Key Concepts of the Sextant Market Letter

Bear Market / Bull Market

While these terms are regularly bandied about by financial columnists and broking houses, there is no universally accepted definition of what constitutes a bull or bear market. The line in the sand that is most widely used is a twenty percent move in a headline index, although this definition is unsatisfactory in the sense that it completely ignores the element of time in addition to subsequent market behavior.

From the viewpoint of wave theory, a legitimate bull market exists when an impulsion (uptrend) constitutes a segment of a larger impulse wave. Any other price structure qualifies as a bear market, regardless of its size.

A practical application of the theory reveals that a bull market is a multi-decade advance of a sustainable nature. They are characterized by above-average gains. Bear markets on the other hand are a multi-decade period of below-average gains. It is important to be cognizant of the fact that a bear market can actually take place while price is moving higher. What you will find with this type of bear market however, is that any gains are largely given up in subsequent market action, contrary to a bull market.

Correction

Corrective waves or countertrends are reactions against the prevailing trend. They may involve a sizeable retracement of the prior move if they unfold in three waves. Corrections that unfold in five, seven or nine waves often produce negligible movement on balance.  They are labelled alphabetically (A-B-C etc). Corrective waves constitute waves 2 and 4 of an impulse wave.

Cumulative Advance-Decline Line 

The Cumulative Advance-Decline Line is a running total of the number of stocks that closed higher versus the number of stocks that closed lower each day. 

Elliott Wave Principle (EWP)

The Elliott Wave Principle (EWP) was conceived by Ralph Nelson Elliott during the 1930s and 1940s. He concluded that the market was not random, but rather multifractal in nature. Aperiodic oscillations in mass psychology give rise to specific price patterns, which can be combined to generate larger price patterns of a self-affine nature. 

Impulsion

Impulse waves produce a significant change in the price level. They contain five segments labelled numerically (waves 1-2-3-4-5). Three of the five waves (waves 1, 3 and 5) will unfold strongly in the direction of the prevailing trend. Two intervening phases (waves 2 and 4) will unfold against the prevailing trend.

McClellan Oscillator

The McClellan Oscillator is a derivative of the Advance-Decline line. It measures the rate at which money is moving into or out of the market on a medium-term basis.  It was developed by Sherman and Marian McClellan in 1969.

McClellan Summation Index

The McClellan Summation Index is a derivative of the A-D line. It measures the rate at which money is moving into or out of the market on a long-term basis.  It was developed by Sherman and Marian McClellan in 1969.