Elliott Wave

Elliott Wave
Steven W. Poser
Managing Director, Research
New York Stock Exchange
212-656-4512
sposer@nyse.com
Todays Objectives
Todays Objectives

Review fundamentals of the Elliott
Review fundamentals of the Elliott
Wave Principle (EWP)
Wave Principle (EWP)

Preparation for CMT II&III
Preparation for CMT II&III

Text:
Text:
Elliott Wave Principle: Key to
Elliott Wave Principle: Key to
Market Behavior
Market Behavior
(A.J. Frost, Robert
(A.J. Frost, Robert
Prechter
Prechter
Jr.)
Jr.)
Overview
Overview

EWPs
EWPs
primary value is as a description of
primary value is as a description of
how markets behave.
how markets behave.

Provides context for market analysis.
Provides context for market analysis.

Prechter
Prechter
and Frost state EWP
and Frost state EWP
is not
is not
primarily a forecasting tool
primarily a forecasting tool

EWP patterns also visible in economic data
EWP patterns also visible in economic data
and in general human behavior
and in general human behavior
Basic Tenets
Basic Tenets

EWP is governed by mans social nature,
EWP is governed by mans social nature,
which is expressed in repetitive form.
which is expressed in repetitive form.

In markets, this is shown as progressions
In markets, this is shown as progressions
of five waves, followed by three waves.
of five waves, followed by three waves.

Three rules
Three rules

Wave
Wave
-
-
2 never moves beyond start of wave
2 never moves beyond start of wave
-
-
1
1

Wave
Wave
-
-
3 never the shortest
3 never the shortest

Wave
Wave
-
-
4 never overlaps wave
4 never overlaps wave
-
-
1, except in a
1, except in a
diagonal triangle
diagonal triangle
Elliott Wave Theory Basics
Elliott Wave Theory Basics

Developed by Ralph Nelson Elliott, mostly
Developed by Ralph Nelson Elliott, mostly
in the 1930s
in the 1930s

Related specific price patterns in the stock
Related specific price patterns in the stock
market as being natures law
market as being natures law

in essence,
in essence,
price patterns were deterministic
price patterns were deterministic

Although most reasonable
Although most reasonable
Elliotticians
Elliotticians
would not call EW deterministic, it does
would not call EW deterministic, it does
give us deep insight into market behavior
give us deep insight into market behavior
Elliott Wave Theory Basics
Elliott Wave Theory Basics

Classic patterns are based deeply in
Classic patterns are based deeply in
market psychology
market psychology

Each wave and sub
Each wave and sub
-
-
wave has a
wave has a
characteristic market psyche
characteristic market psyche
attached to it
attached to it

This improves forecasting capability
This improves forecasting capability
The Basic Wave Pattern
The Basic Wave Pattern
1
1
2
2
3
3
4
4
5
5
A
A
B
B
C
C
Elliott Wave Basics
Elliott Wave Basics

Wave modes
Wave modes

Motive waves
Motive waves

subdivide into five waves

subdivide into five waves

Corrective waves
Corrective waves

subdivide into a three wave

subdivide into a three wave
structure or a triangle
structure or a triangle

A complete cycle is eight waves:
A complete cycle is eight waves:

Five wave motive (1

Five wave motive (1
-
-
2
2
-
-
3
3
-
-
4
4
-
-
5)
5)

Three wave corrective (a

Three wave corrective (a
-
-
b
b
-
-
c)
c)

Even numbered waves are also corrective
Even numbered waves are also corrective
within a motive move
within a motive move
Elliott Wave Basics
Elliott Wave Basics
Waves are fractal Waves are fractal
Wave Wave- -1 breaks into five smaller waves 1 breaks into five smaller waves
Wave Wave- -2 subdivides into a three wave move, etc. 2 subdivides into a three wave move, etc.
Wave Wave- -a is motive against the trend of one larger degree a is motive against the trend of one larger degree
Any cycle of five waves forms a larger cycle of one degree Any cycle of five waves forms a larger cycle of one degree
higher than the individual waves. Degree is based on form, higher than the individual waves. Degree is based on form,
not price and time (despite nomenclature discussed later). not price and time (despite nomenclature discussed later).
Even numbered waves are also corrective within a motive Even numbered waves are also corrective within a motive
move move
Five wave moves have nothing to do with bull or bear Five wave moves have nothing to do with bull or bear
markets: they can be in either direction. Action in the same markets: they can be in either direction. Action in the same
direction as the larger trend is five waves, and countertrend direction as the larger trend is five waves, and countertrend
action develops in three waves. action develops in three waves.
Elliott Wave Basics
Elliott Wave Basics

Actionary
Actionary
moves are motive cycles that
moves are motive cycles that
are not diagonal triangles (no overlapping
are not diagonal triangles (no overlapping
between wave
between wave
-
-
1 and wave
1 and wave
-
-
4). Also known
4). Also known
as impulse moves.
as impulse moves.

