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read Elliott Wave Principle by A.J. Frost and Robert Prechter, or take the free . pattern of five waves up and three waves down to form a complete cycle of eight. You may freely distribute this eBook, provided all content including text, author . gives you access to a free Elliott Wave basics tutorial (50 pages) which covers all the in a declining market will take the form of 5 waves down and 3 waves up. lyubimov.info You may link to that download resource directly from your website / blog / lens, etc. Feel free to give this e-book to.

All rights reserved. Top Forex Pairs Forex is the largest market in the world and trades around the clock. Find out what pair is topping our list and where is it going, view this list for free now! Todays Top Performing Forex Pairs. Return to Elliott Wave Theory. Get 10 free lessons on the Elliott Wave Principle Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it Elliott Wave Video Crash Course A series of three FREE videos that demolishes the widely held notion that news drives the markets The Ultimate Technical Analysis Handbook EWI's new page eBook, The Ultimate Technical Analysis Handbook, will show you the various methods of technical analysis they use every day and teach you how to use these powerful tools for yourself.

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A Self-Teaching Guide. David Borman. In a nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure , illustrating extensions, will clarify this point. The fact that an extension typically occurs in only one actionary subwave provides a useful guide to the expected lengths of upcoming waves. For instance, if the first and third waves are of about equal length, the fifth wave will likely be a protracted surge.

Conversely, if wave three extends, the fifth should be simply constructed and resemble wave one. In the stock market, the most commonly extended wave is wave 3. This fact is of particular importance to real-time wave interpretation when considered in conjunction with two of the rules of impulse waves: Wave 3 is never the shortest actionary wave, and wave 4 may not overlap wave 1.

To clarify, let us assume two situations involving an improper middle wave, as illustrated in Figures and In Figure , wave 4 overlaps the top of wave 1. In Figure , wave 3 is shorter than wave 1 and shorter than wave 5. According to the rules, neither is an acceptable labeling. Once the apparent wave 3 is proved unacceptable, it must be relabeled in some way that is acceptable.

In fact, it is almost always to be labeled as shown in Figure , implying an extended wave 3 in the making. Do not hesitate to get into the habit of labeling the early stages of a third wave extension. The exercise will prove highly rewarding, as you will understand from the discussion under Wave Personality see Chapter 2. Figure is perhaps the single most useful guide to real time impulse wave counting in this book. Extensions may also occur within extensions. In the stock market, the third wave of an extended third wave is typically an extension as well, producing a profile such as shown in Figure A real-life example is shown in Figure Figure illustrates a fifth wave extension of a fifth wave extension.

Extended fifths are quite common in major bull markets in commodities see Chapter 6. Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, "truncation," or "truncated fifth. A truncation often occurs following a particularly strong third wave. The U. The first occurred in October at the time of the Cuban crisis see Figure It followed the crash that occurred as wave 3.

The second occurred at yearend in see Figure It followed the soaring and broad wave 3 that took place from October to March A diagonal is a motive pattern yet not an impulse, as it has two corrective characteristics. As with an impulse, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest.

However, a diagonal is the only five-wave structure in the direction of the main trend within which wave four almost always moves into the price territory of i. On rare occasions, a diagonal may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. This pattern substitutes for an impulse at two specific locations in the wave structure. An ending diagonal occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it.

A very small percentage of diagonals appear in the C-wave position of A-B-C formations. In double or triple threes see next section , they appear only as the final C wave. In all cases, they are found at the termination points of larger patterns , indicating exhaustion of the larger movement. A contracting diagonal takes a wedge shape within two converging lines. This most common form for an ending diagonal is illustrated in Figures and and shown in its typical position within a larger impulse wave.

However, it is unsatisfying analytically in that its third wave was the shortest actionary wave. Ending diagonals have occurred recently in Minor degree as in early , in Minute degree as in February-March , and in Subminuette degree as in June Figures and show two of these periods, illustrating one upward and one downward "real life" formation. Figure shows our real-life possible expanding diagonal. Notice that in each case, an important change of direction followed.

Although not so illustrated in Figures and , the fifth wave of an ending diagonal often ends in a "throw-over," i. The real-life examples in Figures and show throw-overs. While volume tends to diminish as a diagonal of small degree progresses, the pattern always ends with a spike of relatively high volume when a throw-over occurs. On rare occasions, the fifth subwave falls short of its resistance trendline. A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level where it began and typically much further.

A falling ending diagonal by the same token usually gives rise to an upward thrust. Fifth wave extensions, truncated fifths and ending diagonals all imply the same thing: At some turning points, two of these phenomena have occurred together at different degrees, compounding the violence of the next move in the opposite direction.

