Market Dynamism and Irrationality

Before getting into the main conversation I would like to put some light on “Elliot’s Five Wave Theory” and “Dow’s Theory-Three Phases”. Both have a relatively similar concept and if we take a closer look at the two theories then it will become clear that: Wave-1 & Wave-2 are Phase-1; Wave-3 & Wave-4 are Phase-2; Wave-5 is Phase-3.

Phase 1: Rebound and Accumulation

Phase 2: Public Participation

Phase 3: Speculation

Market is no doubt dynamic but the opposite forces which are working in the market, i.e., Bullish Sentiments and Bearish Sentiments, makes it look static. The dynamism and rationality cannot go hand in hand. The market is made and run by humans and humans are not always rational on their part, so how can the market be rational. Thus, market never acts rational.

What happened to the stock market, where the money has gone in just a few weeks,…..??

Many question like this are still unanswered. If we will see the US Dollar Index 2002 onwards, then we will conclude that how the Elliot’s & Dow’s theory came into action.

It’s not the calculation and the theories, but the studies after which those theories have been formulated are more important. The perceptions and the expectations of the buyers and the sellers are the driving forces behind those waves and phases. The market sentiments are based on the different ideas on values and prices. The conflicts and disagreements are very much natural in human beings.

Now that the investors are very much cautious and are excessively careful, thus the market is suffering. It will take some time to gain the confidence of the investors but now as it’s the time for the completion of the final phase or final wave. So, very soon the market will make up all the losses good and the market will recover in terms of turnover and the bull phase will resume soon.

“Market is based on 80% speculation and 20% calculation.” So, let’s hope that the irrationality of the investors will take the market in bull phase very soon.

Any comments and suggestions are welcomed.