A diagonal triangle is also known as a
A diagonal triangle is also known as a
wedge in classic TA and usually shows up
wedge in classic TA and usually shows up
in wave
in wave
-
-
5 or wave
5 or wave
-
-
C, rarely wave
C, rarely wave
-
-
1.
1.
Elliott Wave Notation
Elliott Wave Notation
Elliott created names for cycles of varying sizes and time. Fros Elliott created names for cycles of varying sizes and time. Frost t
and and Prechter Prechter revised the names and notations revised the names and notations
1. 1. Supermillenium Supermillenium 1 1 A A
2. 2. Millenium Millenium (1) (1) (A) (A)
3. 3. Submillenium Submillenium 1 1 A A
4. 4. Grand Grand Supercycle Supercycle I I a a
5. 5. Supercycle Supercycle (I) (I) (a) (a)
6. 6. Cycle Cycle I I a a
7. 7. Primary Primary 1 1 A A
8. 8. Intermediate Intermediate (1) (1) (A) (A)
9. 9. Minor Minor 1 1 A A
10. 10. Minute Minute i i a a
11. 11. Minuette Minuette (i) (i) (a) (a)
12. 12. Subminuette Subminuette i i a a
13. 13. Micro Micro 1 1 A A
14. 14. Submicro Submicro (1) (1) (A) (A)
15. 15. Miniscule Miniscule 1 1 A A
Extensions
Extensions

Usually, one wave in an impulse move extends
Usually, one wave in an impulse move extends

breaks into a larger five wave move. This is

breaks into a larger five wave move. This is
typically the third wave in the stock market and
typically the third wave in the stock market and
is often the fifth wave in the commodity
is often the fifth wave in the commodity
markets.
markets.

A full five wave impulse therefore breaks into a
A full five wave impulse therefore breaks into a
nine leg cycle. For example: (1)
nine leg cycle. For example: (1)
-
-
(2)
(2)
-
-
1
1
-
-
2
2
-
-
3
3
-
-
4
4
-
-
5(3)
5(3)
-
-
4
4
-
-
5 where wave
5 where wave
-
-
(3) extended into 1
(3) extended into 1
-
-
2
2
-
-
3
3
-
-
4
4
-
-
5.
5.

Extensions can extend as well: 1
Extensions can extend as well: 1
-
-
2
2
-
-
3
3
-
-
4
4
-
-
(1)
(1)
-
-
(2)
(2)
-
-
(3)
(3)
-
-
(4)
(4)
-
-
1
1
-
-
2
2
-
-
3
3
-
-
4
4
-
-
5(5)5
5(5)5
The circled waves are primary, the ones in parentheses The circled waves are primary, the ones in parentheses
are intermediate and the last are minor degree. are intermediate and the last are minor degree.
Truncations
Truncations

More commonly known as failures,
More commonly known as failures,
but Frost/
but Frost/
Prechter
Prechter
changed the name
changed the name
to truncation.
to truncation.

When the fifth wave does not move
When the fifth wave does not move
beyond the end of the third wave.
beyond the end of the third wave.
Diagonals
Diagonals
Motive, but not Motive, but not actionary actionary (impulsive) (impulsive)
Each leg is three waves. One exception is that a diagonal Each leg is three waves. One exception is that a diagonal
can appear in wave can appear in wave- -a of a zigzag or wave a of a zigzag or wave- -1 of an impulse. 1 of an impulse.
In those cases, the subdivisions can In those cases, the subdivisions can but do not have to but do not have to
develop as 5 develop as 5- -3 3- -5 5- -3 3- -5. 5.
Third wave still never the shortest Third wave still never the shortest
Usually in fifth and sometimes in c Usually in fifth and sometimes in c- -wave. If in a double wave. If in a double
three, can only be in wave three, can only be in wave- -c of the second of the doubles. c of the second of the doubles.
Looks like wedge, with 5 Looks like wedge, with 5
th th
sometimes over shooting, sometimes over shooting,
sometimes undershooting. Frost/ sometimes undershooting. Frost/Prechter Prechter mentions one mentions one
case of expanding diagonal. case of expanding diagonal.
Fifth wave extensions, truncated fifths and ending Fifth wave extensions, truncated fifths and ending
diagonals often result in dramatic reversals. diagonals often result in dramatic reversals.
Corrections
Corrections
-
-
Categories
Categories
Three basic types: Three basic types:
Zig Zig- -zags zags 5 5- -3 3- -5 pattern. Also double 5 pattern. Also double zig zig- -zag zag and triple and triple
zig zig- -zag zag, which represent multiple , which represent multiple zig zig- -zag zag patterns joined patterns joined
together. These are usually the sharpest corrections. together. These are usually the sharpest corrections.
Flats Flats 3 3- -3 3- -5 pattern. Includes regular, expanded 5 pattern. Includes regular, expanded
(Frost/ (Frost/Prechter Prechter term for irregular) and running. These term for irregular) and running. These
corrections are usually horizontal. corrections are usually horizontal.
Triangle Triangle Actually have five legs (3 Actually have five legs (3- -3 3- -3 3- -3 3- -3). Divided 3). Divided
into symmetrical, ascending, descending and expanding into symmetrical, ascending, descending and expanding
(reverse symmetrical). Always in last correction of an (reverse symmetrical). Always in last correction of an
actionary actionary wave of one larger degree (but can also be wave of one larger degree (but can also be
part of a combination). Frost/ part of a combination). Frost/Prechter Prechter then says in very then says in very
rare cases it can be a second wave, but usually as part rare cases it can be a second wave, but usually as part
of combination. of combination.
Combination Combination Double or triple, combining flats, Double or triple, combining flats, zig zig- -zags zags
and triangles and triangles
Corrections
Corrections