It has recently come to light that a diagonal occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. In the few examples we have, the subdivisions appear to be the same: Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves, as illustrated in Figure A leading diagonal in the wave one position is typically followed by a deep retracement see Chapter 4.

Figure shows a real-life leading diagonal. We have recently observed that a leading diagonal can also take an expanding shape. This form appears to occur primarily at the start of declines in the stock market see Figure These patterns were not originally discovered by R. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity.

Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure.

This struggle between the two oppositely-trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend.

As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves.

Further, they occasionally increase or decrease in complexity as they unfold so that what are technically subwaves of the same degree can by their complexity or time length appear to be of different degree see Figures and For all these reasons, it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us.

As the terminations of corrective waves are less predictable than those for motive waves, you must exercise more patience and flexibility in your analysis when the market is in a meandering corrective mood than when prices are in a persistent motive trend. The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections are never fives. Only motive waves are fives. For this reason, an initial five-wave movement against the larger trend is never the end of a correction, only part of it.

The figures in this section should serve to illustrate this point. Corrective processes come in two styles. Sharp corrections angle steeply against the larger trend. Sideways corrections, while always producing a net retracement of the preceding wave, typically contain a movement that carries back to or beyond its starting level, thus producing an overall sideways appearance.

The discussion of the guideline of alternation in Chapter 2 explains the reason for noting these two styles. Specific corrective patterns fall into three main categories: Zigzag ; includes three types: Triangle ; three types: A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C.

The subwave sequence is , and the top of wave B is noticeably lower than the start of wave A, as illustrated in Figures and In a bear market, a zigzag correction takes place in the opposite direction, as shown in Figures and For this reason, a zigzag in a bear market is often referred to as an inverted zigzag. Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target.

In these cases, each zigzag is separated by an intervening "three," producing what is called a double zigzag see Figure or triple zigzag. These formations are analogous to the extension of an impulse wave but are less common. Within impulses, second waves frequently sport zigzags, while fourth waves rarely do. Unfortunately, this notation improperly indicated the degree of the actionary subwaves of each simple pattern. They were labeled as being only one degree less than the entire correction when in fact, they are two degrees smaller.

We have eliminated this problem by introducing a useful notational device: Each subwave thereof A, B or C, as well as D or E of a triangle — see later section is now properly seen as two degrees smaller than the entire correction.

Each wave X is a reactionary wave and thus always a corrective wave, typically another zigzag.

A flat correction differs from a zigzag in that the subwave sequence is , as shown in Figures and Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction, not surprisingly, seems to inherit this lack of countertrend pressure and terminates near the start of wave A.

Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags. A flat correction usually retraces less of the preceding impulse wave than does a zigzag.

It tends to occur when the larger trend is strong, so it virtually always precedes or follows an extension. The more powerful the underlying trend, the briefer the flat tends to be. Within an impulse, the fourth wave frequently sports a flat, while the second wave rarely does. What might be called a "double flat" does occur. However, Elliott categorized such a formation as a "double three," a term we discuss later in this chapter. The word "flat" is used as a catch-all name for any A-B-C correction that subdivides In Elliott literature, however, three types of corrections have been named by differences in their overall shape.

In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures through Far more common, however, is the variety we call an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular" flat, although the word is inappropriate as they are actually far more common than "regular" flats.

In expanded flats, wave B of the pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown for bull markets in Figures and and bear markets in Figures and The formation in the DJIA from August to November was an expanded flat correction in a bear market, or an "inverted expanded flat" see Figure In a rare variation on the pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended, as in Figures through Apparently in this case, the forces in the direction of the larger trend are so powerful that the pattern is skewed in that direction.

The result is akin to the truncation of an impulse. If the supposed B wave, for instance, breaks down into five waves rather than three, it is more likely the first wave up of the impulse of next higher degree. The power of adjacent impulse waves is important in recognizing running corrections, which tend to occur only in strong and fast markets.

We must issue a warning, however. There are hardly any examples of this type of correction in the price record. A running triangle , in contrast, is much more common see next section. A triangle appears to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. The triangle pattern contains five overlapping waves that subdivide and are labeled A-B-C-D-E. A triangle is delineated by connecting the termination points of waves A and C, and B and D.

Wave E can undershoot or overshoot the A-C line, and in fact, our experience tells us that it happens more often than not. There are three varieties of triangles: Elliott contended that the horizontal line of a barrier triangle could occur on either side of the triangle, but such is not the case; it always occurs on the side that the next wave will exceed.

Figure depicts contracting and barrier triangles as taking place entirely within the area of preceding price action, which may be termed a regular r triangle. Yet, it is extremely common for wave B of a contracting triangle to exceed the start of wave A in what may be termed a running triangle, as shown in Figure There are several real life examples of triangles in the charts in this book see Figures , , , , and As you will notice, most of the subwaves in a triangle are zigzags, but sometimes one of the subwaves usually wave C is more complex than the others and can take the shape of a multiple zigzag.

