MOTIVE(5 WAVES)

- waves 2 and 4 never retrace more than 100 % of wave 1 and 3

- wave 3 always travels beyond wave 1
- in price terms, wave 3 is often the longest but NEVER the shortest of the actionary subwaves (i.e. 1,3,5)
Impulse
- should be easily identifiable, volume should be higher
during trend waves and lower during counter trend
waves with wave 3 typically showing the highest (but
this may not be true for very short time frames)
- waves 4 does not overlap wave 1
- actionary subwaves (1,3,5) are motive and subwave 3
is impulse
- no reactionary subwave fully retraces the preceding
actionary subwave
Extension
- most impulse waves contain an extension and do so
mostly in only one of the 3 actionary subwaves
- if below primary degree, developing 5th wave
extension will be confirmed by new high volume
- most commonly extended wave is wave 3 and 3rd
wave of an extended 3rd wave is typically an extension
Truncation
- usually verified by noting that the presumed 5th wave
contains the necessary 5 waves
- often occurs following an extensively strong third
wave
Diagonal Triangles
- motive yet not an impulse
- no reactionary subwave fully retraces the preceding
actionary wave
- 3rd wave is NEVER the shortest
- the only 5 wave structure in direction of main trend
whereby wave 4 almost always overlaps wave 1
- 5th waves of diagonals often end in "throw-over" (i.e.
brief break of trend lines connecting waves 1 and 3)
accompanied by volume spike and in rare cases 5th wave
falls short of resistance trend line
- rising diagonal usually followed by retracement to where
it began (converse is true for falling diagonal)
ENDING DIAGONAL (wedge shaped, converging lines)
- occurs primarily in 5th wave position - when too far to
fast preceding
- always found at termination points of larger patterns
(indicating exhaustion)
- very small percentage appear in wave C position (in
double or triple threes, only as the final C wave)
- each subwave subdivides into 3 (forming a 3-3-3-3-3
wave pattern)
LEADING DIAGONAL
- occurs in wave 1 of impulses and wave A position of
zigzags
- waves 1 and 4 overlap and boundary lines converge
- traces out 5-3-5-3-5 pattern
- don't confuse with series of 1st and 2nd waves (far more
common). differentiate by the slowing of price change in
the 5th subwave relative to the 3rd v increasing short
term speed between 1st and 2nd
CORRECTIVE(3 WAVES)
- they can NEVER be 5 wave patterns (except triangles?)
- there are 4 main categories as below
Zigzags (5-3-5)
-top of wave B is noticeably lower than start of A (in a bull
market) or higher (in a bear market)
- often move quickly and retrace a large portion of the
wave they are correcting
- will occasionally occur twice or three times at most in
succession, particularly when the first zigzag falls short of
a normal target. Here each zigzag is separated by an
intervening "three", making a double or triple zigzag.
These formations are analogous to extension of an
impulse but are less common
Triangles
- cause a sideways movement usually
associated with decreasing volume and
volatility
- contain 5 overlapping waves that
subdivide into 3-3-3-3-3 and are labelled a-
b-c-d-e
- delineated by connecting termination
points of a and c, and b and d
- wave e more often than not overshoots or
undershoots the a-c line
- extremely common for wave b of a
contracting triangle to exceed the start of
wave a (termed 'running triangle)
- despite sideways appearance, all triangles
effect a net retracement of the preceding
wave at wave's end
- most subwaves in a triangle are zigzags,
but sometimes one of the subwaves (usually
c) might be regular or expanded flat or
multiple zigzag.
- rare, but one of the subwaves (usually e) is
itself a triangle (so that entire pattern
protracts into 9 waves)
- nearly always occur in positions prior to
final actionary wave in the pattern of one
larger degree (i.e. wave 4 in an impulse,
wave B in A-B-C, or final wave X in a
double/triple zigzag or combination.
