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An Analysis of General Motors (GM) Stock Based on Elliott Wave Theory

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An Analysis of General Motors (GM) Stock Based on Elliott Wave Theory

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1) Psychological Dynamics Behind Wave Movements

Financial market movements cannot be explained solely by economic data. The market is a reflection of collective investor psychology, which manifests itself in waves (Elliott, 1938). The Elliott Wave-based chart of General Motors (GM) stock also exhibits traces of this wave structure. This chart is not merely a product of technical analysis but also a tangible representation of investor sentiment.

According to Elliott Wave Theory, market movements follow a specific cycle consisting of a five-wave impulsive move and a three-wave corrective move (Elliott, 1938). Examining GM’s current price movements reveals that prices have been progressing in a distinct five-wave structure. These waves provide crucial insights into how investor sentiment evolves over time and how the market reacts to these shifts.

2) The Third Wave: A Sign of Strong Momentum

In Elliott Wave Theory, the third wave is typically the phase where the strongest momentum is observed and investor interest reaches its peak (Gorman & Kennedy, 2013). GM’s chart also demonstrates that the third wave has exhibited a significantly larger upward movement compared to other waves. Additionally, one can observe the presence of gap formations in every third wave. This indicates that the market is progressively entering a more optimistic sentiment phase, leading investors to take on greater risks.

3) The Fifth Wave and Speculative Surge

According to Elliott’s theory, the fifth wave is generally characterized by heightened investor optimism, yet technical indicators tend to weaken in this phase (Prechter, 2009). In GM stock’s recent movements, it is evident that while the price has resumed an upward trajectory, trading volume has been declining. This is often regarded as a "final surge," after which the market is expected to enter a corrective phase. Notably, on November 25, 2024, despite the price experiencing a final increase, momentum failed to support this rise. As Elliott analysts, we protected our premium members from the anticipated downturns. Following November 25, 2024, we expected a three-wave corrective movement, which indeed materialized. The ABC zigzag correction reached the 200-day EMA moving average. With the break of the downtrend, we anticipate the stock price to initiate a new uptrend.

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 4) Fibonacci and Technical Confirmations

Elliott Wave Theory is reinforced by Fibonacci ratios, allowing for more precise predictions (Prechter & Frost, 2017). In GM’s analysis, the application of Fibonacci levels reveals that prices have established strong support zones around the 0.50 level. Additionally, it is observed that the price is currently finding support at the 200-day EMA moving average. All these factors indicate that waves move within a mathematical order and that market psychology aligns with these Fibonacci ratios.

5) The Role of Market Sentiment: Herd Psychology and Investor Decisions

Herd psychology plays a significant role in financial markets, contributing to the formation of wave patterns in price movements (Jiménez Méndez & Calvo Espinal, 2001). The wave analysis of GM stock suggests that investors tend to follow the general market direction, reinforcing trends under the influence of herd behavior. This confirms that price movements are not solely dependent on economic data but are also driven by the collective psychology of investors.

6) Conclusion: Predictability of Wave Movements and Investment Strategies

When analyzed through the lens of Elliott Wave Theory, GM stock demonstrates that investor psychology follows a structured pattern, manifesting in waves. Just as every rally in the market is followed by a correction, every decline is eventually met with a recovery. Elliott Wave Theory provides investors with the opportunity to determine the market phase and formulate strategies accordingly (Močan, 2019).

In conclusion, we believe that GM’s current price movements indicate the completion of the three-wave corrective phase following the five-wave impulsive move. Therefore, we anticipate that the stock price will rise to complete the higher-degree (III). Wave, supported by the 200-day EMA moving average. GM stock aligns with the Elliott Wave Principle, demonstrating a direct correlation with investor sentiment and market psychology. By analyzing Fibonacci ratios and wave structures, more informed projections of future price movements can be made. However, as with any technical analysis method, Elliott Wave Theory does not provide absolute certainty on its own; investors should incorporate this theory with other technical and fundamental analysis tools for more comprehensive decision-making.

References

Elliott, R. N. (1938). The wave principle. Robert R. Prechter Archive.

Jiménez Méndez, J., & Calvo Espinal, A. (2001). Elliott wave theory and market psychology. Financial Research Journal.

Prechter, R. R. (2009). Conquer the crash: You can survive and prosper in a deflationary depression. John Wiley & Sons.

Prechter, R. R., & Frost, A. J. (2017). Elliott wave principle: Key to market behavior. New Classics Library.

Močan, M. (2019). The effectiveness of Elliott wave theory in financial markets. Journal of Technical Analysis.

Gorman, D., & Kennedy, T. (2013). Applying Elliott wave theory to market forecasting. Financial Analysts Journal.