Facebook competed its bull cycle as per Elliott Wave Theory

(updated below on 25 Oct 2014)

Elliott Wave theory says that a bull cycle has five waves, and if you look at the chart of Facebook Inc, it looks very probable that the stock has completed its bull cycle. Facebook embarked on its bull run in September 2012 from a low of $17.55. The high seen so far is $79.71, a huge gain indeed. Let us now look at come Elliott Wave charts of Facebook. You should use this example as a supplement to my Elliott Wave book – “Five Waves to Financial Freedom”. Almost the first thing you can see is Facebook has completed five waves in its bull run. You will also see that I use the term ‘probably’ or “highly likely’ in my descriptions because that is the right approach when using Elliott Waves for your trading and investment decisions. There is no tool in the world that gives you a definite answer about the future, and when dealing with the financial markets, it pays to always keep in mind that you are trying to determine the odds of something happening, rather than the certainty. Elliott Wave Theory gives you the framework to do this analysis, and your confidence grows as you see the ‘crowd’ behaving as anticipated by the theory. As you read further, I suggest you open the charts in a new tab.

Facebook has probably completed fives waves
It is easy to see 5 waves in a completed bull cycle as shown in this Facebook chart

Interestingly, wave 2 took a lot of time in correcting the wave 1, but it went quite deep, just a shade over the 61.8% level. You will recognize that 61.8% is a pretty important Fibonacci Ratio. Now the key point here is this. Even as early as Q3 of 2013, you would have said to yourself that once the third wave develops, the next correction, namely, wave 4, would be deep and will happen relatively quickly. This is the principle of alternation. Please refer to FWTFF for more information on that, but there are many more examples in this free blog too.

Wave 2 was a deep correction
Facebook Wave 2 corrected wave 1 by 61.8%

A smart investor would have been ready to buy Facebook as it rallied up from the 61.8% retracement because we were then in a 3rd wave. As many of you probably know, wave 3 of any impulse bull market is the strongest up move, and it also has the highest chance of becoming an extended wave. In the case of Facebook, its wave 3 went to a measure of 323.6% of wave 1, as shown in the next Elliott Wave chart.

The 3rd wave of Facebook was an extended wave
Facebook wave 3 was an extended wave

Now some of you might wonder about my use of 323.6% as this is not a ratio that has been discussed by Frost & Prechter. During my over 30-years of dealing with financial markets and experience with Elliott Waves over that time, I have seen this ratio often enough to include it in my offering to the fund of knowledge. You can find many more examples in Wavetimes.com.

The main challenge for traders is to figure out WHERE an extended wave will end. Unfortunately, there is no certainty about that, and anyone who attempts to pick a top during an extending third wave is honestly asking for trouble. However, once the correction starts, in the case of Facebook, it was bound to be swift because, remember, wave 2 took long to develop! Take a look at the following Elliott Wave chart to see this.

Facebook wave 4 was shallow but sharp
Facebook wave 4 was shallow but sharp

The final stages of the bull run begins with wave 5. As with all impulse waves, this wave 5 needs to have its own set of five sub waves, and incredibly, these sub waves are also related to each other quite like the waves of the larger degree. But first see how one could have anticipated the end of wave 5 by computing 161.8% measure of wave 1 and adding it to the bottom of wave 4.

Determining the end point of wave 5
Anticipating the end of wave 5 of the bull cycle

And to add come confirmation, we can look at the relationships of the sub waves of wave 5 as shown below.

Sub waves of wave 5
The sub waves for Facebook’s wave 5 also follow Elliott Wave guidelines.

Now that I have shown you how to read a chart using the clues that Elliott Wave theory gives us, you should attempt to anticipate how the ensuing bear cycle will pan out. One clue I can give you is the correction will travel a distance greater than the larger of the two prior corrective waves. A second clue is the correction will take more time than wave 2 did. If you are an investor who is seeking to buy Facebook, it might be a good idea to focus on some other stock for the next several months while Facebook goes about its business of being moved back and forth by a fickle market. Eventually, it WILL come down by the measures discussed above and that is the right time to invest in this stock for its next bull run.

25 Oct 2014 UPDATE:
The recovery in the last few days to a new high has brought back the need to recompute the targets for the end of wave 5. Here are two more charts to guide you.

FB25Oct14a

FB25Oct14b

The goal of this blog is to share with you some of my experience and teach you how to use Elliott Waves. My other website, wavetimes.net, is where I discuss live trades.



18 Comments

  • John

    Excellent Dear Mr.Ramakrishnan. Simple text book EW ! and easy to understand.