Labeling
Labeling
If you see a five wave move after a motive cycle, then If you see a five wave move after a motive cycle, then
there will be another five wave move to come, forming a there will be another five wave move to come, forming a
correction ( correction (ie ie, a , a zig zig- -zag zag). Five wave moves never stand ). Five wave moves never stand
alone. alone.
Labels for a Labels for a zig zig- -zag zag or flat are of the A or flat are of the A- -B B- -C variety. C variety.
For combinations (double three and triple three), each For combinations (double three and triple three), each
individual three is labeled as W, then Y and then Z. The individual three is labeled as W, then Y and then Z. The
overall labeling then would be: a overall labeling then would be: a- -b b- -c(W), a c(W), a- -b b- -c(X), a c(X), a- -b b- -
c(Y), a c(Y), a- -b b- -c(X), a c(X), a- -b b- -c(Z). The waves between the W,Y and Z c(Z). The waves between the W,Y and Z
are called X are called X- -waves and can be any kind of corrective waves and can be any kind of corrective
pattern, but it is usually a pattern, but it is usually a zig zig- -zag zag. .
If part of a combination is a triangle, that is labeled a If part of a combination is a triangle, that is labeled a- -b b- -c c- -
d d- -e instead of a e instead of a- -b b- -c. c.
Corrections
Corrections

Zig
Zig
-
-
Zags
Zags
Both waves are 5 Both waves are 5- -wave motive moves. wave motive moves.
Wave Wave- -A is rarely a diagonal triangle. A is rarely a diagonal triangle.
Wave Wave- -B can be a triangle, or any other type of correction. B can be a triangle, or any other type of correction.
Wave Wave- -C is often like wave C is often like wave- -3, very powerful, but can occasionally 3, very powerful, but can occasionally
be a diagonal triangle. be a diagonal triangle.
Zig Zig- -zags zags are usually faster and correct more price territory than are usually faster and correct more price territory than
flats. flats.
You should look for a double You should look for a double zig zig- -zag zag if a if a zig zig- -zag zag completes that completes that
has ended too quickly and more importantly has not retraced has ended too quickly and more importantly has not retraced
enough price territory. enough price territory.
A A zig zig- -zag zag can appear, usually as a Y or Z as part of a combination. can appear, usually as a Y or Z as part of a combination.
Corrections
Corrections

Flats
Flats

Usually retraces less ground than a
Usually retraces less ground than a
zig
zig
-
-
zag
zag
.
.

If a flat ends too quickly, although much
If a flat ends too quickly, although much
of the price retracement may have taken
of the price retracement may have taken
place, look for a double
place, look for a double
-
-
three or triple
three or triple
-
-
three to allow for more time (range
three to allow for more time (range
trading).
trading).

Wave
Wave
-
-
B can retrace more than 100% of
B can retrace more than 100% of
wave
wave
-
-
A. This is known as an expanded flat
A. This is known as an expanded flat
(Elliott called it an irregular, and that
(Elliott called it an irregular, and that
term is used by many
term is used by many
Elliotticians
Elliotticians
).
).
Corrections
Corrections

Flats (
Flats (
cont
cont
)
)

Wave
Wave
-
-
C typically ends near the end of
C typically ends near the end of
wave
wave
-
-
A.
A.

In expanded flats, wave
In expanded flats, wave
-
-
C may end well
C may end well
beyond the end of wave
beyond the end of wave
-
-
A.
A.

In a running flat, wave
In a running flat, wave
-
-
B ends far beyond
B ends far beyond
the start of wave
the start of wave
-
-
A. This implies strength
A. This implies strength
in the trend of one larger degree. Wave
in the trend of one larger degree. Wave
-
-
C
C
usually ends well before the end of wave
usually ends well before the end of wave
-
-
A in these cases.
A in these cases.
These types of
These types of
corrections are very rare!
corrections are very rare!
Corrections
Corrections

Triangles
Triangles

Possibly the single most important thing you can
Possibly the single most important thing you can
learn from triangles is that the classic technical
learn from triangles is that the classic technical
analysis books have triangles all wrong:
analysis books have triangles all wrong:
You can always predict which direction a triangle will You can always predict which direction a triangle will
break. break.
Although an ascending triangle is more likely to appear Although an ascending triangle is more likely to appear
as a correction in an up trend, the direction it breaks is as a correction in an up trend, the direction it breaks is
based on the prior wave pattern. They are not inherently based on the prior wave pattern. They are not inherently
bullish. The same is true of descending triangles. bullish. The same is true of descending triangles.

Triangles, in this terminology are always
Triangles, in this terminology are always
corrective. If a triangle appears elsewhere in a
corrective. If a triangle appears elsewhere in a
trend, in Elliott terms, it is something different,
trend, in Elliott terms, it is something different,
even if classic technicians call it a triangle. In all
even if classic technicians call it a triangle. In all
likelihood, these triangles are less perfect
likelihood, these triangles are less perfect
triangles in standard TA terms.
triangles in standard TA terms.
Corrections
Corrections

Triangles (
Triangles (
cont
cont
)
)

Triangles are virtually never in wave
Triangles are virtually never in wave
-
-
2.
2.

Running triangle
Running triangle

When wave
When wave
-
-
b of the
b of the
triangle moves past the starting point of
triangle moves past the starting point of
wave
wave
-
-
a.
a.

Fifth waves after triangles are usually fast
Fifth waves after triangles are usually fast
and the reversals are sharp. The size of
and the reversals are sharp. The size of
wave
wave
-
-
5 is then often about the same as
5 is then often about the same as
the width of the triangle (similar to the
the width of the triangle (similar to the
classic TA projection measure).
classic TA projection measure).
Terminology
Terminology

Frost/
Frost/
Prechter
Prechter
state that stocks are
state that stocks are
directionally progressive. That is, that the
directionally progressive. That is, that the
general direction of stock prices is higher.
general direction of stock prices is higher.

In other words, stocks are upwardly
In other words, stocks are upwardly
directional, due to mans general
directional, due to mans general
progress.
progress.

