The following pages show numerous Elliott wave examples from many markets. Most arc examples that were shown and described in my
Dynamic Trader Analysis Report newsletter.
The purpose here is to get you So recognize patterns that provide a high probability opinion of the position of the market and the market events that will validate or invalidate the opinion of the market position.
None of these charts show the price relationships described in me text Price projections will be illustrated in the Dynamic Price Analysis chapter. For now, I just want you to gel used to viewing the market from a pattern perspective. Many of the charts shown here will also be used to illustrate time and price projections in the next two chapters so you will begin to see the value of the holistic approach to market analysis.
Set-ups that worked and those that didn't work are shown. By becoming very aware of the pattern position of each market traders and investors soon learn to make a quick and accurate determination if a market is in a trend or counter-trend and the market pattern that will signal the end of the trend or counter-trend.
If a trader did nothing but learn to recognize the completion of a five- wave-impulse sequence, think what a profitable benefit that would be! What are the ramifications? When a five-wave-impulse sequence is completed, a counter-trend larger in time and price than any since the beginning of the five-wave sequence should unfold.
If a trader knows that most counter-trends are at least a simple ABC and only a minor rive wave counter-trend has unfolded, the trader knows that the odds are very high that that minor five-wave counter-Trend is probably only wave A and the entire correction will not be complete until waves B and C complete. How profitable do you think this simple piece of information will be?
Focus on the basics. Learn to recognize the obvious and be wary of the less than obvious. Always consider what is me specific market activity that will validate or invalidate the pattern position. What is the market activity that should follow the validation or invalidation signal?
Remember that the objective of Dynamic Technical Analysis is to identify low-risk/low-capital exposure trading opportunities, not to form an opinion of the position of every market, all of the time.
Parallel Channels Often Project The End Of Wave 3 and 5
The parallel channel was constructed by drawing a trendline from the Dec, 3 high (beginning of the bear trend) to the wave 2 high. A parallel line was drawn from the wave I low. The wave 3 low was made on the parallel support line.
Parallel channel targets for waves 3 or 5 should only be considered a confirmative target within the context of the time, price and pattern analysis. If the time, price and pattern factors are signaling a low at the same area as the channel line, the probabilities increase for the trend change.
Parallel Channels Of Two Degrees Project The Wave 5 High
The parallel channel is constructed by drawing a trendline from the waves 2 and 4 lows and a parallel line from the wave 3 high. In the chart above, parallel channels were constructed for wave 5 and wave 5:5.
The wave 5 and 5:5 top was made at the coincidence of both degrees of parallel channel resistance,
It Doesn't Always Work But Still Provides Valuable Information
A parallel channel of waves 2-4 from wave 3 was constructed to project a wave 5 high. The Deutsche mark shot right through the resistance channel line but soon made the final, wave 5 high.
A market will usually not make an extended trend beyond a wave 4 or 5 channel projection. Exceeding the waves 2-4 trendline usually signals the completion of the prior trend.
Consider waves 4 and 5 projection channels as alert signals. They often provide the targets where waves 4 or 5 terminate. They are usually not exceeded for long. Traders and investors should be very alert to the time, price and pattern position of a market if the channel target is exceeded, as the market is probably "overextended" and nearing the completion of the whole trend sequence.
Ideal Five-Wave Advance and ABC Correction
The rally and correction in gold from the March 1993 low through the Sept. 1993 low is a textbook illustration of a five wave impulse and ABC correction. If would be nice if gold and other markets conformed so nicely all of the time. They don't, but what is important is to recognize the set- ups when they do.
Note how impulsive waves three and five sub-divided almost perfectly into five waves themselves.
What should we anticipate after the conclusion of a five wave advance followed by an ABC collection? Another five wave advance that should exceed the Aug. 5, wave 5 high. The next page shows what happened.
Advance Follows ABC Correction As Anticipated
The gold market had not read R. N. Elliott's work. Gold did advance from the ABC, Sept. 13 low as anticipated but not in an impulsive, five wave advance. The advance was a choppy, labored affair. While it made higher highs and higher lows, the very definition of a bull trend, the pattern appeared more corrective than impulsive with overlapping waves, difficult to identify sub-waves, etc.
While we could label this advance in any of a number of ways, for practical purposes the pattern does not conform to a practical wave pattern that provides decision making information to the trader. Do not force a count when none exits!
The failure of an impulsive five wave advance to develop from the Sept. 1993 low as anticipated, signaled the larger degree trend was probably not as bullish as anticipated- This turned out to be the case as gold did not exceed the Aug. 1993 high for over two years. Never-the-less, there were still many good trading opportunities during this period from a shorter term perspective.
Elliott Wave Pattern Analysis Provides The Market Action That Invalidates An Anticipated Outlook
Gold made another textbook, five wave advance from the Nov. 22, 1995 low to the Feb. 2, 1996 high. Wave five sub-divided perfectly into five waves. What should we anticipate following a textbook, five wave
advance? Unless it is a wave C, another five wave advance should follow a correction.
