Initially I am going to go into a little theory or at least speak anecdotally about my experience over many years in the markets and then I am going to look at BLD as a classical example of price pattern to support my views.
In Elliot Wave theory - to which I am a great subscriber – the greatest profits are made on Wave 3 and that is what we have seen over the last several months. Some may argue that it has been a Wave 5 – but again it is important to look at both a daily and weekly chart – they will give you a different perspective and that in itself is a good thing.
Wave 3 is a long run but it eventually tends to run out of steam as buyers become less keen and sellers want to lock in profits – in broad terms. Some players are shrewd and get out at the top of Wave 3 and others follow the retracement right down – it takes some traders longer than others to react. This process of early buyers bailing out and anxious late entrants buying in makes for a Wave 4. Wave 4 finds a bottom when the equilibrium is found between buyers and sellers – neither have the upper hand.
When Wave 4 approaches completion, some buyers eventually believe that the stock has been oversold and move in which creates the next move up – which eventually becomes Wave 5. But more often than not Wave 5 recovery is somewhat less certain than Wave 3 with a great deal of vacillation. Buyers are not quite as ferocious and as the price recovers some sellers who could not exit on the earlier pull back from Wave 3 take that opportunity to exit. So we can sometimes see a great deal of see-sawing.
These points are well illustrated in the BLD daily chart below – especially the vacillation we are now seeing in the stock.