Elliott Wave Theory

Taso Anastasiou
Director: FX/PM Global Technical Strategy Group
UBS Investment Bank

Phone : +44 (0)20 7567 6870

E-Mail : taso.anastasiou@ubs.com
 Elliott Wave theory

5
b
3

a
4

c
1

3070446AL.ppt 1
Market Psychology
SECTION 1
 A Quotation

Traders of my generation armed themselves with charts and

computer-generated graphics that predicted future price
direction. We sat day after day in front of these screens,
mesmerised by blinking lights and ever-changing numbers
in a deafening cacophony of information overload.
With the possible exception of Elliott wave theory, an
intellectual framework for understanding the course of social,
political, and economic events was noticeably forgotten in
favour of just making sure that one was part of the ever
quickening process.

Paul Tudor Jones II, The alchemy of finance by George Soros

3070446AL.ppt 3
 Dow Theory - Important Elements

♦ The averages discount everything

♦ The market has three trends
♦ Major trends have three phases
♦ The averages must confirm each other
♦ Volume must confirm the trend
♦ A trend is assumed to be in effect until it gives definite
signals that it has reversed

3070446AL.ppt 4
 Anatomy of Price Action
W eak
r e s u m p t io n
♦ Trend W e a k te st

sur
but

p ri
♦ Consolidation

se
Stro n g
♦ Reversal C o n s o lid a t io n
re ve rsa l

Stro n g
r e s u m p t io n

Stro n g
d -tre n d
C o n s o lid a t io n

C o n s o lid a t io n Stro n g re ve rsa l

e
r is
rp

t…
su

bu

W e a k te st
W e a k r e s u m p t io n

Market will always be in one of these 3 modes

3070446AL.ppt 5
 Psychological Make up of a trend - Phase 1

♦ A trend is very difficult

to detect at this stage

♦ Very few traders and

investors will actually
open positions in
this phase

♦ Economic news and

cycles are generally
still bad but improving

♦ No public participation
♦ Most traders will still
1 be trying to sell into
the rallies

3070446AL.ppt 6
 Phase 2

♦ Market exceeds previous

top trend is now identified
♦ Traders begin to buy as
bearish sentiment fades
♦ Economic news generally
improving
♦ Media starts to report a
new bull phase
♦ Public begins to participate
2
♦ Traders are now buying
the dips
♦ Is the most powerful phase
of the three and most
profits are generated in
this phase

3070446AL.ppt 7
 Phase 3
♦ Market once again
exceeds previous top
as trend is confirmed
♦ Fear of intervention makes
traders wary
♦ Fundamental factors
33 peaking
♦ Media still reporting
positive news but
now wondering how
far we can go
2 ♦ Increased public
participation
♦ A few scares and profit
taking causes concern
stops are raised
♦ Blow off occurs as stops
1 triggered
♦ Generally the weakest
of the three phases
3070446AL.ppt 8
Awareness of market psychology
and how it affects trading activity is
essential for a greater understanding
of the Elliott Wave Theory.

3070446AL.ppt 9
The Basics—Building on Dow theory
SECTION 2
 The Building Blocks

♦ Elliott isolated 13 waves, or price patterns of directional

movement that recur in markets and are repetitive in
their form

♦ His descriptions constitute a set of empirically derived

rules and guidelines for interpreting market action

♦ First we must look at the basic structure or the five

wave pattern

3070446AL.ppt 11
 The basic five wave structure

5 ♦ Any major movement will

unfold in a pattern of five waves
and in turn will be corrected by
3 b a pattern of three waves going
in the opposite direction

♦ The five wave movement can be

a split into two distinctive
4 segments
1 c
— the numbered phase
— the lettered Phase

3070446AL.ppt 12
 The impulse

Impulsive segment ♦ The Trend phase is known

5 as the impulse

♦ This the numbered phase

b
3

♦ An impulsive segment (1-5)

a
is itself constructed as a
4 series of five waves of
1 c which 1–3–5 are impulses
of a minor degree

3070446AL.ppt 13
 The impulsive segment
5
Zoomed in

3 b

5
a
4 c
Phase b 1
3
5
Impulsive segment
5 a 2
4
b 1 c
b 3
3

a 2
a 4
4 c
1 c1

2 2

3070446AL.ppt 14
 The corrective phase

Correction ♦ Trends move in a series of

5 peaks and troughs

♦ The lettered phase is

b
3 known as the corrective
segment and is always
counted in threes, a–b–c
a
4
c
♦ Wave 2 corrects Wave 1
1
♦ Wave 4 corrects Wave 3