Gold declined sharply Into a low on March 7 that appeared to be a wave A low. The wave B rally was an ABC correction. Once the low of April 19, labeled C, was exceeded, it became obvious the gold market was not going to comply with the anticipated Elliott wave outlook.
Once a market is not conforming with a pattern that falls within the rules and guidelines, do not force an Elliott wave count just for the sake of having a count.
From a trading strategy perspective, traders should be aware that a failed signal is often a signal for a sharp move in the opposite direction. Once the April 19, potential wave C low was exceeded, gold had demonstrated its weakness and bear trend. Go with the market signals, not personal expectation. Trade the market, not the forecast.
Wave Three Is Usually The Longest and Strongest Wave
From the April 18, 1995 high, the mark made an almost ideal five wave decline. Note the force of wave three wich the wide range and gap days
down- While the earlier data is not shown, the April 18 high was made following a prolonged bull market trend.
The five wave decline from the April high should be considered either a wave A in a major ABC correction or wave one of a new bear trend. In either case, another five wave decline would be anticipated following a correction up from the May 18 low.
The rally from the May 18 low was not an ideal ABC correction. Many Elliott wave analysis would probably put in a few X waves to make a pattern fit the market activity into the July high. No pattern count would provide a predictive indication that July 19 would be the final corrective high. It is at this point that other analysis techniques such as the Dynamic Time and Price projections are important.
From a practical trading perspective, the key pattern analysis factors prior to the July high were: 1. The five wave decline from the April 18- May 18 signaled the major trend should be bearish. 2. The mark should complete a corrective high below the April 1 & high followed by at least one more decline to a new low.
From the July 19 high, the mark again declined in an almost ideal five wave impulse pattern. Again, wave three includes the widest range and gap days. Wave five is a fifth-wave-diagonal. Remember that diagonal- fifth-waves are usually followed by sharp corrections. That is an under-
statement in this case. The mark exploded upward following the completion of wave five of five.
Five Wave Sequences Are Usually Part of a Larger Degree Trend
From the Aug. 2, 1995 low, cotton made an ideal five wave advance into the Sept. 1 high. A decline followed, making a low near the wave four low. Corrections to five wave impulses typically terminate at or near the prior wave four extreme-
How does the five wave advance into the Sept, 1 high fit into the larger picture? It could be either a wave one of larger degree or wave A. From a trading perspective, it doesn't make any difference. In each case,
another rally to new highs following the correction is anticipated, and that is exactly what unfolded.
You Must Be Quick To Reassess The Pattern Position If A Market Invalidates The "Preferred Count"
Copper was in a very strong bull trend from the Oct. 26, 1993 low. Wave two was an ABC, running correction which was very bullish. Wave four was an irregular ABC.
It appeared that Sept, 26,1994 (labeled 5?) completed a wave five high in a text book blow-off. A very sharp and short decline unfolded from the Sept. 26 high followed by a continued rally to new highs.
With the continued rally to new highs, the five wave advance into the Sept. 26 high is invalid and a new count must be considered. The most logical alternate count is an extended wave five beginning from the Aug. 5, wave 4 low. Why is this the most logical alternate count? Waves one through four (Oct. 1993 through Aug. 1994) are a perfect fit and do not lend themselves to an alternate count. We should assume that they are correct.
Copper advanced in five waves from the Aug. 5 low to make the final top Jan. 19.
The Lesser Degree Pattern Position of a Market Will Often Signal The Larger Degree Trend Position
In Dec. 1989, the Nikkei made a major bull market top. At least an ABC correction would be expected from the Dec. '89 high. The Nikkei made a three section decline from the Dec. high into the Oct. 1990 low. Was Oct. 1990 an ABC correction or wave one through three of a five wave, impulse decline? What would be the signal for each?
If Oct. 1990 completed an ABC corrective low, a five wave advance should be made from the Oct. low. The Nikkei made a three wave advance (ABC) followed by a continued decline to new lows. This signaled that March 20,1991 should be a wave four high and a wave five to new lows should be made. The Nikkei then declined in another text book, five wave pattern to make the wave 5 of (5) low in Aug. 1992,
What was the first signal following the Oct. 1990 low that alerted traders and investors that the rally was probably a wave four and not the beginning of a new bullish impulse sequence? The signal is obvious from
Elliott Wave "Rules" and Guidelines Will Often Signal Very Quickly Whether A Market is In a Trend or Counter-Trend
The chart above is a close-up of the chart on the previous page of the market activity following the Oct. 4, 1990 low in the Nikkei. The alternate wave counts are shown with a question mark. The initial weeks of the rally looked like it could be waves one and two followed by waves one, two and three of the larger degree wave three. What was the first signal this
potentially very bullish wave count was incorrect?
Wave four should not trade into the price range of wave two. The Nikkei declined from the March 1991 high which is alternately labeled as wave 3:3 into the price range of wave 1:3. This voided the bullish wave count and signaled that the March 1990 high was probably not wave 3:3 but wave C of a completed ABC, wave four. This had major implications. Another five wave decline (wave five of larger degree) should then unfold to new lows! This is exactly what unfolded. See the chart on the previous page.
