Analysis of IBM Stock Price Movements Using The Elliott Wave Principle
Analysis of IBM Stock Price Movements Using The Elliott Wave Principle
ANALYSIS OF IBM STOCK PRICE MOVEMENTS USING THE ELLIOTT WAVE PRINCIPLE
ABSTRACT
This study aims to analyze IBM's stock using the Elliott Wave Principle. The structures comprising impulse and corrective waves in Elliott Wave Theory were examined across four different timeframes (2 months, 2 weeks, 1 week, and 1 day), and the alignment of price movements with market psychology was evaluated. During the analysis, technical indicators such as Fibonacci levels and the 200-day EMA were utilized to support wave structures. The findings reveal that IBM's stock is in a long-term upward trend, which exhibits a predictable pattern in line with the Elliott Wave Principle. Additionally, the impact of economic and social events on market waves was assessed, showing that such events primarily act as accelerators rather than initiators of trends. In conclusion, the Elliott Wave Principle is identified as an effective tool not only for analyzing past price movements but also for forecasting future price movements and making strategic investment decisions.
1. INTRODUCTION
The Elliott Wave Principle is an analytical method that suggests market movements progress in waves and reflect investor psychology (Prechter & Frost, 1978). According to this theory, price movements are categorized into two main types: impulse waves and corrective waves, providing a robust tool for understanding market cycles (Casti, 2002). This study aims to demonstrate the predictive power of the Elliott Wave Principle by applying it to IBM stock. Charts across four different timeframes (2 months, 2 weeks, 1 week, and 1 day) were analyzed, revealing that the stock is in a long-term upward trend. The findings indicate that the Elliott Wave Principle can be used not only to analyze past movements but also to forecast future price trends (Cristina & Ribeiro, 2019). In this context, it is emphasized that investors need to conduct accurate wave counts and integrate technical tools such as Fibonacci levels (Atsalakis et al., 2011). Throughout the analysis, historical price data, market psychology, and factors such as the 200-day EMA were considered to support wave structures.
2. LITERATURE REVIEW
The Elliott Wave Principle is an effective technical analysis method used to understand the dynamics of financial markets and predict future price movements. In the literature, this theory is widely regarded as a powerful tool that combines psychological and mathematical approaches to analyze market behavior.
Poser (2003) elaborated on the applicability of the Elliott Wave Principle, explaining how this method can be utilized to make profitable trading decisions. The study emphasizes the importance of accurate wave counts and the role of Fibonacci ratios in wave forecasting.
Gunn (2009) considers the Elliott Wave Theory a comprehensive investment method for market analysis, encompassing all timeframes and market conditions. According to Gunn, this theory serves as a complete methodology for analyzing price movements, rooted in an understanding of volatility cycles.
Jarusek, Volna, and Kotyrba (2013) demonstrated through experiments that the Elliott Wave Principle is beneficial in investment settings and provides higher profitability compared to traditional forecasting techniques and classic technical analysis methods. They concluded that the Wave Principle significantly contributes to predicting market fluctuations.
Fernández and Crespo (2022) investigated whether the Elliott Wave Principle can be used to forecast the future direction of market trends. They concluded that trend predictions can be made using the Wave Principle and that this principle offers significant value in forecasting future trends.
Guerra (2021) aimed to identify Elliott waves using historical market data. By identifying various wave types and grouping similar waves, the study calculated the probabilities of each wave. The results demonstrated that the Elliott Wave Principle is sufficient for understanding market trends, enabling profitable outcomes through real-time trading. Even partial waves, rather than complete ones, were found to be adequate for achieving profitable trading results.
The Elliott Wave Principle is a technical analysis method that examines the behavior of stock prices and asset prices in financial markets. Based on market behavior, it has been proven that stock prices develop in waves and exhibit predictable patterns. These patterns can assist investors in making profitable decisions in terms of timing and earnings (Tirea & Negru, 2016).
Ivanova (2019) characterized the Elliott Wave Principle as a popular method for trend analysis.
3. METHODOLOGY
This study aims to analyze IBM stock in accordance with the Elliott Wave Principle across different timeframes. The price data used were obtained from the www.tradingview.com platform. Price movements were analyzed using 2 month, 2 week, 1 week, and daily charts to identify wave structures from higher to lower degrees.
The fundamental principles of the Elliott Wave Principle and Fibonacci ratios were utilized to identify wave structures and determine price targets. On the daily chart, the 200-day EMA was employed as a critical tool to evaluate the direction of the long-term trend and identify support/resistance levels. It was observed that the price remained above the 200-day EMA, confirming that the stock was in an upward trend.
The impact of social and economic events on waves was evaluated using examples such as the Covid-19 pandemic and the 2024 U.S. Presidential Election. It was determined that these events accelerated existing trends rather than initiating new wave structures. Wave structures were identified in compliance with the rules of the Elliott Wave Principle.