Waves denoted by numbers are called
Waves denoted by numbers are called
cardinal waves. Waves denoted by letters
cardinal waves. Waves denoted by letters
are called consonant or sub
are called consonant or sub
-
-
cardinal. We
cardinal. We
can always says we are in a cardinal wave
can always says we are in a cardinal wave
of whatever is the current largest degree.
of whatever is the current largest degree.
Irregular Tops
Irregular Tops
Frost/ Frost/Prechter Prechter disagree with Elliotts irregular top idea. disagree with Elliotts irregular top idea.
Elliott stated that major cycle highs were often irregular. Elliott stated that major cycle highs were often irregular.
This would result in a tiny wave This would result in a tiny wave- -a and an enormous wave a and an enormous wave- -
c. c.
The authors state this is because Elliott favored extended The authors state this is because Elliott favored extended
fifth waves, leaving an extra leg at the end of the cycle. fifth waves, leaving an extra leg at the end of the cycle.
Frost and Frost and Prechter Prechter prefer using an extended third wave, prefer using an extended third wave,
which often removes this requirement. which often removes this requirement.
They note that the Elliott counting often had a strange They note that the Elliott counting often had a strange
second wave which combined an expanded flat with a short second wave which combined an expanded flat with a short
c c- -wave. (See figure 1 wave. (See figure 1- -50 in Frost/ 50 in Frost/Prechter Prechter). ).
Alternation
Alternation
This is not a rule, but it is a strong tendency. This is not a rule, but it is a strong tendency.
It states that wave It states that wave- -2 and wave 2 and wave- -4 do not usually develop in 4 do not usually develop in
a similar fashion. The definition is vague, but examples a similar fashion. The definition is vague, but examples
may include: may include:
Flat versus Flat versus zig zig- - zag zag
Expanded versus regular flat Expanded versus regular flat
Combination versus triangle Combination versus triangle
Fast versus slow Fast versus slow
Deep versus shallow retracement Deep versus shallow retracement
In other words, alternation may be in any dimension: size, In other words, alternation may be in any dimension: size,
time or form. time or form.
Alternation also exists in corrections Alternation also exists in corrections
If wave If wave- -a is a flat, expect a a is a flat, expect a zig zig- -zag zag for wave for wave- -b b
If wave If wave- -a is simple, wave a is simple, wave- -b may be complex and wave b may be complex and wave- -c even c even
more complex. more complex.
Depth of Correction
Depth of Correction

Fourth waves usually end near the terminus of
Fourth waves usually end near the terminus of
the fourth wave of the prior wave of one lesser
the fourth wave of the prior wave of one lesser
degree, especially if the current corrective wave
degree, especially if the current corrective wave
is a fourth wave itself.
is a fourth wave itself.

For example, wave
For example, wave
-
-
4 will typically terminate near
4 will typically terminate near
the end of the fourth wave of the just completed
the end of the fourth wave of the just completed
wave
wave
-
-
3.
3.

When wave
When wave
-
-
5 extends, the next correction will
5 extends, the next correction will
often end near the end of the second wave of
often end near the end of the second wave of
wave
wave
-
-
5, though it could end as far as the end of
5, though it could end as far as the end of
the prior fourth wave.
the prior fourth wave.
Symmetry
Symmetry
In an impulse move, the two non In an impulse move, the two non- -extended waves tend to extended waves tend to
be about equal in size. be about equal in size.
The best measurement tool for equality, for all but very The best measurement tool for equality, for all but very
minor cycles ( minor cycles (ie ie, above minor) is percentage, not price , above minor) is percentage, not price
points. points.
If equality does not happen, a Fibonacci ration between the If equality does not happen, a Fibonacci ration between the
two (say wave two (say wave- -5 = 61.8% of wave 5 = 61.8% of wave- -1) often occurs. 1) often occurs.
The extended wave will tend to be at least 1.618 times the The extended wave will tend to be at least 1.618 times the
size of the non size of the non- -extended waves. extended waves.
Note: The book talks about how you cannot use intraday Note: The book talks about how you cannot use intraday
highs and lows in the Dow. This is no longer true, although highs and lows in the Dow. This is no longer true, although
it was correct at the time the book was first published. it was correct at the time the book was first published.
Channels
Channels
A whole impulse cycle often develops in a channel. A whole impulse cycle often develops in a channel.
Alternately, you may be able to draw a channel by Alternately, you may be able to draw a channel by
connecting the lows of waves 2&4 and projecting from the connecting the lows of waves 2&4 and projecting from the
extreme of wave extreme of wave- -3 to provide you with a fifth wave target 3 to provide you with a fifth wave target
area. area.
If a fifth wave approaches its resistance line on lower If a fifth wave approaches its resistance line on lower
volume, it may fail to reach that resistance line. volume, it may fail to reach that resistance line.
A move above the resistance line in wave A move above the resistance line in wave- -5, known as a 5, known as a
throw over, is often preceded by a throw under for wave throw over, is often preceded by a throw under for wave- -4. 4.
A throw under is when wave A throw under is when wave- -4 briefly falls below channel 4 briefly falls below channel
support. support.
If volume in a fifth of less than Primary degree is seen, you If volume in a fifth of less than Primary degree is seen, you
are probably in a fifth wave extension. are probably in a fifth wave extension.
Volume tends to be higher if fifths of Primary degree and Volume tends to be higher if fifths of Primary degree and
higher (capitulation or blow higher (capitulation or blow- -off in classic TA terms of major off in classic TA terms of major
cycles). cycles).
Wave
Wave
Characteristics
Characteristics

