ππ#LECTURE ONE#ππ
ππGuidelines for Applying Elliott Wave Theoryππ
A guideline is not a hard and fast rule that can't be broken. It is a tendency - something that happens so often that it can almost qualify as a rule, except for the times it doesn't work as expected.
The guidelines described below are useful ways of applying Elliott Wave analysis that have shown their validity over time. But as they are not rules, they may not work out every time.
ππGuidelines for Applying Elliott Wave Theoryππ
A guideline is not a hard and fast rule that can't be broken. It is a tendency - something that happens so often that it can almost qualify as a rule, except for the times it doesn't work as expected.
The guidelines described below are useful ways of applying Elliott Wave analysis that have shown their validity over time. But as they are not rules, they may not work out every time.
Guideline 1
The Guideline of Equality says that two of the motive sub-waves in a five wave sequence will tend toward equality, and is generally true of the non-extended waves.
This means that when Wave 3 of an impulse wave is the extended wave, Wave 5 will approximately equal Wave 1 in price. This is useful for potentially projecting the end of Wave 5 in an impulse if you recognize Wave 3 as an extended wave.
The Guideline of Equality says that two of the motive sub-waves in a five wave sequence will tend toward equality, and is generally true of the non-extended waves.
This means that when Wave 3 of an impulse wave is the extended wave, Wave 5 will approximately equal Wave 1 in price. This is useful for potentially projecting the end of Wave 5 in an impulse if you recognize Wave 3 as an extended wave.
Guideline 2
The Guideline of Alternation within an Impulse says that the forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp style of correction, Wave 4 will be a sideways style of correction. If Wave 2 is sideways, Wave 4 will be sharp.
This is useful for anticipating the end of a Wave 4 correction within a suspected impulse.
The Guideline of Alternation within an Impulse says that the forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp style of correction, Wave 4 will be a sideways style of correction. If Wave 2 is sideways, Wave 4 will be sharp.
This is useful for anticipating the end of a Wave 4 correction within a suspected impulse.
Guideline 3
The Guideline of Alternation within a Correction says that the forms for Wave A and Wave B will alternate within a 3-wave correction. If Wave A is a flat type of correction, Wave B may be a zigzag type of correction and vice versa.
It also states that if the correction begins with a more simple wave for Wave A, expect the following Waves B and C to be more complex.
The Guideline of Alternation within a Correction says that the forms for Wave A and Wave B will alternate within a 3-wave correction. If Wave A is a flat type of correction, Wave B may be a zigzag type of correction and vice versa.
It also states that if the correction begins with a more simple wave for Wave A, expect the following Waves B and C to be more complex.
Guideline 4
The Guideline of Depth of Corrective Waves says that when the market goes into a correction, it often will correct to the territory of the previous Wave 4 of lesser degree.
This does not necessarily mean that it will reach the bottom of the previous 4th wave, but rather that we should expect it will reach the span of the previous Wave 4 of lesser degree.
This is often a good place for a market to find support (or resistance) before the trend moves on.
The Guideline of Depth of Corrective Waves says that when the market goes into a correction, it often will correct to the territory of the previous Wave 4 of lesser degree.
This does not necessarily mean that it will reach the bottom of the previous 4th wave, but rather that we should expect it will reach the span of the previous Wave 4 of lesser degree.
This is often a good place for a market to find support (or resistance) before the trend moves on.
Guideline 5
The Guideline of Channeling is really a technique to project the potential end of waves within impulses.
Although channeling can be used for corrective waves, it really boils down to the application of trend lines and doesn't have any hard tendencies for corrective applications.
As for impulse waves, Elliott noticed that channel lines often mark their boundaries with sometimes dramatic precision.
There are three ways that channeling can be used for projecting the end of waves, but they all use the same technique.
They all require three points - beginning and ending of waves - to create their channels.
This technique can be used for projecting the end of Wave 3, the end of Wave 4, and the end of Wave 5.
