In this chart, we see clearly the three waves of market reaction to surprise shocks in the world of finance. I am referring to three waves of orders flowing through the futures exchanges, not Elliott Waves. I have marked each wave near its end above.Elliott Wave Theory
There are also larger waves on higher time frames. While I am not an adherent to Elliott Wave Theory, I acknowledge that it may have some validity. It certainly has many devotees. I have a an excellent book on the subject that was graciously gifted to me by the author. However, it is so incredibly complex (waves within waves, etc.), and so subject to interpretation, that it tends to be more art than science, in my opinion. It also takes very practiced practitioner to be good at it. The waves I am referring to in this chart are not Elliott Waves.
Three Waves of Orders
Phantom of the Pits refers to three waves in his book, Phantom's Gift. This chart shows three waves of selling today as different market participants reacted to the various data.
- Wave #1 occurred today when the data was released and traders responded immediately to the data. This wave often occurs as professionals, and especially floor traders, react immediately to breaking news.
- Wave #2 in this chart occurred when the stock market opened and investors were able to respond to the data. This wave also often occurs as orders flow into the pits from those who have belatedly heard about the recent news.
- Wave #3 occurred in this chart when retail investors (the general public) began to catch wind of market sentiment and began to react. Often, this will occur when brokers call their clients and make recommendations. These retail investors will then respond to market sentiment based upon their agreement or disagreement with brokers. This wave often occurs when the public hears of the recent news, and is often the strongest wave.
Note that often, wave #3 occurs just at or near the market apex or, in this case, the nadir of the market's reaction to news. Sadly for most retail investors, it is often the turning point of the market.
Phantom of the Pits refers to the three waves in his book, Phantom's Gift, but doesn't explain in great detail. He does say that the safest and most reliable place to enter the market is at the earliest stages of wave #2. He also implies taking profits on wave #3 and positioning against the public by fading the market in wave #3, which is when volume is the strongest but will soon lose steam. This may seem like a contradiction, but it's not. The third wave, while strong and often causing new highs or lows, is also the thinnest. This is the best time to prepare for a counter-trend move or reversal. I'm not familiar with any books on the subject of this phenomenon of the three waves of orders, except Phantom's Gift. If you do, please contact me by writing a comment attached to one of my posts in my other blog. Thanks!
Phantom of the Pits refers to the three waves in his book, Phantom's Gift, but doesn't explain in great detail. He does say that the safest and most reliable place to enter the market is at the earliest stages of wave #2. He also implies taking profits on wave #3 and positioning against the public by fading the market in wave #3, which is when volume is the strongest but will soon lose steam. This may seem like a contradiction, but it's not. The third wave, while strong and often causing new highs or lows, is also the thinnest. This is the best time to prepare for a counter-trend move or reversal. I'm not familiar with any books on the subject of this phenomenon of the three waves of orders, except Phantom's Gift. If you do, please contact me by writing a comment attached to one of my posts in my other blog. Thanks!
