Stock Market analysts are constantly trying to predict the market to determine when corrections and bull markets will occur. If an analyst or investor can accurately predict either of the two, they may stand to gain a profit.
The Elliott Wave Theory is one method that investors use to predict the market. The stock market may seem spontaneous and impossible to accurately predict. While to an extent this is true, the Elliott Wave Theory established that the market tends to move in a pattern reflective of the collective investor psychology - cycling between periods of optimism and pessimism.
This pattern is called the 5-3 move. Five waves move in the direction of the main trend (five wave impulse phase) followed by three waves in a corrective trend (three wave corrective phase).
In a bull market (the stock market is on the rise and the conditions of the economy are generally favorable), five waves trend upward (impulse phase) and the correction trends downward (corrective phase) .
Here, during the impulse phase, waves 1, 3, and 5 represent large rises in the market, while waves 2 and 4 represent small drops in the market. During the corrective phase, waves a and c represent larger drops in the market while wave b represents a small rise. Overall, there is a net market gain.
In a bear market (the stock market is receding and the conditions of the economy are generally unfavorable), the pattern unfolds in reverse: five waves downward (impulse phase) and three waves upward (corrective phase).