4. FINDINGS
4.1. Analysis of the 2-Month Chart
IBM Stock 2-Month Chart
The 2-month chart provides a basis for examining IBM's long-term trends in accordance with the Elliott Wave Principle. On this chart, the major trends of the stock are clearly discernible. According to the Elliott Wave Principle, the waves are structured as follows:
4.1.1. Internal Structure of the Higher-Degree Wave 1:
Wave (I): September 1974 – April 1979
Wave (II): April 1979 – October 1981
Wave (III): October 1981 – April 1986
Wave (IV): April 1986 – January 1987
Wave (V): January 1987 – August 1987
4.1.2. Internal Structure of the Higher-Degree Wave 2 (ABC):
Wave A: August 1987 – December 1989
Wave B:December 1989 – February 1991
Wave C: February 1991 – August 1993
4.1.3. Higher-Degree Waves 3, 4, and 5:
The 3rd Wave began in August 1993 and concluded in July 1999. Spanning approximately six years, this wave represents a period during which IBM solidified its leadership in the technology sector, gained market confidence, and experienced significant stock price increases.
The 4th Wave occurred between 1999 and 2008, forming a flat correction with an ABC internal structure. The bursting of the dot-com bubble and the effects of the 2008 financial crisis reflected market uncertainties during this period.
The 5th Wave was completed between 2008 and 2013. IBM's focus on strategic areas such as cloud computing and artificial intelligence contributed to the renewed rise in stock prices during this period.
With the completion of these five waves, it is suggested that the Wave (1), which began in September 1974, concluded in 2013.
4.2. Analysis of the 2-Week Chart
IBM Stock 2-Week Chart
On the 2-week chart, the details of the higher-degree Wave (2) were analyzed. This wave formed a zigzag pattern (ABC) between 2013 and 2020:
Wave (A) : Developed with a five-wave internal structure between March 2013 and February 2016.
Wave (B): Completed as a WXY complex structure between February 2016 and February 2020.
Wave (C): Occurred as a sharp and destructive wave between February 2020 and March 2020.
The retracement level of 2nd Waves typically corresponds to the Fibonacci level of 0.618 of the 1st Wave's length (Baranauskas, 2011). As illustrated in Figure 1, it is evident that the Wave (II) within the 1st Wave retraced to the 0.618 Fibonacci level, and similarly, the higher-degree Wave (2) also retraced to the 0.618 Fibonacci level. The alignment of IBM stock prices with the Fibonacci level of 0.618 validates our wave analysis.
4.3.Analysis of the Weekly Chart
IBM Stock Weekly Chart
After the completion of higher-degree Waves (1) and (2). it is assumed that the Wave (3) has begun. Since the Wavewill (3) also consist of five internal structures, the price is currently within the 1st Wave of a lower timeframe.
1st Waves typically consist of five internal structures and are formed at the beginning of a consolidation phase following a prolonged price decline. Initially, this wave may appear as a minor correction to the preceding downtrend. In terms of price movement, the 1st Wave is generally the smallest of the three impulse waves. In technical analysis, this phase is often referred to as the "accumulation phase" (Person, 2007).
The Wave (I) within the 1st Wave developed as a leading diagonal structure between March 2020 and January 2022. The Wave (II) formed a flat correction with a 3-3-5 internal structure between January 2022 and May 2023.
It is believed that IBM's stock is currently within the Wave (III). Since the Wave (III) will also consist of five internal structures, it is observed that the I, II, III, and IV Waves have been completed. The next expected move is the formation of the Wave V, which will complete the Wave (III). Subsequently, a Wave (IV) correction is anticipated.
4.4. Analysis of the Daily Chart
IBM Stock Daily Chart
On the 1-day chart, it is considered that the Wave V could form in two different structures: a terminating diagonal or an impulse wave. The analysis assumes that the Wave V forms as an impulse wave. It is projected that the first and second waves of the lower timeframe have been completed and that the third wave has commenced. However, the invalidation level for this count is set at 214.67 USD. If the price falls below this level or touches it, the current wave count will be invalid, as second waves cannot fully retrace the entirety of the first wave.
The target for the third wave is determined to be 271.73 USD. This target is calculated based on the principle that third waves are typically 1.618 times the length of the first wave.
5. DISCUSSION
Human activities follow a rhythmic order, and future events can be predicted with a high degree of certainty using historical data. These cycles manifest as waves that repeat at regular intervals or as series of impulses formed in specific patterns and numbers (Elliott, 1946). The analysis conducted on IBM stock demonstrates how the Elliott Wave Principle aligns with social and economic perspectives. Elliott wave structures clearly highlight critical points where changes in the collective sentiment of market participants coincide with economic conditions.