In rare cases, one of the sub-waves usually wave E is itself a triangle, so that the entire pattern protracts into nine waves. Thus, triangles, like zigzags, occasionally display a development that is analogous to an extension. One example occurred in silver from through see Figure A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i. A triangle may also occur as the final actionary pattern in a corrective combination, as discussed in the next section, although even then it usually precedes the final actionary wave in the pattern of one larger degree than the corrective combination.

Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, it is usually due to the fact that a triangle is part of the correction, which is in fact a double three for example, see Figure In the stock market, when a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle.

Elliott used the word "thrust" in referring to this swift, short motive wave following a triangle. The thrust is usually an impulse but can be an ending diagonal. In powerful markets, there is no thrust, but instead a prolonged fifth wave.

So if a fifth wave following a triangle pushes past a normal thrust movement, it is signaling a likely protracted wave. Post-triangle advancing impulses in commodities at degrees above Intermediate are usually the longest wave in the sequence, as explained in Chapter 6.

Many analysts are fooled into labeling a completed triangle way too early. Triangles take time and go sideways. If you examine Figure closely, you will see that one could have jumped the gun in the middle of wave b, pronouncing the end of five contracting waves. But the boundary lines of triangles almost never collapse so quickly.

Subwave C is typically a complex wave, though wave B or D can fulfill that role. Give triangles time to develop. On the basis of our experience with triangles, as the examples in Figures and later in and illustrate, we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market. Perhaps the frequency of this occurrence would justify its inclusion among the guidelines associated with the Wave Principle.

Elliott called a sideways combination of two corrective patterns a "double three" and three patterns a "triple three. As with double and triple zigzags, the simple corrective pattern components are labeled W, Y and Z. Each reactionary wave, labeled X, can take the shape of any corrective pattern but is most commonly a zigzag. As with multiple zigzags, three patterns appear to be the limit, and even those are rare compared to the more common double three.

Combinations of threes were labeled differently by Elliott at different times, although the illustrative pattern always took the shape of two or three juxtaposed flats, as shown in Figures and However, the component patterns more commonly alternate in form.

For example, a flat followed by a triangle is a more typical type of double three which we now know as of ; see Appendix , as illustrated in Figure A flat followed by a zigzag is another example, as shown in Figure Naturally, since the figures in this section depict corrections in bull markets, they need only be inverted to observe them as upward corrections in bear markets.

For the most part, a combination is horizontal in character. Elliott indicated that the entire formation could slant against the larger trend, although we have never found this to be the case. One reason is that there never appears to be more than one zigzag in a combination. Neither is there more than one triangle.

Recall that triangles occurring alone precede the final movement of a larger trend. Combinations appear to recognize this character and sport triangles only as the final wave in a double or triple three. But double and triple threes are different from double and triple zigzags not only in their angle but in their goal. In a double or triple zigzag, the first zigzag is rarely large enough to constitute an adequate price correction of the preceding wave.

The doubling or tripling of the initial form is usually necessary to create an adequately sized price retracement. In a combination, however, the first simple pattern often constitutes an adequate price correction. The doubling or tripling appears to occur mainly to extend the duration of the corrective process after price targets have been substantially met.

Sometimes additional time is needed to reach a channel line or achieve a stronger kinship with the other correction in an impulse. As the consolidation continues, the attendant psychology and fundamentals extend their trends accordingly.

Notice that while an impulse wave has a total count of 5, with extensions leading to 9 or 13 waves, and so on, a corrective wave has a count of 3, with combinations leading to 7 or 11 waves, and so on.

The triangle appears to be an exception, although it can be counted as one would a triple three, totaling 11 waves.

Thus, if an internal count is unclear, you can sometimes reach a reasonable conclusion merely by counting waves. A count of 9, 13 or 17 with few overlaps, for instance, is likely motive, while a count of 7, 11 or 15 with numerous overlaps is likely corrective.

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The main exceptions are diagonals of both types, which are hybrids of motive and corrective forces. In such cases, the end of the pattern is called the "orthodox" top or bottom in order to differentiate it from the actual price high or low that occurs intra-pattern or after the end of the pattern.

For example, in Figure , the end of wave 5 is the orthodox top despite the fact that wave 3 registered a higher price.

In Figure , the end of wave 5 is the orthodox bottom. In Figures and , the starting point of wave A is the orthodox top of the preceding bull market despite the higher high of wave B.

In Figures and , the start of wave A is the orthodox bottom. In Figure , the end of wave Y is the orthodox bottom of the bear market even though the price low occurs at the end of wave W.