Wave
Wave
-
-
1
1
(I am writing this from the perspective of
(I am writing this from the perspective of
a bullish first wave. It can also be bearish, just
a bullish first wave. It can also be bearish, just
reverse bull for bear and bear for bull in all
reverse bull for bear and bear for bull in all
sentences)
sentences)
Start of bull move Start of bull move
Almost everybody still bearish Almost everybody still bearish
Rally seen as selling opportunity Rally seen as selling opportunity
Volume may not be very high, but usually there is a Volume may not be very high, but usually there is a
small increase in volume and improved market breadth. small increase in volume and improved market breadth.
About half of first waves have very deep retracements. About half of first waves have very deep retracements.
Fundamental news probably still bad Fundamental news probably still bad
In futures, open interest might fall In futures, open interest might fall
In stocks, A/D line may have already been improving In stocks, A/D line may have already been improving
before bottom. before bottom.
Wave
Wave
Characteristics
Characteristics

Wave
Wave
-
-
2
2

Correction of first leg of bull move
Correction of first leg of bull move

Fundamentals still mostly negative
Fundamentals still mostly negative

Drop seen as resumption of bear trend
Drop seen as resumption of bear trend

Bears tell bulls, I told you so!
Bears tell bulls, I told you so!

But, volume weaker on drop
But, volume weaker on drop

In futures, open interest falls
In futures, open interest falls

Most sentiment surveys still bearish
Most sentiment surveys still bearish
A Diversion: Behavioral Finance
A Diversion: Behavioral Finance

Studies how human emotion and
Studies how human emotion and
crowd psychology can cause
crowd psychology can cause
inefficiencies in the markets
inefficiencies in the markets

Can be used to support both
Can be used to support both
fundamental and technical analysis
fundamental and technical analysis
as being able to offer positive alpha
as being able to offer positive alpha
Behavioral Finance
Behavioral Finance

Some academics in behavioral
Some academics in behavioral
finance have embraced technical
finance have embraced technical
analysis as a tool in their cadre.
analysis as a tool in their cadre.

Two examples are be Blake
Two examples are be Blake
LeBaron
LeBaron
(Brandeis) and Andrew Lo (MIT)
(Brandeis) and Andrew Lo (MIT)
Back to Elliott
Back to Elliott

Wave
Wave
-
-
3
3
Characteristics
Characteristics

Elliotticians
Elliotticians
dream of third waves (they dont
dream of third waves (they dont
have much of a life, do they?)
have much of a life, do they?)

Usually most powerful and largest price move
Usually most powerful and largest price move

The public jumps on board during this move
The public jumps on board during this move

High volume, momentum confirms
High volume, momentum confirms

Typically at least 1.618 times as large as wave
Typically at least 1.618 times as large as wave
-
-
1
1

Fundamentals (finally) confirm the positive price
Fundamentals (finally) confirm the positive price
action
action

Breakouts, continuation gaps are common.
Breakouts, continuation gaps are common.

Excellent market breadth with Dow Theory
Excellent market breadth with Dow Theory
confirmation for higher degree stock market bull
confirmation for higher degree stock market bull
cycles.
cycles.
Wave
Wave
-
-
3 and Behavioral Finance
3 and Behavioral Finance

Sentiment should be at highest level
Sentiment should be at highest level
during this move
during this move

Forecasts should show revisions to extend
Forecasts should show revisions to extend
earlier expectations
earlier expectations

Recognition that this is a bull market is
Recognition that this is a bull market is
likely
likely

While should be easy to get in, some will
While should be easy to get in, some will
want to wait for a pull back to get a
want to wait for a pull back to get a
bargain, and they will miss the boat
bargain, and they will miss the boat
Wave
Wave
-
-
4 Characteristics
4 Characteristics
Often the most difficult wave to trade Often the most difficult wave to trade
Trend is still up Trend is still up
Extended range trading possible, and irregulars very Extended range trading possible, and irregulars very
common common
Seen as buying opportunity. Seen as buying opportunity.
Forms first support in head and shoulders neckline Forms first support in head and shoulders neckline
Preferably, trend line drawn from start of wave Preferably, trend line drawn from start of wave- -1 through 1 through
bottom of wave bottom of wave- -2 is not breached 2 is not breached
Wave
Wave
-
-
5 Characteristics
5 Characteristics

Everybody is bullish; it is a true bull
Everybody is bullish; it is a true bull
love fest
love fest

Bears are regularly ridiculed in the
Bears are regularly ridiculed in the
financial media
financial media

The news is all good
The news is all good

Prices make new highs
Prices make new highs
BUT....
BUT....
Wave
Wave
-
-
5 Characteristics
5 Characteristics
Volume probably lower than at end of third wave, except in Volume probably lower than at end of third wave, except in
Primary degree and higher where there can be a blow Primary degree and higher where there can be a blow- -off off
type situation. Also, volume is high in a fifth wave type situation. Also, volume is high in a fifth wave
extension. extension.
Open interest (in futures) might not confirm gains Open interest (in futures) might not confirm gains
Usually see momentum divergences Usually see momentum divergences
COT reports may show growing short positions held by COT reports may show growing short positions held by
hedgers hedgers
Optimism is extreme. The bull market will never end! Optimism is extreme. The bull market will never end!
Wave
Wave
-
-
5 Behavioral Clues
5 Behavioral Clues

Forecast targets extended to allow for new
Forecast targets extended to allow for new
paradigms
paradigms

Your friendly neighborhood plumber is talking
Your friendly neighborhood plumber is talking
about the investment
about the investment

Cover stories in mass media magazines such as
Cover stories in mass media magazines such as
Time
Time
and
and
Newsweek
Newsweek

Nobody will talk to all of the famous bearish
Nobody will talk to all of the famous bearish
gurus, except to ridicule them. Remember how
gurus, except to ridicule them. Remember how
technical analysts were treated in early 2000 by
technical analysts were treated in early 2000 by
the mainstream financial media?
the mainstream financial media?
Wave
Wave
-
-
A Characteristics
A Characteristics

At the start of the bear market,
At the start of the bear market,
people still think they should be
people still think they should be
buying dips.
buying dips.