Extremely rare to be in wave 2 of impulse
- when triangle occurs in wave 4 position,
wave 5 is sometimes swift (called "thrust")
and travels approx. distance of widest part
of triangle. Thrust is normally impulse but
can be ending diagonal
CONTRACTING TRIANGLE
- Symmetrical: top declining, bottom rising
- Ascending: top flat, bottom rising
- Descending: top declining, bottom flat
EXPANDING TRIANGLE
- has only one form: top rising, bottom
declining
Combinations
DOUBLE AND TRIPLE THREES (i.e. sideways combinations)
- combination of simpler types of corrections (zigzags,
flats, triangles)
- appears to be flat correction's way of extending the
sideways action
- each simpler correction is labelled W, Y, and Z
- reactionary waves, X, can take any form but are most
commonly zigzags
- appears to be never more than one zigzag or triangle
(which are normally the final wave) in a combination
- in double/triple zigzag, first zigzag is rarely large enough
to constitute adequate price correction of the preceding
wave and the doubling/tripling is needed to make it an
adequate retracement
Flats (3-3-5)
- occur in periods involving strong larger trend and thus
virtually always precede or follow extensions
- the more powerful the underlying trend, the briefer the
flat
- within impulses, 4th waves frequently sport flats, 2nd
waves less so
REGULAR FLAT
- wave B ends near start of A, C generally ends slightly
beyond end of A
EXPANDED /IRREGULAR FLAT (common)
-B terminates beyond start of A, and C ends more
substantially beyond end of A
- show underlying trend is very strong
RUNNING FLAT (rare)
- B terminates well beyond start of A, BUT C falls short of
the end of A
Which actionary waves develop in corrective mode?
- waves 1, 3 and 5 in an ending diagonal
- wave A in a flat correction
- waves A, C and E in a triangle
- waves W and Y in double zigzags and double corrections
- wave Z in triple zigzags and triple corrections
Actionary (1, 3, 5, A, C, E, W, Y and Z) Reactionary (2, 4, B, D and X)
Wave 1s
- rarely recognized at their inception, when the news
is almost universally bad and previous trend is seen
as still being in force
- analysts are revising estimates lower, sentiment
polls are at typically at historic bearish extremes
- much greater interest in put options than call
options and implied volatility is typically quite high
- volume might pick up a bit but should not be very
high (which implies rampant short selling and a bear
market correction)
- slow and steady price increase fits more closely to
start of a new bull market
----------------------------
-roughly speaking, half of wave 1s are part of the
basing process and thus tend to be heavily corrected
by wave 2
- in contrast to the bear market rallies within previous
decline, however, this 1st wave rise is technically
more constructive, often displaying subtle increase in
volume and breadth.
- Plenty of short selling is in evidence as majority
finally become convinced that overall trend is down
and investors take advantage of one more rally to sell
on.
- the other 50% of wave 1s rise from either large
bases formed by previous correction, from downside
failures, or from extreme compression. From such
beginnings they are dynamic and only moderately
retraced
Wave 2s
-they rarely retrace less than 38% and often retrace
61.8% of wave 1 (this can be exceeded if the time
frame is very short or we are fighting off a major,
entrenched bear market, but otherwise there is a
strong possibility the count is wrong)
- assuming a bull market, the drop should be in three
waves (remember if its a-b-c zigzag down, wave a
would still develop in 5 waves but the retrace amount
of wave 1 should be rather small by the time wave a
completes)
-second subwave of wave 3s is often very shallow
and could retrace less than the 38%
- they are often fast and furious though a second
wave which is part of a corrective wave is not likely to
be as powerful as a wave 2 that is correcting the
initial wave of a major reversal
- volume should be lower than wave 1
- second waves often produce downside non-
confirmations and Dow Theory "buy spots", when low
volume and volatility indicate a drying up of selling
pressure
Wave 3s (wonders to behold)
- this is where most of the public will realize that the bear
market is over
-strong and broad (including almost all stocks), trend is
unmistakable, volume is usually highest
- increasingly favourable fundamentals as confidence
returns
- any pull-backs will be short-lived and shallow and
therefore anybody waiting will lose out
- It is most often the extended wave in the series and
wave 3 is usually at least 1.618 times as large as wave 1
in price terms but because it is very powerful will
probably take less than 1.618 times as long to complete
-third wave of a third wave will be the most volatile point
of strength and invariably produce breakouts,
"continuation" gaps, volume expansions, exceptional
breadth, major Dow Theory trend confirmations
- momentum almost always confirms the price highs
- momentum divergences confirm price action at the end
of wave 3 (if it appears complete and momentum does
not confirm it probably means it is a C wave at the end of
a correction or end of a first wave of a larger wave 3)
Wave 4s
-predictable in depth and form because by alternation
they depend and should differ from previous 2nd wave of
the same degree.
