Every Big Turn In GameStop Stock Price Followed Elliott Wave Patterns!
Even before I start writing this story, I can see critics saying that all this analysis is after the fact. Well, I can show you plenty of examples where the technique that is being discussed below was able to anticipate key pressure points before the moves actually happened. With that out of the way, let us marvel at how crowd behavior made the seemingly random and erratic price movements in GameStop (NYSE:GME) actually follow a predictable pattern.
I am assuming that the reader has a basic understanding of the Elliott Wave Theory which states that markets move in cycles of five waves up followed by three waves down. We start from a significant low, which is at $2.57 seen on 3 April 2020. The first screen grab from Thomson Reuters is presented below, where you can see today’s date as well as the year’s low pointed out with arrows.
In the next chart, you will see that the first of the 5-waves of the bull cycle went from $2.57 to a high of $159.18 seen on 25 January 2021, a mere 4 days ago! You will also see that once wave 1 was completed, that move was corrected by wave 2, which barely exceeded the classic 61.8% Fibonacci retracement level. A knowledge of Elliott Waves would have alerted you to the possibility of a new up move from around this level, although no-one could have anticipated the scale of the move that actually happened.
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Elliott Wave theory states that there is a tendency for one of the three impulse waves (the waves that are moving in the direction of the trend) to be extended, which is another way of saying that it will be of extraordinary length. I typically judge a wave to be extended when it travels well past a 161.8% relationship to a prior impulse wave. This surmise is my own, gleaned from years of being in the market. In the case of GameStop GME , to the delight of Redditors and the dismay of some Hedge Funds, the short squeeze sent the third wave to a dizzying high of 200% of wave 1.
Thus, while wave 1 increased the share price from $2.57 to $159.18, a move of $156.61, we see that wave 3 was 200% of 156.61, of a rise of $313.22 from the wave 2 low of $61.13. The actual high for wave 3 was at $380.
Once the third wave suffered from exhaustion, we got a brief correction as wave 4, which provided another opportunity to buy, as the stock dipped to close to the 38.2% retracement of wave 3. This is shown in the next chart.
When we get an extended third wave, it is typical for wave 5 to attempt the 61.8% measure of the distance from point zero to the top of wave 3. The next probable target is often equality to wave 1. In the case of GameStop, there was no stopping the rally until it reached to within a handshake of the 61.8% measure. You have got to see this chart below to believe it!
Anyone who was long the stock should have planned on selling it when it was approaching this target. There was an increasing likelihood of a correction when the fifth wave ended, and who would want to be buying up there, given the already crazy moves that had taken place! We got the inevitable correction that promptly sent it down to close to a 78.6% retracement of the entire bull cycle.
OK! Now it is time to study the more recent moves to see if there are any clues. You will of course be aware of the class action suit against Robinhood and that traders might get a chance to trade GameStop again on this platform. What will be the action of these traders? Will they be selling at once, or will they be buying afresh? The price action suggests that this correction will likely become a complex pattern, what Elliott Wave practitioners will recognize as a double-three pattern. This pattern is basically two sets of three-wave moves, separated by an X wave that goes up. If this assumption proves to be correct, then we are in the second set of three waves, actually in wave c of the three waves. The chart below illustrates this approach.
If this is going to be the case, then wave c can end at one of the targets shown below. It is also pertinent to state here that all ‘c’ waves will be made up of 5 smaller waves, and we can see that we are already in the third small wave down. So, if a trader can spot the 4th and 5th waves, and especially if the 5th wave ends at one of the targets shown, then he should understand that there is a high probability of seeing another rally from there. This is how we use Elliott Waves to identify low-risk entry points! Of course, the markets could turn earlier than anticipated, but should it reach where we would like to enter the trade, that will give us a much higher chance of success, and our stop-loss orders could be placed so much nearer to our entry level.