Sentiment is still bullish.
Sentiment is still bullish.

If Wave
If Wave
-
-
A is five waves, it means
A is five waves, it means
that the bear market will be a
that the bear market will be a
zig
zig
-
-
zag
zag
Wave
Wave
-
-
B Characteristics
B Characteristics

A wolf in sheeps clothing.
A wolf in sheeps clothing.

Market participants still following the bullish
Market participants still following the bullish
mantra and see the just completed wave
mantra and see the just completed wave
-
-
A as
A as
corrective.
corrective.

Everything is going to be okay.
Everything is going to be okay.

But, volume probably not very strong (except in
But, volume probably not very strong (except in
Primary Degree and higher) and market breadth
Primary Degree and higher) and market breadth
is poor even if sentiment is still strong and
is poor even if sentiment is still strong and
fundamentals, which tend to be trailing, still look
fundamentals, which tend to be trailing, still look
constructive.
constructive.

Wave
Wave
-
-
B is the right shoulder of the classic head
B is the right shoulder of the classic head
and shoulders reversal pattern.
and shoulders reversal pattern.
Wave
Wave
-
-
C Characteristics
C Characteristics

Cousins of third waves.
Cousins of third waves.

Usually impulsive, but can be diagonal
Usually impulsive, but can be diagonal
triangles.
triangles.

High volume as end of wave is reached (at
High volume as end of wave is reached (at
the end of a bear, this would be termed a
the end of a bear, this would be termed a
capitulation)
capitulation)

Everybody finally buys into the bear
Everybody finally buys into the bear
market.
market.

However, as the end approaches, there
However, as the end approaches, there
might even be some technical lights at the
might even be some technical lights at the
end of the tunnel (which are not an
end of the tunnel (which are not an
oncoming train).
oncoming train).
Waves D&E (Triangles)
Waves D&E (Triangles)

Wave
Wave
-
-
D might see higher volume in non
D might see higher volume in non
-
-
expanding triangles.
expanding triangles.

This may be due to the fact that they
This may be due to the fact that they
follow c
follow c
-
-
waves and can be initially
waves and can be initially
believed to be the start of the next cycle
believed to be the start of the next cycle
and the end of the correction.
and the end of the correction.

E
E
-
-
waves look like the resumption of the
waves look like the resumption of the
bear market and news can be very
bear market and news can be very
negative. They often break below triangle
negative. They often break below triangle
support. But, they are a fake
support. But, they are a fake
-
-
out as the
out as the
market is then ripe for a return to the
market is then ripe for a return to the
prior up trend.
prior up trend.
Da
Da
Rules!
Rules!

It is not worth going through all of the guidelines
It is not worth going through all of the guidelines
and rules noted in the 2005 edition on pages 86
and rules noted in the 2005 edition on pages 86
-
-
91, but you should be familiar with most of them.
91, but you should be familiar with most of them.

Note that most of these guidelines have been
Note that most of these guidelines have been
discussed in prior slides.
discussed in prior slides.

Here are a few of the less obvious but more
Here are a few of the less obvious but more
important rules and guidelines:
important rules and guidelines:
Usually, only one motive wave extends, but two might in Usually, only one motive wave extends, but two might in
Cycle or Cycle or Supercycle Supercycle degree. degree.
When wave When wave- -5 extends, it is typically in a Fibonacci 5 extends, it is typically in a Fibonacci
proportion to the distance traveled by waves 1 proportion to the distance traveled by waves 1- -3 3
Wave Wave- -4 usually ends in the area of the fourth of wave 4 usually ends in the area of the fourth of wave- -3 3
Wave Wave- -4 often subdivides the entire impulse in a 4 often subdivides the entire impulse in a
Fibonacci price or time proportion Fibonacci price or time proportion
Da
Da
Rules! (
Rules! (
cont
cont
)
)

An ending diagonal always appears as wave
An ending diagonal always appears as wave
-
-
5 of
5 of
an impulse or wave
an impulse or wave
-
-
c of a
c of a
zig
zig
-
-
zag
zag
or flat.
or flat.

A leading diagonal always appears as wave
A leading diagonal always appears as wave
-
-
1 of
1 of
an impulse or wave
an impulse or wave
-
-
A of a
A of a
zig
zig
-
-
zag
zag
or flat.
or flat.

All waves of an ending diagonal and waves 2&4
All waves of an ending diagonal and waves 2&4
of a leading diagonal always divide into a
of a leading diagonal always divide into a
zig
zig
-
-
zag
zag
.
.

Wave
Wave
-
-
4 of a diagonal always overlaps wave
4 of a diagonal always overlaps wave
-
-
1.
1.

Diagonals look like classic TA wedges.
Diagonals look like classic TA wedges.

Wave
Wave
-
-
3 is still never the shortest wave and in an
3 is still never the shortest wave and in an
expanding diagonal wave
expanding diagonal wave
-
-
5 always ends beyond
5 always ends beyond
the terminus of wave
the terminus of wave
-
-
3.
3.