- all the books say they should retrace 38% of wave 3 but
they often fail to and may retrace more
- usually clearly corrective, difficult to count, price
declines are shallow and volume is much less than wave
3
- volatility probably wont pick up very much even though
prices are dropping
- can take a long time to develop but should not take
longer than previous impulse waves however, be
warned it is possible if that is the only inconsistency
-this initial deterioration sets stage for non-confirmations
and subtle signs of weakness during wave 5
- it is the first time that some analysts start to warn that
prices have gone to far and profit taking may ensue
Wave 5s
- often ends with momentum divergences, volume is
lower than wave 3 but as high or higher than wave 4
- less dynamic than wave 3 in terms of breadth, slower
max speed of price change (unless extension)
- optimism runs very high despite narrowing of breadth,
everybody is bullish
A waves
-Typically seen as a correction of the then-current
trend when it is actually the first leg of a reversal, or
larger correction
-5 wave A indicates a zigzag for wave B, while a 3
wave A indicates a flat or triangle
-If wave a was just three waves but achieved a deep
retracement of the prior impulse wave, then
probabilities favour a resumption of the prior trend
- if wave a was also very fast, even if the retrace was
deep, the odds favour a period of range trading (i.e.
triangle/flat/irregular/or even more complex)
meaning you can use oscillators for entries and exits
more reliably
- if there are only three subwaves, and if the
correction is shallow, wave a may not be done
- during bear markets, investment world believes
this reaction is just a pullback pursuant to the next
leg of advance
- Volumes and volatility might pick up but not nearly
enough to imply a bottom
B waves (phonies, most difficult to track)
-always either three wave patterns or triangles
- in a flat they should retrace nearly all of wave A
and at least 62% of it and by definition retrace more
than 100% if irregular/expanded
- in a zigzag wave b typically corrects 38% to 62% of
wave A. Zigzags have far more bearish implications
than flats and irregulars do
-if A has five legs (i.e. In a triangle the most
confusing of B waves) the retrace is normally < 62%
- sucker plays, often involve focus on narrow list of
stocks, often unconfirmed by other averages, rarely
technically strong, virtually always doomed to
complete retracement by C
- X and D waves in expanding triangles have the
same characteristics
- B waves of intermediate degree and lower usually
show declining volumes while those of primary
degree and greater can display volume heavier than
that which accompanied preceding bull market
C waves
- very impulsive (high level of fear), always 5 waves,
close relative of third waves
- in zigzags, C waves normally exceed wave A in time
and size
-Volume may be higher in C than A
- some suggest that wave C should not continue
beyond 1.618 times wave A but inconsistencies
occur. If wave C completes a flat, its length is usually
similar to that of wave A
-can be mistaken for new upswing if within upward
corrections of bear markets
D waves
- accompanied by increased volume in all but
expanding triangles
- as phony as B waves
E waves
- in triangles, they appear to most to be dramatic
kick off of a new downtrend after a top has been
built
- almost always accompanied by strongly supportive
views
- tendency to stage a false breakdown through the
triangle boundary line, thus intensifying bearish
conviction
Throw-over
- generally true of the two non-extended waves
when one is an extension and is especially true if the
3rd wave is an extension. If perfect equality is
lacking, a 0.618 multiple is the next likely
relationship
TECHNIQUE
- parallel trend channels typically mark the upper
and lower boundaries of impulse waves, often with
dramatic precision
- when wave 3 ends connect points 1 and 3, then
draw a parallel line touching point 2. This initial
channel provides an estimate boundary for wave 4
- if wave 4 ends at a point not touching the parallel,
you must reconstruct the channel in order to
estimate boundary for wave 5. First connect wave 2
and 4
- if waves 1 and 3 are normal, upper parallel most
accurately forecasts end of wave 5. If wave 3 is
abnormally strong, almost vertical, a parallel
touching the top of wave 1 is usually more useful.
