Financial markets exhibit crowd behaviour. A crowd is a dynamic system. A dynamic system can be expressed as a system of spirals. Hence, it follows that if we can identify the presence of an unstable cycle in price movements, we should be able to calculate the precise price targets. The life cycle of a positive shock goes something like this: the initial market reaction that establishes a new trend or the resumption of an old one, a reversal under a spiral mechanism and finally, a jump in a dynamic move. The final jump is 2.618 (the Golden Ratio) times the length of the last wave of the base pattern that precedes it.
The actual shape of a price pulse will be distorted by higher-order trends. However, in practice, any price movement subdivides into there phases: the first two phases constitute either a top or base pattern. The third phase consists of a dynamic impulse wave. Subsidiary fluctuations occur because this three-wave pattern is repeated at all levels of the hierarchy.
This is one of a series of posts reviewing The Psychology of Technical Analysis by Tony Plummer.