Waves 2&4 usually retrace 66% to 81% of the
Waves 2&4 usually retrace 66% to 81% of the
prior wave.
prior wave.
Da
Da
Rules! (
Rules! (
cont
cont
)
)
In an impulse, a diagonal is unlikely unless wave In an impulse, a diagonal is unlikely unless wave- -3 is 3 is
extended. extended.
In a In a zig zig- -zag zag, wave , wave- -B never retraces more than 100% of B never retraces more than 100% of
wave wave- -A A
If wave If wave- -B is a running triangle, it will typically retrace 10 B is a running triangle, it will typically retrace 10- -
40% of wave 40% of wave- -A A
Wave Wave- -B usually retraces 38 B usually retraces 38- -79% of wave 79% of wave- -A if it isnt a A if it isnt a
running triangle. running triangle.
If wave If wave- -B is a B is a zig zig- -zag zag, it typically retraces 50 , it typically retraces 50- -70% of 70% of
wave wave- -A. A.
Wave Wave- -A is never a triangle in a flat (or a A is never a triangle in a flat (or a zig zig- -zag zag). ).
Wave Wave- -B always retraces at least 90% of wave B always retraces at least 90% of wave- -A and A and
usually retraces 100 usually retraces 100- -138% of wave 138% of wave- -A in a flat. A in a flat.
In a flat, wave In a flat, wave- -C is typically 100 C is typically 100- -162% of wave 162% of wave- -A. A.
Wave Wave- -C usually ends beyond the end of wave C usually ends beyond the end of wave- -A in a flat. A in a flat.
Da
Da
Rules! (
Rules! (
cont
cont
)
)
An expanded flat is when wave An expanded flat is when wave- -B is more than 105% of B is more than 105% of
wave wave- -A and wave A and wave- -C ends beyond the end of wave C ends beyond the end of wave- -A. A.
If wave If wave- -B is more than 100% of wave B is more than 100% of wave- -A, but wave A, but wave- -C does C does
not move past the end of wave not move past the end of wave- -A, then the flat is called a A, then the flat is called a
running flat. running flat.
In a contracting triangle, at least four of the waves must In a contracting triangle, at least four of the waves must
divide into a divide into a zig zig- -zag zag or a or a zig zig- -zag zag combination. combination.
Except for wave Except for wave- -E, a wave in a contracting triangle never E, a wave in a contracting triangle never
retraces more than 100% of the prior wave. retraces more than 100% of the prior wave.
A triangle never has more than one complex wave and if it A triangle never has more than one complex wave and if it
does, it is either a does, it is either a zig zig- -zag zag combination or a triangle itself. combination or a triangle itself.
About 60% of the time, wave About 60% of the time, wave- -B does not end beyond the B does not end beyond the
end of wave end of wave- -A. This is a running triangle. A. This is a running triangle.
Wave Wave- -5 following a triangle is typically either brief or an 5 following a triangle is typically either brief or an
exceptionally long extension. exceptionally long extension.
Da
Da
Rules! (
Rules! (
cont
cont
)
)
In an expanding triangle, waves c,d and e retrace at least In an expanding triangle, waves c,d and e retrace at least
100%, but not more than 150% of the prior 100%, but not more than 150% of the prior subwave subwave. They . They
usually retrace 105 usually retrace 105- -125% of the previous 125% of the previous subwave subwave. .
Combinations are formed by two or three corrective Combinations are formed by two or three corrective
patterns separated by corrective pattern(s) in the opposite patterns separated by corrective pattern(s) in the opposite
direction. direction.
A double three flat is either a A double three flat is either a zig zig- -zag zag&flat, a flat& &flat, a flat&zig zig- -zag zag, ,
two flats, a two flats, a zig zig- -zag zag and triangle or a flat&triangle. and triangle or a flat&triangle.
A triple three flat comprises three flats. A triple three flat comprises three flats.
Double and triple Double and triple zig zig- -zags zags take the place of take the place of zig zig- -zags zags while while
double and triple threes stand in for flats or triangles. double and triple threes stand in for flats or triangles.
An expanding triangle has never been seen as part of a An expanding triangle has never been seen as part of a
combination. combination.
Determining Your Count
Determining Your Count
You should consider all factors discussed to this point in You should consider all factors discussed to this point in
developing a wave count. developing a wave count.
More than one count may be possible. Frost& More than one count may be possible. Frost&Prechter Prechter
recommend always having an alternate count. Alternates recommend always having an alternate count. Alternates
must also abide by these rules and guidelines. must also abide by these rules and guidelines.
Never forget that wave form is more important than Never forget that wave form is more important than
volume, exact timing, price target calculations of non volume, exact timing, price target calculations of non- -Elliott Elliott
indicators, be they technical or fundamental in developing indicators, be they technical or fundamental in developing
your count. your count.
In the next section, we will cover in greater detail Fibonacci In the next section, we will cover in greater detail Fibonacci
ratios to help you more closely compute potential time and ratios to help you more closely compute potential time and
price targets. However, these calculations remain less price targets. However, these calculations remain less
important than wave form. important than wave form.
Despite these admonitions, if several methods provide you Despite these admonitions, if several methods provide you
with a good price target (such as equality between wave with a good price target (such as equality between wave- -1 1
and wave and wave- -5, a trend line, a day count, plus volume and 5, a trend line, a day count, plus volume and
indicators), the probability of your being correct is better. indicators), the probability of your being correct is better.
Fibonacci
Fibonacci
-
-
Introduction
Introduction

Based on the work of the mathematician
Based on the work of the mathematician
Leonardo
Leonardo
da
da
Pisa (later known as Fibonacci).
Pisa (later known as Fibonacci).

