Declines

As uptrends end, the same crowd that lifts price provides fuel for the ensuing decline.
Longs get lulled into a false sense of confidence as rally momentum fades and a topping
pattern forms. As smart money quietly exits, the uptrend hits a critical trigger point: the
bulls suddenly realize they're trapped. Seeking to protect profits, they start dumping the
stock. Price fails and selling spirals downward through wave after wave.
Common features appear through most price declines. Several false bottoms print and
fail. Volume repeatedly surges as losers unload positions and price carries well past
downside target after target. Then just as hope collapses, the stock makes a final, multiple
bottom.

Pattern Cycles offer a superb way for the short-term trader to understand and capitalize
upon this repeating market behavior. Look no further than R. N. Elliott's work in the
1930s and you'll find the Five Wave Decline. This structure for price correction is as
powerful today as it was 60 years ago. And as a parable for crowd behavior, traders can
use it without understanding the broader Elliott Wave Theory.


The 1st, 3rd and 5th
wave impulses in EWT
become Top-1-2 in the
Decline's count. Connect
the 3rd (1) and 5th (2)
waves with a trendline.
Ignore the 1st (Top)
wave, which the
trendline can violate in
any way it wants. The
first bounce after the
(Drop) may come close
to that trendline but will
rarelyviolate. it.

5WDs consist of three downward impulses and two corrections. The first impulse (Top)
corrects the uptrend that carries an issue to a new high. This Top begins the price failure
that completes through the second impulse (1): the technical breakdown of the stock. As
with rising markets, this impulse can be very dynamic. But in most declines, the worst is
usually reserved for last. As this 2nd impulse completes, a false bottom paints a
comforting picture that slows the selling and brings in weak longs. The selling then
suddenly resumes and accelerates into a final 3rd impulse (2) that is so emotional that
prices violate set targets and reasonable support zones.

The emotion of this last wave extinguishes selling pressure, bouncing the stock. Rapid
upward motion ignites the first impulse of a significant countertrend. This strong rally
then fails suddenly. As the longs brace for more pain, the prior low unexpectedly holds.
A new crowd then steps in and price returns to the 1-2 trendline as a double bottom
forms. The balance of power shifts and the stock breaks through that line into a new
uptrend.

The skilled eye can see 5WDs in all time frames, from 5- min to monthly bars. And the
unconscious crowd behavior represented by this fascinating pattern goes well beyond
declining markets. These volatile movements fit perfectly into the larger structure of
herd mentality that drives Pattern Cycles through their orderly and predictable process.

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