2 ♦ a–b–c corrects
Waves 1 to 5

3070446AL.ppt 15
 In Practice

♦ Your start point

should always be
a significant high
or low

♦ Start point is
labelled 0, the
impulse segment in
this phase is labelled
1 and is corrected by
1 the lettered phase
labelled 2

0
3070446AL.ppt 16
Summary of wave structure

3070446AL.ppt 17
 Summary of wave structure (continued)
Waves 1–3–5 are impulses moving in the direction of the trend

5
5
3 b

a
3
1 4
c

4
1

3070446AL.ppt 18
 Summary of wave structure (continued)
Waves 2–4 are counter trend movements

3070446AL.ppt 19
 Summary of wave structure (continued)
The complete structure
5
5
2
3 3
b
5 4 c
1
4 a 2
3
3 b 1
b 1
4
5
2
1 a a 3
4
5 c
1

3
b 4 5
c
2
4 a
1 c
2
2

3070446AL.ppt 20
 USD/CAD
1
5

b 1

4 2
a
2
c
2
11

3070446AL.ppt 21
Impulsive waves 1–3–5
SECTION 3
 Rule 1

♦ There are three basic ground

rules used when defining an
impulsive phase
1
♦ The first inviolable rule is that
from your start point at 0
(major high or low) Wave 2
must never move below the
start of Wave 1 at 0

3070446AL.ppt 23
 Rule 2

Incorrect count Alternative count

5 iii
♦ Wave 3 can never
be the shortest
wave in the impulse

3 ♦ This doesn’t mean i

that it is necessarily
the longest
1 4 1 ii
♦ In the example the
alternative count
2 provides the clue as 2
Wave 3 is probably
extending

3070446AL.ppt 24
 Rule 3
5
♦ Wave 4 should not overlap
3 Wave 1

♦ There are two exceptions to

this rule:
♦ Wave 1 can be a leading
diagonal triangle and price
1 action can overlap (wedge)
♦ Wave 5 can be an ending
diagonal triangle where
4 price action overlaps
(wedge)

3070446AL.ppt 25
 Impulse waves—the extension

♦ An extension can only occur in one of the impulse waves 1–3–5.

Most extensions will actually occur in the 3rd wave. Extensions
may also occur in the extending wave itself
5
3
v

iii

4
5
iv
i 3 b
1
4 a
1 c
ii
2 2

3070446AL.ppt 26
 Labelling the cycles
0 1 2 3 4 5 A B C Grand super cycle
0 1 2 3 4 5 A B C Super cycle
0 I II III IV V A B C Cycle
0 1 2 3 4 5 A B C Primary
(0)(I) (2) (3) (4) (5) (a) (b) (c) Intermediate
0 1 2 3 4 5 a b c Minor
0 i ii iii iv v a b c Minute
0 1 2 3 4 5 a b c Minuette
0. i. ii. iii. iv. v. a. b. c. Sub-minuette
0 I II III IV V a b c Micro
0 i ii iii iv v a b c Sub-micro

3070446AL.ppt 27
 Extensions

5 5 5 9
3
3 7

3 5 8
1 4 4
3
6
1 1 4
2 1 4
2 2 2
2 2 22
2 4
1 1 4 1
1
6
4 3
1 4 8
3
5
3 3
5 7
5 5 9

3070446AL.ppt 28
Example of an extension

B
2

1 ii
2

1
i iv
A 4

1
3
5
iii 4

v
3

C
0101092L.ppt 29
In Practice - GBP/USD

3070446AL.ppt 30
In Practice - GBP/USD

5
3

3070446AL.ppt 31
In Practice - GBP/USD

5
3

a
c
4
1
b

a
c
2

3070446AL.ppt 32
In Practice - GBP/USD

5
3
v

b
iii
a

iv c
4
1
b i

a
c ii
2

3070446AL.ppt 33
 The ending diagonal triangle

An ending diagonal ♦ Diagonal triangles are

triangle is counted formed by two converging
as a five wave up 5 lines, in its usual form. This
v
but sub-divides iii pattern occurs in fifth
into threes i wave positions
iv
3 ♦ The only exception to the
ii overlap rule between
Wave 1–4 can occur in
a diagonal
4
1 ♦ A diagonal can also be
located in the C wave
positions. As in a rising
wedge this is to be
2 considered a
termination pattern

