Elliot Wave Theory [PDF]

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Elliott Wave 1. 2. 3. 4. 5. 6. 7.



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 they’ve 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 Off’s, 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