Alternation - always expect a difference in the
next expression of a similar wave
IMPULSES
- one of the two corrective phases will contain a
move back to or beyond the end of the preceding
impulse, the other will not
- Wave 2 and wave 4 will usually not look alike (i.e. if
wave 2 is a sharp correction, wave 4 is more likely to
be sideways and vice versa)
- sharp corrections NEVER include a new price
extreme, they are almost always zigzags (single,
double, triple), occasionally they are double threes
that begin with a zigzag.
- sideways corrections include flats, triangles, double
and triple corrections, they usually include a new
price extreme, in rare cases a regular triangle (i.e.
one that does not include a new price extreme) in
4th wave position will take the place of a sharp
correction and alternate with another type of
sideways pattern in the 2nd wave position
- diagonal triangles do not display alternation
between subwaves 2 and 4, typically both are zigzags
- extensions are an expression of alternation
CORRECTIVE WAVES
- if a large correction begins with a flat a-b-c
construction for wave A, expect a zigzag a-b-c for
wave B and vice versa
- quite often, if 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 alternation. Sometimes wave C will be yet
more complex. The reverse order of complexity is
less common.
Depth of corrective waves/bear
markets
- corrections/bear markets, especially when they
themselves are 4th waves, tend to register their
maximum retracement within the span of travel of
the previous 4th wave of one lesser degree, most
commonly near the level of its terminus
- however, it is often the case that if wave 1 in a
sequence extends, the correction following the 5th
wave will have as a typical limit, the bottom of the
2nd wave of lesser degree
-On occasion, flat corrections or triangles,
particularly those following extensions, will barely
fail to reach into the 4th wave area
- Second wave corrections tend to be fairly deep
- Zigzags, on occasion will cut deeply and move
down into the area of the 2nd wave of lesser degree,
although this almost exclusively occurs when the
zigzags are themselves 2nd waves. "Double
bottoms" are sometimes formed in this manner
- when wave 5 of an advance is an extension, the
ensuing correction will be sharp and find support at
low of wave 2 of the extension. Sometimes the
correction may end there or it may just be an
accurate turning point for A.
Channelling
- one of the guidelines of EWT 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 is an extension
and is especially true if the 3rd wave is an extension. If
perfect equality is lacking, a 0.618 multiple is the next
likely relationship
TECHNIQUE
- parallel trend channels typically mark the upper and
lower boundaries of impulse waves, often with dramatic
precision
- when wave 3 ends connect points 1 and 3, then draw a
parallel line touching point 2. This initial channel
provides an estimate boundary for wave 4
- if wave 4 ends at a point not touching the parallel, you
must reconstruct the channel in order to estimate
boundary for wave 5. First connect wave 2 and 4
- if waves 1 and 3 are normal, upper parallel most
accurately forecasts end of wave 5. If wave 3 is
abnormally strong, almost vertical, a parallel touching
the top of wave 1 is usually more useful.
THROW-OVER
- within parallel channels and converging lines of
diagonal triangles, a 5th wave approaching the trendline
on declining volume indicates the wave will meet or fall
short of it. Heavy volume indicates a possible throw-
over - near the point of throw-over, a 4th wave of small
degree may trend sideways immediately below the
parallel, allowing 5th to break in final gust of volume
- occasionally telegraphed by a preceding "throw-
under" either by wave 4 or 2 of 5. They are confirmed by
immediate reversal back below the line.