3070446AL.ppt 34
 Ending diagonal triangles
5 iv
iii
i

3 iv

ii

3070446AL.ppt 35
 Ending diagonal triangles
5
5
3

3
1
4

4
1

0101092L.ppt 36
 Leading diagonal triangles

5 ♦ In normal circumstances this

pattern would be referred to as
a rising wedge and is a bearish
3
pattern as it is assumed that the
pattern will break the support
♦ The target on the break would
suggest a re-test of the base
4
1 ♦ This pattern is only found in
v
iii Wave 1 or A
i ♦ All other rules apply
e.g. Wave 3 is not the shortest
2 and 2 doesn’t break below the
iv start point then you must buy
the dip as it will turn out to be
a bullish pattern
ii

3070446AL.ppt 37
 The failed fifth wave
3
3 5 ♦ As Wave 5 is the weakest
part of the trend it
sometimes has a tendency
to fail early, creating what
we traditionally call
4
a double top

1 ♦ The Internal wave

structure must still
count up in five

3070446AL.ppt 38
 Failed fifth waves & leading diagonal
3 5

1
5
4
3
1

2
2

0101092L.ppt 39
 Failed fifth waves (continued)
Incorrect counting as Wave (5) would only count up in 3

100
3 5

90
4

80

70

60

1991 1992 1993 1994 1995

3070446AL.ppt 40
 Failed fifth waves (continued)
Correct count where (I) is a leading diagonal triangle,
(III) has extended and (V) has failed
100
2

4 (II)
91.22 2
90 c
1
1 a
4
3
80
3
b
5
5
(I)
70 (IV)
c
a

60
(III) b (V)

1991 1992 1993 1994 1995

3070446AL.ppt 41
The Trap...

3070446AL.ppt 42
 Successful Trend Definition Is Essential

♦Analysis and therefore positioning

must be biased in the direction of the
prevailing trend

3070446AL.ppt 43
Trend Definition Is Essential

3070446AL.ppt 44
 Ground Rules

♦ You can quantify trends and market positioning by biasing your

position base in the direction of the underlying trend

3070446AL.ppt 45
Corrective waves a–b–c
SECTION 4
 Corrective waves

♦ We have seen that movements against the trend are known as

corrective waves, sometimes referred to as consolidations or
lettered phase

♦ Identifying and fitting corrections into particular patterns in

advance is very difficult

♦ The complexity of corrective waves can increase or decrease

without warning

3070446AL.ppt 47
 The three corrective wave types
Corrective waves fall into four categories

♦ Zig-Zag 5–3–5 includes three variations single,

double and triple

♦ Flats 3–3–5 includes 3 variations, regular,

expanded, running

♦ Triangles 3–3–3–3–3 four types, ascending,

descending, contracting, expanding

♦ Double and
triple threes (combined structures)

3070446AL.ppt 48
 Zig-Zags 5–3–5

Bull market correction Bear market correction

c
ii

b
i c
a
iv a ii

iii
b i
iv
v
a b
iii

v
c

3070446AL.ppt 49
 Zig-Zag corrections

♦ Zig-Zags have a 5–3–5 wave structure

♦ These formations are usually found in Wave 2 position
♦ It would be fair to assume that they would also occur after
Wave 5 as a traditional head and shoulders reversal pattern
is formed

♦ Wave C of the Zig-Zag will typically extend the same distance

as Wave A

3070446AL.ppt 50
Example of a Zig-Zag correction
2

1
B2

5
A
3
5
C
A=C

0101092L.ppt 51
 Flat corrections 3–3–5

Bull market correction Bear market correction

b a c

a c b

3070446AL.ppt 52
Example of a flat correction

B2
ii
b

1
4
i
iv
a

iii
v
c 3
A
5

0101092L.ppt 53
 Irregular flats 3–3–5

Bull market correction Bear market correction

c
a

a
c

3070446AL.ppt 54
 Flats 3–3–5

♦ Flats are counted as 3–3–5

♦ There are standard flats which are typically ranges
♦ There are irregular flats where the B wave exceeds the high,
but can only be counted as a 3-wave affair

