “mold” the events, and not vice versa, i.e. “events” are not impelling people to act one way or another, as is still generally assumed … The first to have carried out a systematic survey of the market according to this perspective is precisely R. Nelson Elliott. Elliott (1871/1948) discovered that the UNIVERSE is governed by definite laws, any manifestation of human or natural phenomenon is due to a cycle governed by strict rules. Therefore, although fluctuations in financial markets follow a “recurrence” graphics, a graphical model, allowing a development “regular” and “harmonious” oscillations within the same recurring sequences determined by precise graphic mathematical parameters, due to a single pattern that is repeated sequentially to infinity, the smallest time frame (the “tick by tick”) to the time frame over … [To understand what kind of “art” is this theory – not only for its mathematical basis but also for its practical application – it should be remembered as the discovery of Elliott on the fractal nature of the processes in nature and in finance is much earlier than Mandelbrot and as usual there is a use of such “mathematical model of Elliott = Theory” in physics]