ππ Projecting the end of Wave 3: Draw a trend line from the beginning of Wave 1 to the end of Wave 2. Project a parallel line off the end of Wave 1. There is a potential for Wave 3 to end when it reaches the projected trend line.
ππ Projecting the end of Wave 4: Draw a trend line from the beginning of Wave 2 to the end of Wave 3. Project a parallel line off the end of Wave 2. There is a potential for the Wave 4 correction to end when it reaches the projected trend line.
ππ Projecting the end of Wave 5: Draw a trend line from the beginning of Wave 3 to the end of Wave 4. Project a parallel line off the end of Wave 3. There is a potential for Wave 5 to end when it reaches the projected trend line.
The Guideline of Channeling is really a technique to project the potential end of waves within impulses.
Although channeling can be used for corrective waves, it really boils down to the application of trend lines and doesn't have any hard tendencies for corrective applications.
As for impulse waves, Elliott noticed that channel lines often mark their boundaries with sometimes dramatic precision.
There are three ways that channeling can be used for projecting the end of waves, but they all use the same technique.
They all require three points - beginning and ending of waves - to create their channels.
This technique can be used for projecting the end of Wave 3, the end of Wave 4, and the end of Wave 5.
ππ Projecting the end of Wave 3: Draw a trend line from the beginning of Wave 1 to the end of Wave 2. Project a parallel line off the end of Wave 1. There is a potential for Wave 3 to end when it reaches the projected trend line.
ππ Projecting the end of Wave 4: Draw a trend line from the beginning of Wave 2 to the end of Wave 3. Project a parallel line off the end of Wave 2. There is a potential for the Wave 4 correction to end when it reaches the projected trend line.
ππ Projecting the end of Wave 5: Draw a trend line from the beginning of Wave 3 to the end of Wave 4. Project a parallel line off the end of Wave 3. There is a potential for Wave 5 to end when it reaches the projected trend line.
βοΈβοΈ The Personality of Elliott Waves
Wave βpersonalityβ is the reflection of mass psychology acting in the market - the emotions that flow from optimism to pessimism, creating the structures we see in the market.
The personality of each wave type is the same whether it is a higher-degree wave or a lesser one. This section will expand on the characteristics of some of the waves. Please keep in mind the eight-wave cycle when going over this section.
Wave βpersonalityβ is the reflection of mass psychology acting in the market - the emotions that flow from optimism to pessimism, creating the structures we see in the market.
The personality of each wave type is the same whether it is a higher-degree wave or a lesser one. This section will expand on the characteristics of some of the waves. Please keep in mind the eight-wave cycle when going over this section.
ππFirst Waves (Wave 1)
About half of the first waves seen are part of the basing process and tend to be heavily corrected by Wave 2.
Many people feel that this is one more opportunity to trade in the direction of the previous trend, and, if that was down, many will sell short. However, market breadth and volume will subtly increase.
The other 50% of first waves will rise from large basing price movement formed by the previous correction and these tend to be dynamic and only moderately retraced. This is a good probable spot to have a Wave 1 extension.
About half of the first waves seen are part of the basing process and tend to be heavily corrected by Wave 2.
Many people feel that this is one more opportunity to trade in the direction of the previous trend, and, if that was down, many will sell short. However, market breadth and volume will subtly increase.
The other 50% of first waves will rise from large basing price movement formed by the previous correction and these tend to be dynamic and only moderately retraced. This is a good probable spot to have a Wave 1 extension.
ππ Second Waves (Wave 2)
Second waves tend to retrace so much of Wave 1 that most of the profits gained are eroded.
They tend to end on low volume and low volatility. In a bear market, this indicates a drying up of selling pressure. However, during Wave 2 most investors are convinced that the bear market is here to stay.
Second waves tend to retrace so much of Wave 1 that most of the profits gained are eroded.
They tend to end on low volume and low volatility. In a bear market, this indicates a drying up of selling pressure. However, during Wave 2 most investors are convinced that the bear market is here to stay.
ππThird Waves (Wave 3)
Third waves tend to be strong and broad. They are typically unmistakable, as confidence in the direction of the new trend is clearly evident. Wave 3 usually generates the most volume and price movement, and they are the most likely wave to extend.