♦ Last but not least there are running flats

♦ Flat corrections are typically found in fourth and B wave
positions and tend to have lower retracement values

3070446AL.ppt 55
 Triangles 3–3–3–3–3
Bull market correction

b
d
♦ Five waves – a / b / c / d / e

e ♦ Each wave subdivides into 3-

c waves
a
♦ Each wave tends to be related
Bear market correction to a preceding wave by the
0.618 ratio.
a — Wave d will be 0.618 of wave b
c — Wave e will be 0.618 of wave c
e
♦ This correction is typically found
in wave-4
d
b

3070446AL.ppt 56
 Complex corrective forms (double threes) Zig-Zag
Zig-Zag -x- Zig-Zag

Bull market correction

ii
b
c
i
iv
a ii
x
ii
iii b
b i iv c
v i
iv a ii
a
iii
iii iv
b i
v v
c a
iii

v
c
3070446AL.ppt 57
 Complex corrective forms (double threes) Zig-Zag
Zig-Zag -x- flat

Bull market correction

ii x b

b
i c

iv a ii

iii
b i
iv
v
a
iii

v a c
c

3070446AL.ppt 58
 Complex corrective forms (double threes) Zig-Zag
Zig-Zag -x- triangle

Bull market correction

ii x
b
b
i
c
d
iv a ii

iii
b i
iv e
v
a
iii c

a
v
c
3070446AL.ppt 59
 Complex corrective forms (double threes) Zig-Zag
Zig-Zag -x- irregular flat

Bull market correction

ii x
b
i c
iv a ii

iii
b i iv
v
a
iii

v a
c
c

3070446AL.ppt 60
 Complex corrective forms (double threes) flat
Flat -x- flat

x b
b

a a c
c

3070446AL.ppt 61
 Complex corrective forms (double threes) flat
Flat -x- Zig-Zag

a c
x ii
ii

b
b
ii cc
iv aa ii
iv ii

iii
iii
bb ii iv
iv
v
va
a
iii
iii

b v
cv
c
3070446AL.ppt 62
 Complex corrective forms (double threes) flat
Flat -x- triangle

b x
b

a
a
c

3070446AL.ppt 63
 Complex corrective forms (double threes) flat
Flat -x- irregular

b
x
b

a c
a

3070446AL.ppt 64
 Complex corrective forms (double threes)
Irregular -x- irregular

b
x

a
c
a
c

3070446AL.ppt 65
 Complex corrective forms (double threes)
Irregular flat -x- flat

b
x
b

a
a c
c

3070446AL.ppt 66
 Complex corrective forms (double threes)
Irregular flat -x- Zig-Zag

b
x ii

b
i c

iv a ii

iii
b i
iv
v
a
iii

a v
c
c

3070446AL.ppt 67
 Complex corrective forms (double threes)
Irregular flat -x- Zig-Zag

b x
b

a a

3070446AL.ppt 68
 Complex corrective waves

To date we have looked at standard corrective waves as well as

double complex waves. There is a third type of complex correction
which is called the complex triple three.

ii b b
b x
i iv c x b
a ii d
iii b i iv
v e
a iii c
a
v a
c a
c c

Zig-Zag x Irregular flat x Triangle

3070446AL.ppt 69
Examples of complex corrections
B i
b
B
X
B b B
1
a

c
A a
A
A c
C A C
FLAT IRREGULAR
c ii
FLAT
ZIG-ZAG
2
FLAT
A=C
C
ZIG-ZAG

0101092L.ppt 70
The rule of alternation
SECTION 5
 The rule of alternation

♦ This rule is relatively simple as it states that no two corrective

phases are similar

♦ If Wave 2 is a Zig-Zag then Wave 4 will probably be a flat or

a triangle – typical scenario

♦ The rule also states that only one of the impulse waves will extend
(and can itself extend)

♦ If two corrective phases are similar then one will differ in

magnitude or length

3070446AL.ppt 72
 Alternation

5 5
2
3 2
3

4 1

1
1 4 4

4
1

3
2 3 5 5
2

3070446AL.ppt 73
 The rule of alternation
5

3 b

a
FLAT
c
4
1 TRIANGLE
b d

e
c
a
2

0101092L.ppt 74
The depth of corrective waves
SECTION 6
 The depth of corrective waves
No market approach other than the Elliott Wave Theory gives a satisfactory
answer to this question. The primary guideline is that corrections , especially
when they themselves are fourth waves tend to register their maximum
retracement within the span of travel of the previous fourth wave of one
lesser degree which would also represent support (or resistance for a rising
market).
5