This concept is important primarily because a successful analysis always depends upon a proper labeling of the patterns. Assuming falsely that a particular price extreme is the correct starting point for wave labeling can throw analysis off for some time, while being aware of the requirements of wave form will keep you on track. Further, when applying the forecasting concepts that will be introduced in Chapter 4, the length and duration of a wave are typically determined by measuring from and projecting orthodox ending points.

Earlier in this chapter, we described the two functions waves may perform action and reaction , as well as the two modes of structural development motive and corrective that they undergo.

Now that we have reviewed all types of waves, we can summarize their labels as follows:.

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As stated earlier, all reactionary waves develop in corrective mode, and most actionary waves develop in motive mode.

The preceding sections have described which actionary waves develop in corrective mode. They are:. Because the waves listed above are actionary in relative direction yet develop in corrective mode, we term them "actionary corrective" waves. Though action in five waves is followed by reaction in three waves at all degrees of trend regardless of direction , progress begins with an actionary impulse, which by convention is graphed in the upward direction.

Since all such graphs depict ratios, they could be depicted in the downward direction. Instead of dollars per share, for instance, one could plot shares per dollar. Progress is carried out by the development of impulse waves of ever larger degree. Motive waves downward are merely parts of corrections and therefore are not synonymous with progress. Similarly, corrective waves upward are still corrective and thus ultimately do not achieve progress.

Therefore, three additional terms are required to denote the purpose of a wave, to differentiate conveniently among waves that result in progress and those that do not. Any motive wave upward that is not within a corrective wave of any larger degree will be termed a progressive wave. It must be labeled 1, 3 or 5. Any declining wave, regardless of mode, will be termed a regressive wave.

Finally, an upward wave, regardless of mode, that occurs within a corrective wave of any larger degree will be termed a progressive wave. Both regressive and proregressive waves are part or all of corrections. Only a progressive wave is independent of countertrend forces. The reader may recognize that the commonly used term "bull market" would apply to a progressive wave, the term "bear market" would apply to a regressive wave, and the term "bear market rally" would apply to a proregressive wave.

However, conventional definitions of terms such as "bull market," "bear market," "primary," "intermediate," "minor," "rally," "pullback" and "correction" attempt to include a quantitative element and are thus rendered useless because they are arbitrary.

By this definition, a decline of Such terms are of questionable value. Although a whole list of quantitative terms could be developed cub, mama bear, papa bear and grizzly, for instance , they cannot improve upon the simple use of a percentage. In contrast, Elliott wave terms are properly definitive because they are qualitative, i. Thus, there are differing degrees of progressive, regressive and proregressive waves under the Wave Principle.

A Supercycle B wave in a Grand Supercycle correction would be of sufficient amplitude and duration that it would be popularly identified as a "bull market. There are two classes of waves, which differ in fundamental importance.

Waves denoted by numbers we term cardinal waves because they compose the essential wave form, the five-wave impulse, as shown in Figure The market can always be identified as being in a cardinal wave at the largest degree. Waves denoted by letters we term consonant or subcardinal waves because they serve only as components of cardinal waves 2 and 4 and may not serve in any other capacity. A motive wave is composed, at one lesser degree, of cardinal waves, and a corrective wave is composed, at one lesser degree, of consonant waves.

Our selection of these terms is due to their excellent double meanings. The Merriam-Webster Unabridged Dictionary. There is little practical use for these terms, which is why this explanation has been relegated to the end of the chapter.

However, they are useful in philosophical and theoretic discussions and so are presented to anchor the terminology. In The Wave Principle and elsewhere, Elliott discussed what he called an "irregular top," an idea he developed with a great deal of specificity.

He said that if an extended fifth wave terminates a fifth wave of one higher degree, the ensuing bear market will either begin with or be an expanded flat in which wave A is extremely we would say impossibly small relative to the size of wave C see Figure Wave B to a new high is the irregular top, "irregular" because it occurs after the end of the fifth wave.

Elliott contended further that occurrences of irregular tops alternate with those of regular tops. His formulation is inaccurate, however, and complicates the description of phenomena that we describe accurately in the discussion of the behavior following fifth wave extensions and under "Depth of Corrective Waves" in Chapter 2. The question is, how did Elliott end up with two extra waves that he had to explain away?

The answer is that he was powerfully predisposed to marking a fifth wave extension when in fact the third wave had extended. Two impressive Primary degree fifth wave extensions occurred in the s and s, engendering that predisposition. In order to turn an extended third into an extended fifth, Elliott invented an A-B-C correction called an "irregular type 2. He often asserted this labeling in the wave 2 position. These labels then left him with two extra waves at the peak.