The third wave of an extended third wave will likely be the most volatile point of strength in the new trend and things like price breakouts, continuation gaps, volume expansions, and increased breadth will accompany it. In Wave 3 for a stock index, nearly all stocks will participate.
Because of the dynamics of this wave, it will provide the greatest clues to the correct wave count as it unfolds.
Third waves tend to be strong and broad. They are typically unmistakable, as confidence in the direction of the new trend is clearly evident. Wave 3 usually generates the most volume and price movement, and they are the most likely wave to extend.
The third wave of an extended third wave will likely be the most volatile point of strength in the new trend and things like price breakouts, continuation gaps, volume expansions, and increased breadth will accompany it. In Wave 3 for a stock index, nearly all stocks will participate.
Because of the dynamics of this wave, it will provide the greatest clues to the correct wave count as it unfolds.
ππFourth Waves (Wave 4)
Fourth waves can be predictable in both depth and form because of the guideline of alternation.
They tend to differ with the previous Wave 2 of the same degree. They often trend sideways, building a base for the final Wave 5 to spring from.
In Wave 4 for a stock index, lagging stocks will tend to build their tops and start declining.
Fourth waves can be predictable in both depth and form because of the guideline of alternation.
They tend to differ with the previous Wave 2 of the same degree. They often trend sideways, building a base for the final Wave 5 to spring from.
In Wave 4 for a stock index, lagging stocks will tend to build their tops and start declining.
ππFifth Waves (Wave 5)
Fifth waves tend to be less dynamic and display slower speed of price change than the previous waves. It will usually be accompanied by lesser volume and breadth.
Of course, if the fifth wave is the extended wave, this will not be the case in terms of price change. In advancing fifth waves, optimism is extremely high despite a narrowing of breadth.
However, the fifth wave of an extended fifth will lack the change of the previous waves and give clues about a change in direction.
Fifth waves tend to be less dynamic and display slower speed of price change than the previous waves. It will usually be accompanied by lesser volume and breadth.
Of course, if the fifth wave is the extended wave, this will not be the case in terms of price change. In advancing fifth waves, optimism is extremely high despite a narrowing of breadth.
However, the fifth wave of an extended fifth will lack the change of the previous waves and give clues about a change in direction.
ππA Waves (Wave A)
During Wave A, the public is convinced that this is just a correction of the previous trend and will rush in to capitalize on it, despite any technically damaging signals. This sets things up for the next wave to follow.
If Wave A is divided into five sub-waves, it will be a zigzag. If it is divided into three sub-waves, it will be a flat or a triangle.
During Wave A, the public is convinced that this is just a correction of the previous trend and will rush in to capitalize on it, despite any technically damaging signals. This sets things up for the next wave to follow.
If Wave A is divided into five sub-waves, it will be a zigzag. If it is divided into three sub-waves, it will be a flat or a triangle.
ππB Waves (Wave B)
Wave B catches people in the wrong direction. It performs the task of enticing the suckers to jump into the market.
This is where bear or bull traps happen. As a general rule, B Waves tend to show lower volume.
Wave B catches people in the wrong direction. It performs the task of enticing the suckers to jump into the market.
This is where bear or bull traps happen. As a general rule, B Waves tend to show lower volume.
C Waves (Wave C)
ππWave C tends to break the illusions of Wave A and Wave B.
In a declining market, it can be devastating and fear takes over with broad participation.
An advancing Wave C as an upward correction in a larger bear market can be just as dynamic and it fools investors into thinking that it is the start of a new upswing.
The fact that Wave C may do this in five sub-waves helps the deception.
ππWave C tends to break the illusions of Wave A and Wave B.
In a declining market, it can be devastating and fear takes over with broad participation.
An advancing Wave C as an upward correction in a larger bear market can be just as dynamic and it fools investors into thinking that it is the start of a new upswing.
The fact that Wave C may do this in five sub-waves helps the deception.