  • Analyzing the internals of wave 5, I feel wave 5 is not complete.It just completed wave 4 of 5 and will likely go to 86 . Of course this prediction is useful mainly for somebody wanting to short FB.Or somebody who has not exited their long position.

  • Dilesh

    Hello Ramki Sir,

    Seasons greetings!

    Your today’s post on FB was very interesting for me as I have been working on this chart since a long time. Actually, I had an alternate count which I request you to have a look and comment on it.

    I have been seeing a 5 wave advance off the Week ending 7-June-13 Low of 22.67, From the point you have market 2. Details as per below. I have written the week ending dates:

    [1] Wave 1 from 7-JUN-13 Low of 22.67 to 18-OCT-13 High of 54.83
    [2] Wave 2 Low at 29-NOV-13 Low at 43.55
    [3] Wave 3 High at 14-MAR-14 High at 72.59
    [4] Wave 4 Low at 2-MAY-14 Low at 54.66
    [5] Probable Wave 5 High at / near 3-OCT-14 High at 79.71

    Here the wave 1 looks extended. So I was anticipating this 5 wave advance to be a completion of a Major wave 3.

    I would like to know whether you find this as a valid alternate count.
    Looking forward to your response.

    Thanks & regards,
    Dilesh

  • Thank you for sharing your analysis on Facebook. In this instance I am puzzled why your wave 3, do not seem to clear 5 internal waves (only has 3 swings). Likewise the price action since your wave 5 top completion and minor pull back appears to be moving up in impulsive manner which could end up making new higher high or retest the last high.

    My conclusion with Facebook, is that since low in September 2012 it appears to be in abc zigzag rally to the upside that is close to completion.

  • Kevin Bull

    Hi Ramki,

    Many thanks for taking the time to produce this.

    Financial markets display regularity and order, where to a degree there shouldn’t be any. What makes traders “globally” stop buying and start selling when wave 5 of 5 reaches 38.2 of waves 0-3 projected from 4? What is the underlying cause/reason this would happen?

    The cause and extent of waves is generally not recognised until they complete. Regarding the possible “correction” now due, as you state it would pay to leave Facebook alone,

    Is it safe to say that during the course of the movement, current news is available to everyone and thus modifies both the extent and duration of the movement, but once it is complete, it will again adhere to the mathematical proportions displayed within the wave principal.

    I feel there is far more “complexity masked by simplicity” of 5’s corrected by 3’s than people understand, or ever will.

    All the best

  • Dipak

    Sir,currently practicing to apply EW theory in real life,after reading your niceeee book.sir,is it necessary to count all waves in higher time frame from significant low? Is there way to avoid enter in 5th wave correction of higher time frame(In my case is weekly)…….

  • Sean

    Very interesting indeed! It would be nice to see how the stock manages to progress in 2015. Your PDF FWTFF is ABSOLUTELY fantastic. I bought it some months ago and still read it everyday and find something new to learn. Thanks a lot Mr Ramki

  • Naga

    Hi Ramki – Happy Diwali to you and your family!

    Thank you for sharing the EWA for Facebook, I have been following your blog posts for more than a year now and it has really been a great learning for me personally

    Appreciate all your efforts in keeping this blog purely as a forum to share EWA and through that allowing folks like me grow in knowledge and experience in using EW efficiently

    Just my 2 cents, of course learned through your approach. With the 5 wave getting completed I see that the next 3 wave movement downward can hit $40 which is 61.8% retracement of wave 1

    From a long term perspective, I also see that the current 5 wave movement is just completion of wave I or wave A and which also gives us extra information that the more we buy on regular dips around $40 to $50 levels it is going to help folks on a 1 to 3 year long term perspective

  • Sinuhet

    Hi Ramki
    I agree with you FB has topped and allowing to present me an alternative count where the move from April 2014 low is irregullar wave B
    http://stockcharts.com/h-sc/ui?s=FB&p=D&yr=2&mn=4&dy=0&id=p09946993642&a=360671219
    Sinuhet

    • Hi Sinuhet, Thanks for posting. I often tell folks that one can make money with even a wrong count! That is why being correct is not as important as knowing when to move in, as well as knowing when to get out. In your chart, you will gain confidence as soon as there is an overlap over 68.65, the top of minor wave ‘a’ inside the irregular correction. Good luck.

  • Omar

    Hello Ramki, I have a question in which I hope you can answer. How do we label the move prior to point 0? Do we disregard it in the context of the Elliot Wave Cycle?

    • Ramki Ramakrishnan

      Omar, In this case you will move to one higher degree and start your count from the relevant significant turn level. I suggest that you refer to my book FWTFF and things will get clearer

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