Thus, these two erroneous concepts were born of the same tendency. In fact, one requires the other. As you can see by the count illustrated in Figure , the a-b-c "irregular type 2" in the wave 2 position necessitates the "irregular top" labeling at the peak. In fact, there is nothing irregular about the wave structure except its false labeling! Elliott also contended that every fifth wave extension is "doubly retraced," i.

Such movement happens naturally due to the guideline that corrections usually bottom in the area of the previous fourth wave see Chapter 2 ; the "second retracement" is the next impulse wave. The term might apply reasonably well to waves A and B of an expanded flat following an extension, as per the discussion in Chapter 2 under "Behavior Following Fifth Wave Extensions. In Nature's Law , Elliott referred to a shape called a "half moon.

This shape is found more often when declining prices are plotted on semilog scale and when advancing prices in a multi-year trend are plotted on arithmetic scale. The fact is that Elliott invented this pattern during a period in which he was trying to force his Principle into the year triangle concept, which no interpreter today accepts as valid under the rules of the Wave Principle.

Indeed, it is clear that such a pattern, if it existed, would have the effect of invalidating the Wave Principle. The authors have never seen an "A-B base," and in fact it cannot exist. As far as we know, this chapter lists all wave formations that can occur in the price movement of the broad stock market averages.

Under the Wave Principle, no other formations than those listed here will occur. The authors can find no examples of waves above Minor degree that we cannot count satisfactorily by the Elliott method. The hourly readings are a nearly perfectly matched filter for detailing waves of Subminuette degree.

Elliott waves of much smaller degree than Subminuette are revealed by computer generated charts of minute-by-minute transactions. Even the few data points transactions per unit of time at this low a degree are often enough to reflect the Wave Principle accurately by recording the rapid shifts in psychology occurring in the "pits" and on the exchange floor.

All rules and guidelines of the Wave Principle fundamentally apply to actual market mood, not its recording per se or lack thereof. Its clear manifestation requires free market pricing. When prices are fixed by government edict, such as those for gold and silver for half of the twentieth century, waves restricted by the edict are not allowed to register.

When the available price record differs from what might have existed in a free market, rules and guidelines must be considered in that light. In the long run, of course, markets always win out over edicts, and edict enforcement is only possible if the mood of the market allows it. All rules and guidelines presented in this book presume that your price record is accurate.

Now that we have presented the rules and rudiments of wave formation, we can move on to some of the guidelines for successful analysis using the Wave Principle. The guidelines presented throughout this chapter are discussed and illustrated in the context of a bull market.

Except where specifically excluded, they apply equally in bear markets, in which context the illustrations and implications would be inverted. The guideline of alternation is very broad in its application and warns the analyst always to expect a difference in the next expression of a similar wave. Hamilton Bolton said,. Although alternation does not say precisely what is going to happen, it gives valuable notice of what not to expect and is therefore useful to keep in mind when analyzing wave formations and assessing future probabilities.

It primarily instructs the analyst not to assume, as most people tend to do, that because the last market cycle behaved in a certain manner, this one is sure to be the same. As "contrarians" never cease to point out, the day that most investors "catch on" to an apparent habit of the market is the day it will change to one completely different. However, Elliott went further in stating that, in fact, alternation was virtually a law of markets. If wave two of an impulse is a sharp correction, expect wave four to be a sideways correction, and vice versa.

Figure shows the most characteristic breakdowns of an impulse wave, either up or down, as suggested by the guideline of alternation.

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Sharp corrections never include a new price extreme, i. They are almost always zigzags single, double or triple ; occasionally they are double threes that begin with a zigzag. Sideways corrections include flats, triangles, and double and triple corrections. They usually include a new price extreme, i. In rare cases, a regular triangle one that does not include a new price extreme in the fourth wave position will take the place of a sharp correction and alternate with another type of sideways pattern in the second wave position.

The idea of alternation within an impulse can be summarized by saying that one of the two corrective processes will contain a move back to or beyond the end of the preceding impulse, and the other will not. A diagonal does not display alternation between subwaves 2 and 4. Typically both corrections are zigzags. An extension is an expression of alternation, as the motive waves alternate their lengths.

Typically the first is short, the third is extended, and the fifth is short again. An extension, which normally occurs as wave 3, sometimes occurs as wave 1 or 5, another manifestation of alternation. If a correction begins with a flat a-b-c construction for wave A, expect a zigzag a-b-c formation for wave B, and vice versa see Figures and Quite often, when a large correction begins with a simple a-b-c zigzag for wave A, wave B will stretch out into a more intricately subdivided a-b-c zigzag to achieve a type of alternation, as in Figure Sometimes wave C will be yet more complex, as in Figure The reverse order of complexity is somewhat less common.