By being aware of the pattern position of a market and the ramifica- tions of when a pattern is voided, the trader and investor is prepared for the early signals of the direction of the larger degree trend. Every market does not always provide such a ideal wave count and alternate count set- up. But when they do, traders and investors are provided with a powerful piece of information.
How would you like to have known in June 1991 that the Nikkei should probably continue to decline to new lows in the months ahead?
What wave count?
The S&P began a relentless bull trend from the Dec. 1994 low. Up to the Feb. 1996 high, there were no waves to count! If you followed any of the traditional Elliott wave analysis services, you may recall any number of wave counts that continually projected a wave five top. Prior to Feb. 1996, where could you possibly count waves four and five? Only in the illusions of your mind. Certainly not on the chart.
Why did many of the services see a five wave advance as complete prior to Feb. 1996? They made the wave count fit their forecast. If you are strongly predisposed for a particular market forecast, you will find the evidence, however flimsy, to support that outlook.
Don't trade your prophesy of the future. Trade the market. Don't see what isn't obviously not there, or it will be very detrimental to your wallet.
Markets Do Not Always Play By The Rules
Sugar made a five wave advance into the March 1996 high that broke most of the rules. Markets just have no respect. Each larger degree impulse wave (1, 3 and 5) sub-divided into five waves. But, in every case, the wave fours traded into the range of the wave ones for a day or two and then immediately continued the bull trend.
Traditional Elliott wave analysts would feel forced to re-label the waves to some sort of complex and indecipherable collection. Real- world traders will look to identity the completion of a five wave sequence in order to step out of the trade and possibly reverse the trading direction. If a market is closely fitting the structure of a wave sequence, at least consider it valid even if it very briefly breaks the "rules."
The Dynamic Time and Price projections which will be learned in the next two chapters will be critical to validating me probability of the wave count.
Do Nat Ignore The Ramification of the Completion Of Multiple Degrees of 5th Waves
This is a close-up from the previous page of the larger degree wave five that began from the Jan. 16, 19% low. This is a beautiful example of minor degree sub-divisions signaling the trend reversal of larger degree. Sugar made a final lop at wave five of five of five.
Look again at the chart on the previous page and note the extent of the decline from the March 1996 high. Do you care if this five wave sequence precisely meets all of the Elliott wave "rules" or would you rather be pre- pared to recognize completion of the final, minor wave five of a long term
Don't Force a Wave Count Where No Logical Count Exits
What is your idea of a wave count for this three year bull trend in bonds? This was an unmistakable bull trend, yet there is no logical Elliott wave impulse count that was evident as the market was unfolding or is evident after-the-fact.
However, almost all of the intermediate degree trends marked off on the chart made very clean five wave advances and three wave declines. The chart above are weekly bare. Check your daily charts for the intermediate degree patterns to see how tradable bond swings are.
When Handed A Gift, Take It
It doesn't get much better than this. Beans made an almost ideal five wave advance from the Feb. 1,1995 low into the April 11, 1995 high followed by an ABC correction into the May 9,1995 low.
Markets Do Sometimes Correct In A Five-Wave Sequence
Corrections are supposed to be three waves or a scries of three waves, right? Somebody forgot to tell the bean traders. Beans made an ideal, five wave impulse decline which completed a collection. The bean market hadn't read the Elliott wave textbooks.
Traders may still have taken advantage of the five wave decline from the short side and know to bring stops close to the market as beans entered the fifth wave down.
Take advantage of what ever information the market is providing. Profits will be maximized and losses minimized.
Do not try to re-label this decline to fit the "rules" of corrections. This is a five wave, impulse sequence, period. Now and them, a correction will be a perfect five wave sequence. Academic Elliott wave hardheads will
always re-label a market to make it fit their perceptions of how they think it is supposed to be rather than move on to the present condition and the next money-making set-up.
Elliott Wave Analysis Applies To All Actively Traded Markets
This is a chart of the close-only data of Fidelity's Select Precious Metals mutual fund. Elliott wave pattern analysis applies to all actively traded markets including futures, stocks, stock indexes and mutual funds.
The PM fund made a five wave advance where wave five subdivided into five waves in text book fashion.
Form More Important Than Rules
The chart above is weekly close-only data of Fidelity's Select Bio-Tech fund. The bull trend from the Nov. 1987 low to the Jan. 1992 high had three distinct rally sections, waves 1,3 and 5. Waves 1 and 3 definitely didn't conform to Elliott wave impulse pattern rules or guideline, but still were distinct rally trends. Wave 5 (Oct. 1990 - Jan. 1992) was a text book Elliott impulse pattern, right down to the five-wave subdivision of wave 5. The ABC correction (Jan, 1992-March 1993) was also a text book pattern. The initial five wave decline into the June 1992 low is the A wave. The B wave was an abc (correction to the correction). Note the initial, minor five wave pattern up following the C wave low.
How is this analysis put to practical used?
1. As the mutual fund rallied to new highs in Jan., it appeared that it was