Investment Insights

Investment Insights

Elliott Wave Analysis

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 Introduction
• This concept was proposed by Ralph Elliott Nelson.

• Proposes that markets move in predefined patterns.

• Elliott Waves consist of impulse waves and corrective

waves

• Impulse waves consists of 5 sub-waves and move in the

direction of the trend.

• Corrective waves have three sub-waves and move against

the direction of the trend.

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 Elliott Wave Pattern
• The basic wave pattern consists of an
impulse wave and a corrective wave.

• Impulse waves consist of 5 waves

(Wave-1 to Wave-5) and moves in the
direction of the trend.

• Waves 1, 3 and 5 move in the direction

of the trend while Waves-2 and 4 move
opposite to the trend.

• Corrective waves can be simple or

complex.

• A simple correction consists of 3 waves

(Wave-A, B and C) which retrace a
portion of the impulse wave

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 Impulse Waves
• A wave which moves in the
direction of the trend is called a
impulse wave.

• Waves 1, 3, 5 in an impulse
wave.

• Impulse waves can be

subdivided into 5 waves

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 Impulse Waves
• Following guidelines can be used to
determine if a wave is impulse,

o Wave 2 should not retrace Wave 1

completely.

o Wave 4 should not retrace Wave 3

completely.

o Wave 4 should not go below the top

of Wave 1.

o Top of Wave 3 should be higher than

the top of Wave 1.

o Wave 3 is generally the longest

amongst Waves 1, 3 and 5.

o Wave 3 is never the shortest amongst

Waves 1,3 and 5.
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 Extension
• Extensions are elongated
impulse waves.

• Wave 3 is most likely to show

an extension pattern.

• Any of Waves 1, 3 and 5 can

show an extension pattern.

• Extensions generally occur in

only one of Waves 1,3 or 5

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Truncation
• A truncation pattern is formed
when the Wave 5 is not able to
break above the highs of Wave
3.

• Generally happen following a

strong Wave 3

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 Ending Diagonal
• These are generally formed as
Wave 5.

• These indicate exhaustion of the

prevailing trend.

• These are generally formed after

sharp moves.

• A rising ending diagonal in an

uptrend is a very bearish signal
and leads to a sharp reversal.

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 Corrections
• Corrective waves move against the broader trend.

• Corrections can be simple or complex.

• Corrections are never in 5 waves.

• Common corrective patterns are

o Zigzags
o Flats
o Triangles
o Complex Corrections: Can be combinations of the above
patterns. Example, a double Zigzag or Flat and Triangle
joined by a X wave, etc

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 Zigzags
• Three wave corrective pattern.

• The top of wave B is lower than

the beginning of Wave A. Bottom
of Wave C is lower than Bottom of
Wave A.

• Wave A and C can be divided into

5 sub waves. Wave B can be
divided into 3 waves.

• Complex corrections can take the

form of double or triple zigzags
joined by X waves.

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 Flats
• This is a 3 Wave corrective
pattern.

• Wave B ends close to the

beginning of Wave A and Wave
C ends close to the end of
Wave A.

• Waves A and B are in 3 waves.

Wave C is in 5 waves.

• Complex corrections can take

the form of double or triple flats
or combinations of flats and
other corrective patterns joined
by X waves.
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Triangles
• Triangles are consolidation
patterns which consist of 5
waves.

• Each of the 5 waves can be

subdivided into 3 sub waves.

• Complex corrections may be a

combination of triangles and
other corrective patterns joined
by X waves.

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 Elliott Wave Example
• The example shows a 5 wave
move higher followed by a 3
wave corrective decline.

• At this stage the market may

move higher in another impulse
wave or a complex correction
may take place.

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