Three of the five waves determine the direction of the trend, while the other two occur in the opposite direction, correcting the main trend. The first, third, and fifth waves indicate the primary direction of the trend, whereas the second and fourth waves act as corrections to the main trend. A sequence of five waves at one degree becomes the first wave of the next larger movement. For instance, the five-wave sequence of a movement is considered the first wave of the next higher-degree trend. This demonstrates how waves are interconnected and how movements evolve (Elliott, 1938). As seen in IBM's 2-month chart, the 1, 2, 3, 4, and 5 Waves collectively form the higher-degree Wave (1).
The Elliott Wave Principle is based on the cyclical nature of market participants' behaviors. This principle enables the understanding and prediction of market movements through the combination of factors such as economic conditions, socionomic effects, and investor psychology. The analysis of IBM stock reveals how the sentiment of market participants shapes over different timeframes and how these changes influence wave structures.
The higher-degree waves (I) and (III) represent the increasing optimism of market participants and periods of market uptrend, whereas the waves (II) and (III) reflect correction periods and the indecisiveness of investors. Notably, the internal structures of corrective waves (e.g., the formation of the wave (IV) as a flat correction) clearly illustrate market participants’ responses to economic uncertainties.
In the Elliott Wave Principle, C Waves represent the most severe part of corrections and often involve collective panic reactions from market participants (Elliott, 1946). In the analysis of IBM stock, the (C) Wave within the (2) Wave corresponds to a period when the market hit its lowest point. The decline between February 2020 and March 2020 was directly related to the global economic impact of the Covid-19 pandemic. The increasing uncertainty in the markets at the onset of the pandemic triggered risk-averse behavior among investors (Baker, Bloom, Davis & Terry, 2020). During the same period, volatility rapidly increased across financial markets, and the stock prices of many major companies experienced significant declines (Albulescu, 2021; Zhang, Hu & Ji, 2020).
The destructive impact of the Wave (C) clearly demonstrates the collective panic reactions of market participants to the economic crisis. However, such declines often lay the groundwork for the market trend to resume its upward movement. Indeed, following the initial shock of the Covid-19 pandemic, markets began to recover, and companies like IBM returned to an uptrend.
The expectations surrounding economic and tax policies after Trump’s victory in the 2024 U.S. Presidential Election (The Wall Street Journal, 2024) created a strong sense of confidence among market participants. In particular, expectations for increased infrastructure spending and accelerated economic growth supported various sectors, including the technology sector. This optimism contributed to the strong upward formation of subwave structures within the Wave (III) on the daily chart.
However, as Elliott Wave theorists, we recognize that the price is moving within the higher-degree Wave (3), rendering these news events irrelevant. News merely serves to accelerate the existing trend. These events only helped accelerate the rise in IBM stock prices, which were already within an impulse wave.
6. CONCLUSION
The stock market is a reflection of human behavior, exhibiting regular, measured, and harmonious movements that follow a specific wave principle (Elliott, 1946). This study on IBM stock demonstrates that the Elliott Wave Principle is an effective tool for understanding the dynamics of financial markets and predicting future price movements. Elliott wave structures clearly illustrate how changes in the collective sentiment of market participants are reflected in market prices. Analyses conducted across different timeframes validate that each wave structure develops in alignment with the cyclical nature of markets, shaping market trends within these structures.
During the analysis, intersections of price movements with economic and political developments were also examined. However, from the perspective of the Wave Principle, such developments are considered accelerators of existing trends rather than initiators. For instance, the sharp decline observed in prices between February 2020 and March 2020 due to the impact of the Covid-19 pandemic was part of the Wave (C) within the corrective structure of the higher-degree Wave (2). This decline occurred sharply in accordance with the nature of the wave. The pandemic accelerated this process but did not alter the wave structure.
Similarly, the optimism in the markets following Donald Trump’s re-election as President in the 2024 U.S. Presidential Election (The Wall Street Journal, 2024) contributed to the strong continuation of the higher-degree Wave (3). As Elliott Wave theorists, we recognize that market prices follow a natural order within wave structures, with such news serving as factors that accelerate existing trends. In this context, the behavior of market participants and their collective sentiment are the primary determinants shaping wave structures.
The analyses indicate that IBM stock is currently within the higher-degree Wave (3). According to the Elliott Wave Principle, this wave is typically the most powerful and pronounced impulse wave, suggesting that prices are in a long-term uptrend. In the daily chart analysis, it is observed that the subwaves within the Wave V are still forming, indicating the continuation of this trend. The fact that prices are above the 200-Day EMA supports this view. It has been determined that prices are currently in the third subwave of the Wave V, with a price target of 271.73 USD. The invalidation level of 214.67 USD is considered a critical level for maintaining the current trend.
The Elliott Wave Principle is not merely a tool for predicting market prices but also provides a robust theoretical framework for understanding the psychology of market participants and deciphering the cyclical nature of financial market movements. This study demonstrates that the Elliott Wave Principle is a valuable tool for forecasting future market movements and making strategic investment decisions.
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