An example of its occurrence can be found in wave 4 in Figure No market approach other than the Wave Principle gives a satisfactory answer to the question, "How far down can a bear market be expected to go? Our analysis of the period from to uses the chart of stock prices adjusted to constant dollars developed by Gertrude Shirk and presented in the January issue of Cycles magazine. Here we find that the Supercycle low bottomed within the area of the previous fourth wave of Cycle degree, an expanding triangle spanning the period between and In this case, the Cycle degree bear market from to was a zigzag that terminated within the area of the fourth Primary wave of the bull market from to This narrow miss nevertheless illustrates why this guideline is not a rule.

The preceding strong third wave extension and the shallow A wave and strong B wave within 4 indicated strength in the wave structure, which carried over into the moderate net depth of the correction.

Again, Figure shows what happened. Here we have an illustration from another market of the tendency for a correction to terminate in the area of travel of the preceding fourth wave of one lesser degree. Our analysis of small degree wave sequences over the last twenty years further validates the proposition that the usual limitation of any bear market is the travel area of the preceding fourth wave of one lesser degree, particularly when the bear market in question is itself a fourth wave.

However, in a clearly reasonable modification of the guideline, it is often the case that if the first wave in a sequence extends, the correction following the fifth wave will have as a typical limit the bottom of the second wave of lesser degree. For example, the decline into March in the DJIA bottomed exactly at the low of the second wave in March , which followed an extended first wave off the December low.

On occasion, a flat correction or triangle, particularly if it follows an extension, will fail, usually by a slim margin, to reach into the fourth wave area see Example 3. A zigzag, on occasion, will cut deeply and move down into the area of the second wave of lesser degree, although this almost exclusively occurs when the zigzag is itself a second wave.

Having cumulatively observed the hourly changes in the DJIA for over twenty years, the authors are convinced that Elliott imprecisely stated some of his findings with respect to both the occurrence of extensions and the market action following an extension.

The most important empirically derived rule that can be distilled from our observations of market behavior is that when the fifth wave of an advance is an extension, the ensuing correction will be sharp and find support at the level of the low of wave two of the extension.

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Sometimes the correction ends there, as illustrated in Figure , and sometimes only wave A ends there. Although a limited number of real life examples exist, the precision with which A waves have reversed at this level is remarkable. Figure is an illustration showing both a zigzag and an expanded flat correction. Since the low of the second wave of an extension is commonly in or near the price territory of the immediately preceding fourth wave of one larger degree, this guideline implies behavior similar to that of the preceding guideline.

It is notable for its precision , however. Additional value is provided by the fact that fifth wave extensions are typically followed by swift retracements.

Their occurrence, then, is an advance warning of a dramatic reversal to a specific level, a powerful combination of knowledge. This guideline need not apply when the market is ending a fifth wave at more than one degree, yet the action in Figure see above reference suggests that we should still view this level as at least potential or temporary support.

One of the guidelines of the Wave Principle is that two of the motive waves in a five-wave sequence will tend toward equality in time and magnitude. This is generally true of the two non-extended waves when one wave is an extension, and it is especially true if the third wave is the extension.

If perfect equality is lacking, a. When waves are larger than Intermediate degree, the price relationships usually must be stated in percentage terms. When waves are of Intermediate degree or below, the price equality can usually be stated in arithmetic terms, since the percentage lengths will also be nearly equivalent. Thus, in the year-end rally of , we find that wave 1 traveled The guideline of equality is often extremely accurate.

Hamilton Bolton always kept an "hourly close" chart, i. Elliott himself certainly followed the same practice, since in The Wave Principle , he presents an hourly chart of stock prices from February 23 to March 31, Bar charts are fine but can be misleading by revealing fluctuations that occur near the time changes for each bar but not those that occur within the time for the bar.

Actual print figures must be used on all plots. The so-called "opening" and "theoretical intraday" figures published for the Dow averages are statistical inventions that do not reflect the averages at any particular moment. Respectively, these figures represent a sum of the opening prices, which can occur at different times, and of the daily highs or lows of each individual stock in the average regardless of the time of day each extreme occurs.

This exercise is easy as long as the wave counts are clear, as in fast-moving, emotional markets, particularly in impulse waves, when minor movements generally unfold in an uncomplicated manner. In these cases, short term charting is necessary to view all subdivisions.

However, in lethargic or choppy markets, particularly in corrections, wave structures are more likely to be complex and slow to develop. In these cases, a longer term chart often effectively condenses the action into a form that clarifies the pattern in progress. With a proper reading of the Wave Principle, there are times when a sideways trend can be forecasted for instance, for a fourth wave when wave two is a zigzag. Even when anticipated, though, complexity and lethargy are two of the most frustrating occurrences for the analyst.

