While there is basically just one pattern for impulse waves, a five wave structure, Elliott described eight different potential patterns with variations for corrective waves. Identification and labeling of corrective waves is what has not only brought so much confusion to Elliott wave analysis, but has driven so many people to deny its practical application. In the spirit and necessity of keeping market analysis simple, I am not going to include descriptions of the many "complex" corrections.
Essentially, corrective waves are three wave patterns or various combi- nations of three wave patterns. The simplest three wave, corrective pattern is called an ABC correction. Even within this simple pattern there are four variations: zigzag, flat, irregular and running, I am only going to describe in detail the ABC corrective patterns and ignore all of the various
complex, corrective patterns for two important reasons:
1. Once a market has demonstrated that the corrective pattern will not be an ABC correction, it is almost impossible to predict what form the correction will take. All labeling of the correction beyond a simple ABC pattern is little more than guess work. The form of the complex correction usually only becomes evident after the correction has completed.
2. There is no practical trading value in knowing all of the complex corrective variations. The purpose of this training is not to become academic experts of market analysis but recognize and apply analysis and trading strategies that have practical value for making trading decisions. We'll let the academics and non-trading analysis argue over the proper interpretation of market structure while we'll concentrate on what helps us to make trading and investing profits.
Corrective Waves
General Characteristics
1. Corrective waves within a five wave structure are waves two and tour. 2. Corrective patterns unfold following the completion of a five-wave,
impulse structure.
3. Corrective patterns unfold in at least a three wave, ABC structure, 4. Three wave, ABC corrections may take [he form of 5-3-5 or 3-3-5,
That is, the A wave may be three or five waves, the B wave should always be three waves and the C wave should always be five waves. 5. Three wave, ABC corrections may take several shapes including a
zigzag, irregular, flat or running,
6. Corrective waves may unfold in an atmost unlimited progression of threes and fives called "complex" corrections which can include a series of ABCs separated by so-called "X" waves. An X wave may also he labeled a DK wave (Don't Know). X waves are frequently used by Elliott wave analysts to make a count fit as a corrective series when there really is no logical pattern other than the knowledge that the market is not undergoing a five wave, impulse sequence.
7. Corrections tend to terminate near the range of the fourth wave of one lesser degree,
Simple ABC Zigzag Correction
A. The correction begins following the completion of a five wave impulse pattern.
B. Wave A may be five or three waves. If wave A is five waves, the ABC correction is called a 5-3-5. If wave A is three waves, the ABC correc- tion is called a 3-3-5.
C. Wave B is a correction of the larger degree correction. Wave B should be a three wave structure.
D. Wave C exceeds the extreme of wave A. E. Wave C should be sub-divided into five waves.
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ABC Flat Correction
A. The correction begins following the completion of a five wave impulse pattern.
B. Wave A may be a three or a five.
C. Wave B tests the extreme of wave five. Wave B is a three wave. D. Wave C tests the extreme of wave A. Wave C is a five wave.
ABC Irregular Correction
A. The corretion begins following the completion of a five wave impulse pattern.
B. Wave A may be a three or five wave.
C. Wave B exceeds me extreme of wave five. Wave B is a three wave. D. Wave C exceeds the extreme of wave A, Wave C is a five wave.
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ABC Running Correction
An ABC "running correction" appears to be the continuation of the trend rather than a correction to a five wave sequence. For practical purposes, it is considered & correction because it is [he interim pattern between the completion of a five wave sequence and the beginning of the next five wave sequence. A running correction implies a strong continuation of the trend following the end of the correction. Running corrections are made infrequently.
A. A running correction begins following the completion of a five wave impulse pattern.
B. Wave A may be a three or a five wave and is relatively shallow. C. Wave B exceeds the extreme of wave 5.
D. Wave C retraces wave B and does not exceed the extreme of wave A. ABC Running Correction
Correction or Impulse?
An ABC (5-3-5) zigzag corrective pattern will have the same structure as Waves 1-3 of a five wave impulse pattern. If the position of the market at the beginning of the structure is not clearly evident, only the pattern of the market as it unfolds will reveal whether a correction or impulse pattern is underway.
The wave pattern shown below could be the initial stages of a five wave impulse sequence or an ABC corrective sequence. Which pattern is more likely to be the case will depend a great deal on the wave structure going into the beginning of this pattern.
The one thing we know regarding the above illustration within the context of Elliott wave rules is that a five wave sequence should develop from the low that is labeled 2 or B. That five wave sequence may be a wave three or a wave C. The position of the market at? will help deter- mine whether the current activity is a correction or impulse. Even if the position o f ? is not clear, a five wave sequence should unfold from a 2 or B.
If the five wave sequence from 2 or B extends beyond a 100% Alternate Price Projection (W.C >100% W.A), more than likely it is the beginning of a five wave sequence. If the five wave sequence from 2 or B completes at less than a 100% Alternate Price Projection (W.C < 100% W.A), more than likely the pattern starting at ? is an ABC correction and not waves one-three of a five wave sequence.
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Correction or Impulse?
If a five wave sequence completes following 2 or B and the market then declines below the top of 1 or A, it cannot be waves one-three, as a wave four cannot trade into the price range of wave one.
The wave count shown above assumes the market made a wave three high. Price then declined below the lop of wave one. Why is the wave count incorrect? Wave four may not trade into the price range of wave one. Rather than a 1-2-3 sequence as labeled above, the sequence must be reconsidered as either an ABC or 1-2-1:3.
As a market unfolds, it will continually provide conditions that confirm or invalidate the assumed wave count position.
Wave Count Incorrect
Wave 4 may not trade into the price range of Wave 1. This sequence cannot be a 1-2-3.