Elliott Wave

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Introduction & Psychology

Rules & Guidelines
Look & Feel
Law of Alternation
End of Wave Analysis
Identifying Corrections
Raw Charts

Market Psychology

3 Steps Forward, 2 Steps Back

Impulse, Correction, Impulse, Correction, Impulse

Two Market Phases

Impulsive (denoted by numbers)

Powerful moves that impel the market forward

Smooth, clean

Corrective (denoted by letters)

Counter trend interruptions

Choppy, overlapping price action

START

START
Usually started by an over reaction to news
A new upward wave pattern will start with bad news and quite
probably a blow off low
A new downward wave pattern will start with a good news event
and possibly a blow off high, although buyer exhaustion is more
than likely to cause a new wave pattern
Look for extreme volume events, especially when a new bullish
wave pattern could form

WAVE 1
News is mostly negative, open interest in put options is high
Will usually be a low volume rally and contain a minor short
squeeze (in case of new uptrend)
Market is not yet convinced that a new up trend is underway and
will be more inclined to wait until the downtrend continues.

WAVE 2
Market assumes down trend will resume.
News is usually still negative. Late comers getting the
news and entering the market
Volume will be declining as wave-2 unfolds but with
background volume strength at START we should be
looking for prices to hold major lows
Wave tends to be deep because belief is that prices will
be going lower again. Retracement is 50.0% to 61.8% of
wave-1

WAVE 3
Usually started by short squeeze after wave-2 decline.
News starts to turn positive early in the trend and the
progressively get better as the trend unfolds
Volume starts to accelerate, dips become less pronounced.
Crowd join at any opportunity creating the smoothness of
motion
Wave-3 will normally extend 161.8x wave-1

WAVE-4
Weaker hands usually taking some profits.
Volume dries up and prices stall into sideways or shallow
corrective state.
Decline usually 38.2% to 50.0% of wave-3

WAVE-5
Crowd join back in again thinking that theyve found the
holy grail.
News is very positive.
Call option open interest is usually very high.
Latecomers join the party.
Volume tends to dry up and momentum tends to wane.
Bearish divergence becomes apparent

Rules
1. Wave-2 cannot retrace 100% of wave-1
2. Wave-3 cannot be the shortest
3. Wave-4 cannot overlap wave-2

Guidelines
Keep it simple!
Impulsive Waves (1, 3 and 5) tend to be smooth
and strong.
Corrective Waves (2 and 4) tend to be choppy and
messy.

Guidelines
Keep it simple!
W-2 tends to retrace between 50% to 70% of W-1

W-4 tends to retrace between 30% to 50% of W-3

Guidelines
Keep it simple!
Wave-1 and Wave-5 tend to be the same length

Corrective Wave-A and corrective Wave-C tend to

be the same length

Look & Feel

Proportion
Law of Alternation

Proportion
Waves must be symmetrical in both
time and price

Alternation

End of Wave Analysis

Channeling
Overbought / Oversold
Divergence
Volume
Classic Chart Patterns

Channeling
Identifying retracements, pauses and
extensions

Divergence

Overbought / Oversold

Volume

Classic Chart Patterns

Blow Offs, Gaps,
Head & Shoulders,
Island Reversals, etc

Identifying Corrections
Understand how a correction will unfold
Identify its probable completion

Impulse, Correction, Impulse,

Correction, Impulse

Identify the correction

trade the impulse?

Simple Zig-Zag

Zig Zag Rules

Wave-a will contain 5-waves (intra day?)

Wave-b will usually retrace 50% of a
Wave-b cannot retrace more than 75% of a
Wave-c shows equality with wave-a
Wave-c will surpass the lows made by wave-a

Flat

Flat Rules

Wave-a & -b will contain 3-waves (intra day?)

Wave-b will usually retrace 100% of a
Wave-c may contain 5-waves (intra day?)
Wave-c will terminate or just surpass the lows
made by wave-a

Running Flat

Running Flat
Wave-b will retrace > 100% of a
Wave-c may contain 5-waves (intra day?)
Wave-c will terminate or just surpass the lows
made by wave-a

Triangle

Triangle
5-internal waves
All waves may contain 3-waves (intra day?)
Must always coil

Raw Chart Examples