Nevertheless, they are part of the reality of the market and must be taken into account. The authors highly recommend that during such periods you take some time off from the market to enjoy the profits made during the rapidly unfolding impulse waves. When the market rests, do the same. The investor is concerned with percentage gain or loss, not the number of points traveled in a market average.

For instance, ten points in the DJIA in meant a one percent move. In the early s, ten points meant a ten percent move, quite a bit more important. For ease of charting, however, we suggest using semilog scale only for long term plots, where the difference is especially noticeable.

Arithmetic scale is quite acceptable for tracking hourly waves since a 40 point rally with the DJIA at is not much different in percentage terms from a 40 point rally with the DJIA at Thus, channeling techniques work acceptably well on arithmetic scale with shorter term moves. Elliott noted that a parallel trend channel typically marks the upper and lower boundaries of an impulse wave, often with dramatic precision.

You should draw one as early as possible to assist in determining wave targets and provide clues to the future development of trends. The initial channeling technique for an impulse requires at least three reference points. When wave three ends, connect the points labeled 1 and 3, then draw a parallel line touching the point labeled 2, as shown in Figure This construction provides an estimated boundary for wave four.

If the fourth wave ends at a point not touching the parallel, you must reconstruct the channel in order to estimate the boundary for wave five. First connect the ends of waves two and four. If waves one and three are normal, the upper parallel most accurately forecasts the end of wave five when drawn touching the peak of wave three, as in Figure If wave three is abnormally strong, almost vertical, then a parallel drawn from its top may be too high.

Experience has shown that a parallel to the baseline that touches the top of wave one is then more useful, as in our depiction of gold bullion from August to March see Figure In some cases, it may be useful to draw both potential upper boundary lines to alert you to be especially attentive to the wave count and volume characteristics at those levels and then take appropriate action as the wave count warrants. Always remember that all degrees of trend are operating at the same time.

Sometimes, for instance, a fifth wave of Intermediate degree within a fifth wave of Primary degree will end when it reaches the upper channel lines at both degrees simultaneously. Or sometimes a throw-over at Supercycle degree will terminate precisely when prices reach the upper line of the channel at Cycle degree. Zigzag corrections often form channels with four touch points.

One line connects the starting point of wave A and then end of wave B; the other line touches the end of wave A and end end of wave C. Once the former line is established, a parallel line drawn from the end of wave A is an excellent tool for recognizing the exact end of the entire correction.

Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline on declining volume, it is an indication that the end of the wave will meet or fall short of it.

If volume is heavy as the fifth wave approaches its upper trendline, it indicates a possible penetration of the upper line, which Elliott called a "throw-over. A throw-over is confirmed by an immediate reversal back below the line. A throw-over can also occur, with the same characteristics, in a declining market. Elliott correctly warned that a throw-over at large degree causes difficulty in identifying the waves of smaller degree during the throw-over, as smaller degree channels are sometimes penetrated on the upside during the final fifth wave.

Figures , and show real-life examples of throw-overs. Elliott contended that the necessity of channeling on semilog scale indicated the presence of inflation. To date, no student of the Wave Principle has questioned this assumption, which is demonstrably incorrect. Some of the differences apparent to Elliott may have been due to differences in the degree of waves that he was plotting, since the larger the degree, the more necessary a semilog scale usually becomes.

On the other hand, the virtually perfect channels that were formed by the market on semilog scale see Figure and the market on arithmetic scale see Figure indicate that waves of the same degree will form the correct Elliott trend channel only when plotted selectively on the appropriate scale. On arithmetic scale, the s bull market accelerates beyond the upper boundary, while on semilog scale the s bull market falls far short of the upper boundary.

This monetary background convinces us that inflation is not the reason behind the necessity for use of semilog scale. In fact, aside from this difference in channeling, these two waves of Cycle dimension are surprisingly similar: The essential difference between the two bull markets is the shape and time length of each individual subwave. At most, we can state that the necessity for semilog scale indicates a wave that is in the process of acceleration, for whatever mass psychological reasons.

Given a single price objective and a specific length of time allotted, anyone can draw a satisfactory hypothetical Elliott wave channel from the same point of origin on both arithmetic and semilog scale by adjusting the slope of the 75 waves to fit. Thus, the question of whether to expect a parallel channel on arithmetic or semilog scale is still unresolved as far as developing a tenet on the subject.

If the price development at any point does not fall neatly within two parallel lines on the scale you are using, switch to the other scale in order to observe the channel in correct perspective. To stay on top of all developments, you should always use both. Elliott used volume as a tool for verifying wave counts and in projecting extensions.

He recognized that in a bull market, volume has a natural tendency to expand and contract with the speed of price change. Late in a corrective phase, a decline in volume often indicates a decline in selling pressure. A low point in volume often coincides with a turning point in the market.