Volume
- a low point in volume often coincides with a
turning point in the market.
- in normal 5th waves below Primary degree, volume
tends to be less than in wave 3s. If volume in wave 5
of less than Primary degree is equal to or greater
than in wave 3, an extension of the 5th wave is in
force (this is expected anyway if wave 1 and 3 are
about equal in length, but it is an excellent warning
of rare times when both wave 3 and 5 are extended)
- volume at terminal point of a bull market above
Primary degree tends to run at all time high
Retracements
-Occasionally a correction retraces a Fib % of the
preceding wave
- markets are more likely to obey Fib lines (and other
measures of support and resistance) during times of
high volatility
-sharp corrections often tend to retrace 61.8% or
50% of the previous wave, particularly when they
occur as wave 2 of an impulse, wave B of a larger
zigzag, or wave X in a multiple zigzag
- sideways corrections tend more often to retrace
38.2% of the previous impulse wave, particularly
when the occur as wave 4
Motive Wave Multiples
- wave 3 usually exceeds the size of wave 1 by 1.618 times but may reach 2.618 or 4.236 times
- a weak wave 5 might only attain 0.618 of wave 1
- if waves 1 and 3 are close in size, wave 5 will likely reach 1.618 or more times wave 1
- the distance travelled by wave 5 usually reaches between 61.8% and 100% of the total price gain/loss
covered by wave 1 through 3. A move greater than 100% likely means current leg is actually wave 3 of very
powerful third
- as a generalization, unless wave 1 is extended, wave 4 (at the point of its start, end or extreme countertrend
point) often divides the price range of an impulse wave into the Golden Section whereby the latter portion is
0.382 of the total distance if wave 5 is not extended (Fig 4-6) and 0.618 when it is (Fig 4-7). It therefore provides
two or three closely clustered targets for the end of wave 5 and this guideline explains why the target for a
retracement following a wave 5 often is doubly indicated by the end of the preceding 4
th
wave and the 0.382
retracement point.
-when wave 3 is extended, 1 and 5 tend to equality or a 0.618 relationship (Fig 4-3)
-wave 5's length is sometimes related by the Fib ratio to the length of wave 1 through 3 (Fig 4-4). 0.382 and
0.618 relationships occur when wave 5 is not extended.
- in rare cases where wave 1 is extended, wave 2 often subdivides the entire impulse wave into the Golden
Section (Fig 4-5)
Corrective Wave Multiples
-wave C is often very close to A in size (Fig 4-8) and usually not more than 1.618 of A in a zigzag and is not
uncommonly also 0.618 times A. The same relationship applies to a second zigzag relative to the first (Fig-4-9)
- weaker corrections may see wave C reach only 61.8% of A
- in flats, wave C rarely exceeds a 1.000 ratio to wave A
- subsequent legs of a triangle often retrace 61.8% of the prior leg
- in a regular flat, A, B and C are approximately equal (4-10)
- in an expanded flat, wave C is often 1.618 times the length of wave A. Sometimes C will terminate beyond
the end of A by 0.618 times the length of A. Both tendencies are illustrated in Fig 4-11
- wave B in an expanded flat is sometimes 1.236 or 1.382 times the length of A
- in rare cases wave C is 2.618 times the length of wave A
- in a triangle at least two of the alternate waves are typically related by 0.618 (i.e. e=0.618c, c=0.618a, or
d=0.618b). In an expanding triangle the multiple is 1.618 and in rare cases, adjacent waves are related by
these ratios
- in double and triple corrections, the net travel of one simple pattern is sometimes related to another by
equality or particularly if one of the threes is a triangle, by 0.618
- wave 4 quite commonly spans a gross and/or net price range that has an equality or Fib relationship to its
corresponding wave 2. As with impulse waves, these relationships usually occur in percentage terms