4
1

3070446AL.ppt 76
The Fibonacci sequence and its application
SECTION 7
 Ratio analysis

♦ Ratio analysis has revealed a number of precise price

relationships that occur often among waves. There are two
categories of relationships: retracements and multiples

Retracements

♦ Fairly often, a correction retraces a Fibonacci percentage of

the preceding wave

♦ Sharp corrections tend more often to retrace 61.8% or 50%

of the previous wave, particularly when they occur as Wave 2
of an impulse wave, Wave B of a larger Zig-Zag, or Wave X in
a multiple Zig-Zag

3070446AL.ppt 78
 Retracements
Typical retracement levels

100
24.6

38.2

50.0

61.8

76.4

Typical of Wave 2 100 Typical of Wave 4

0

3070446AL.ppt 79
 Impulse wave multiples

When Wave 3 has extended, waves 1–5 will tend towards

equality (1.00) or a 0.618% relationship. All three impulse
waves tend to be related by Fibonacci mathematics whether
by equality, 1.618 or 2.618 whose inverses are 0.618 and
0.382

3070446AL.ppt 80
 Impulse wave multiples (continued)

3rd wave extension 5th wave extension 1st wave extension

5 5 5
3
1.00 3
.618
4 .382
4 1
2
3
.618
1
.382 4
1
1.00
2 2

3070446AL.ppt 81
 Corrective wave multiples

Zig-Zag Double Zig-Zag

1.00

1.00/6.18/1.618
b
x

1.00
a b

1.00/.618/2.618
c a

3070446AL.ppt 82
 Corrective wave multiples (continued)

Flat Irregular flat

1.00

a c

1.00

.618 a 1.618
c

3070446AL.ppt 83
 1

2
i

ii
3?

Wave 3 = 1.00/1.618/2.618 of Wave 1

1

2
Calculating targets

4
5?

Wave 5 can be equal to wave 1

3070446AL.ppt

0.618 of 3 0r .382 of waves 1 and 3

84
Fibonacci relationships
Wave 2 retraces just
above the 61.8% level
of wave-1

2
ii

i
Wave 4 retraces just
above the 38.2% level
1 of wave-3

4
iv

Failed
iii v 5th
3
5

0101092L.ppt 85
 Fibonacci relationships (continued)
1.9000
Wave (V) is 1.00 multiplied by the length of wave (I)
(V) 1.8904
1.8500

1.8000
Wave III is 2.62 multiplied from the length of wave I (III)
1.7500 V
1.7207 III
1.7000

1.6500 Wave (III)and III retraces Wave (IV) and IV by 24% 1.6618
IV (IV)
1.6000 (I)
1.5500 1.5489 I

1.5000
Wave II retraces Wave I by 62%
II
1.4500
(II) Wave (II) retraces Wave (I) by 50%
1.4000 1.3811
1.3500 (0)
May-95 Nov-95 May-96 Nov-96 May-96 Nov-96 May-97 Nov-97

tmta3 © DEM-USD Weekly Bar 06-Mar-95—28-Nov-97 [Zoomed] 1.8904 1.3455 1.7635 0.3685 0.0000
V 2.980014 Copyright 1994-1997 Tradermade International Ltd.

3070446AL.ppt 86
 A word on momentum

2
♦ Divergence between price
and momentum warns of
technical weakness in a
1 trend

♦ Divergence between price

and momentum is typical
4 during the 5th and final
wave.

♦ One would also expect

3 5

such a set-up to develop

during wave-C

3070446AL.ppt 87
Fibonacci Relationships - S&P Cash

1.00 of wave 1 (1246)

0.618 of wave 1 (1175)

3

4?

Potential for bearish divergence in momentum

3070446AL.ppt 88
Fibonacci Relationships - S&P Cash

5
iii v
3
i
iv

ii
4

3070446AL.ppt 89
Analyse

3070446AL.ppt 90
Analyse

3070446AL.ppt 91
Analyse

3070446AL.ppt 92
Analyse

3070446AL.ppt 93
 Disclaimer

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