In a normal fifth wave below Primary degree, volume tends to be less than in the third wave. If volume in an advancing fifth wave of less than Primary degree is equal to or greater than that in the third wave, an extension of the fifth is in force.

While this outcome is often to be expected anyway if the first and third waves are about equal in length, it is an excellent warning of those rare times when both a third and a fifth wave are extended. At Primary degree and greater, volume tends to be higher in an advancing fifth wave merely because of the natural long term growth in the number of participants in bull markets.

Elliott noted, in fact, that volume at the terminal point of a bull market above Primary degree tends to run at an all-time high. Finally, as discussed earlier, volume often spikes briefly at the throw-over point of a parallel trend channel line or the resistance line of a diagonal.

Upon occasion, such a point can occur simultaneously, as when a diagonal fifth wave terminates right at the upper parallel of the channel containing the price action of one larger degree.

In addition to these few valuable observations, we have expanded upon the importance of volume in various sections of this book. To the extent that volume guides wave counting or expectations, it is most significant. Elliott once said that volume independently follows the patterns of the Wave Principle, a claim for which the authors find no convincing evidence.

The overall appearance of a wave must conform to the appropriate illustration. Although any five-wave sequence can be forced into a three-wave count by labeling the first three subdivisions as a single wave A, as shown in Figure , it is incorrect to do so. Elliott analysis would lose its anchor if such contortions were allowed. If wave four terminates well above the top of wave one, a five-wave sequence must be classified as an impulse. Since wave A in this hypothetical case is composed of three waves, wave B would be expected to drop to about the start of wave A, as in a flat correction, which it clearly does not.

While the internal count of a wave is a guide to its classification, the right overall shape is, in turn, often a guide to its correct internal count. The "right look" of a wave is dictated by all the considerations we have outlined so far in the first two chapters. Elliott cautioned that "the right look" may not be evident at all degrees of trend simultaneously.

The solution is to focus on the degrees that are clearest. If the hourly chart is confusing, step back and look at the daily or weekly chart. Conversely, if 77 the weekly chart offers too many possibilities, concentrate on the shorter term movements until the bigger picture clarifies. Generally speaking, you need short term charts to analyze subdivisions in fast moving markets and long term charts for slowly moving markets.

The idea of wave personality is a substantial expansion of the Wave Principle. It has the advantage of bringing human behavior more personally into the equation. The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies.

The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure. As the Wave Principle indicates, market history repeats but not exactly. Every wave has siblings same-directional waves of the same degree within a larger wave and cousins samedegree and same-numbered waves within different larger waves but no wave has a twin. Related waves — particularly cousins — have similar market and social characteristics.

The personality of each wave type is manifest whether the wave is of Grand Supercycle degree or Subminuette. As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules.

It is at these junctures that a knowledge of wave personality can be invaluable. Recognizing the character of a single wave can often allow you to interpret correctly the complexities of the larger pattern.

The following discussions relate to an underlying bull market picture, as illustrated in Figures and These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down.

Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other fifty percent of first waves rise from either large bases formed by the previous correction, as in , from downside failures, as in , or from extreme compression, as in both and From such beginnings, first waves are dynamic and only moderately retraced.

This is especially true of call option purchases, as premiums sink drastically in the environment of 79 fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often end on very low volume and volatility, indicating a drying up of selling pressure. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns.

Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence. Such points invariably produce breakouts, "continuation" gaps, volume expansions, exceptional breadth, major Dow Theory trend confirmations and runaway price movement, creating large hourly, daily, weekly, monthly or yearly gains in the market, depending on the degree of the wave.

Virtually all stocks participate in third waves. Besides the personality of B waves, that of third waves produces the most valuable clues to the wave count as it unfolds.

More often than not they trend sideways, building the base for the final fifth wave move. Lagging stocks build their tops and begin declining during this wave, since only the strength of a third wave was able to generate any motion in them in the first place.

This initial deterioration in the market sets the stage for non-confirmations and subtle signs of weakness during the fifth wave. They usually display a slower maximum speed of price change as well, although if a fifth wave is an extension, speed of price change in the third of the fifth can exceed that of the third wave. Similarly, while it is common for volume to increase through successive impulse waves at Cycle degree or larger, it usually happens in a fifth wave below Primary degree only if the fifth wave extends.

Otherwise, look for lesser volume as a rule in a fifth wave as opposed to the third. Market dabblers sometimes call for "blowoffs" at the end of long trends, but the stock market has no history of reaching maximum acceleration at a peak.

Even if a fifth wave extends, the fifth of the fifth will lack the dynamism that preceded it. During advancing fifth waves, optimism runs extremely high despite a narrowing of breadth.