FIN630 Assignment # 1 Solution

Solution Assignment 01
FIN 630
Marks=20
In the following graph at each highlighted point of the Elliott wave theory you are
required to:
1. State the stock trend, and
2. Suggest the possible decision of the investor regarding buying, selling or
retaining of shares. (Marks=10+10)
Solution
Each highlighted point carries 2 marks
Wave 1
1. The stock makes its initial move upwards (stock trend)
2. This is usually caused by a relatively small number of people that all of the sudden
(for a variety of reasons real or imagined) feel that the price of the stock is cheap so
it’s a perfect time to buy (investor’s decision)
3. This causes the price to rise.
Wave 2
1. At this point enough people who were in the original wave consider the stock
overvalued and take profits (retention/sell) (investor’s decision)
2. This causes the stock to go down (stock trend)
3. However, the stock will not make it to its previous lows before the stock is considered
a bargain again.
Wave 3
1. This is usually the longest and strongest wave.
2. The stock has caught the attention of the mass public. More people find out about the
stock and want to buy it. (investor’s decision)
3. This causes the stock’s price to go higher and higher. (stock trend)
4. This wave usually exceeds the high created at the end of wave 1.
Wave 4
1. People take profits because the stock is considered expensive again. (retention/sell)
(investor’s decision)
2. The stock will go down (stock trend)
3. This wave tends to be weak because there are usually more people that are still
bullish on the stock and are waiting to “buy on the dips”.
Wave 5
1. This is the point that most people get on the stock, and is most driven by hysteria.
2. People start coming up with ridiculous reasons to buy the stock.(investor’s decision)
3. This is when the stock becomes the most overpriced.
4. The stock will go up (stock trend)
5. Contrarians start shorting the stock which starts the ABC pattern.