Many waves relate to prior
Many waves relate to prior
subwaves
subwaves
and
and
degrees based on comparisons using Fibonacci
degrees based on comparisons using Fibonacci
-
-
based ratios.
based ratios.

Ratios based on the series of numbers where
Ratios based on the series of numbers where
S
S
n n
= S
= S
n n- -1 1
+ S
+ S
n n- -2 2
Example: 1,1,2,3,5,8,13,21,34 Example: 1,1,2,3,5,8,13,21,34
Example: 6,11,17,28,45,73,118 Example: 6,11,17,28,45,73,118

The ratio of number n in the series, to number n
The ratio of number n in the series, to number n
-
-
1, quickly approaches 1.618.
1, quickly approaches 1.618.

The inverse of this is 0.618 and is known by the
The inverse of this is 0.618 and is known by the
Greek letter phi (
Greek letter phi (

).
).
Fibonacci
Fibonacci
-
-
Introduction
Introduction
There is a whole lot of numerology involved with There is a whole lot of numerology involved with , which , which
is not all that relevant to Elliott. is not all that relevant to Elliott.
What is relevant are the main ratios and retracements that What is relevant are the main ratios and retracements that
Elliotticians Elliotticians use: use:
0.382 (S 0.382 (S
n n
/S /S
n n- -2 2
) ) 1.618 1.618
0.618 0.618 2.618 = 1.618*1.618 2.618 = 1.618*1.618
0.236 (S 0.236 (S
n n
/S /S
n n- -3 3
) ) 4.236 = 1.618 4.236 = 1.618
3 3
0.764 (1 0.764 (1- -0.236) or 0.786 ( 0.236) or 0.786 (
0.5 0.5
) )
The Golden Mean (or Golden Ratio) is 0.618 or 1.618 The Golden Mean (or Golden Ratio) is 0.618 or 1.618
according to Frost/ according to Frost/Prechter Prechter. .
The Golden Section: The point on a line where the ratio The Golden Section: The point on a line where the ratio
between the smaller part of the line and the larger part of between the smaller part of the line and the larger part of
the line equals the ratio between the larger part of the line the line equals the ratio between the larger part of the line
and the whole line. This is at the 0.618 point. and the whole line. This is at the 0.618 point.
The book covers the Golden Rectangle and Golden Spiral. The book covers the Golden Rectangle and Golden Spiral.
Using Fibonacci
Using Fibonacci

Some basic tendencies were discussed in
Some basic tendencies were discussed in
Da
Da
Rules earlier.
Rules earlier.

You can use Fibonacci ratios for determining
You can use Fibonacci ratios for determining
possible targets for retracements and for current
possible targets for retracements and for current
and later wave termini.
and later wave termini.

You can also use Fibonacci numbers and ratios to
You can also use Fibonacci numbers and ratios to
help you time when waves might end.
help you time when waves might end.

On their own, a dependence on Fib numbers can
On their own, a dependence on Fib numbers can
be dangerous, but when combined with the
be dangerous, but when combined with the
principals of channeling as well as by using
principals of channeling as well as by using
volume and momentum, plus an understanding
volume and momentum, plus an understanding
of Crowd Behavior, you can learn to apply Elliott
of Crowd Behavior, you can learn to apply Elliott
Wave in a profitable and easy
Wave in a profitable and easy
-
-
to
to
-
-
understand
understand
manner.
manner.
Using Fibonacci (
Using Fibonacci (
cont
cont
)
)

When wave
When wave
-
-
3 extends, wave
3 extends, wave
-
-
1 and wave
1 and wave
-
-
5 end
5 end
to be equal in size.
to be equal in size.

When wave
When wave
-
-
5 extends, it tends to travel about
5 extends, it tends to travel about
1.618 times the distance traveled by waves 1
1.618 times the distance traveled by waves 1
-
-
3
3

When wave
When wave
-
-
1 extends, it will often travel 1.618
1 extends, it will often travel 1.618
times the distance of waves 3
times the distance of waves 3
-
-
5.
5.

Wave
Wave
-
-
4 often divides a whole move into the
4 often divides a whole move into the
Golden mean (
Golden mean (
ie
ie
, wave
, wave
-
-
5 is 38.2% or 61.8% of
5 is 38.2% or 61.8% of
the distance from the start of wave
the distance from the start of wave
-
-
1 to the
1 to the
bottom of wave
bottom of wave
-
-
4).
4).

In a contracting triangle each alternate wave
In a contracting triangle each alternate wave
tends to be 0.618 times the preceding alternate
tends to be 0.618 times the preceding alternate
wave (
wave (
ie
ie
, wave
, wave
-
-
e = 0.618 times wave
e = 0.618 times wave
-
-
a)
a)
Using Fibonacci (
Using Fibonacci (
cont
cont
)
)

You can also use Fibonacci numbers to look for
You can also use Fibonacci numbers to look for
timing targets.
timing targets.

Waves will often take Fib ratios in terms of time
Waves will often take Fib ratios in terms of time
as well. For example, if wave
as well. For example, if wave
-
-
1 takes eight days,
1 takes eight days,
wave
wave
-
-
2 might take five, and wave
2 might take five, and wave
-
-
3 13.
3 13.

I have often found that daily cycles tend take
I have often found that daily cycles tend take
Fibonacci numbers of days.
Fibonacci numbers of days.

My work has also shown that trading days works
My work has also shown that trading days works
better than calendar days. However, neither this
better than calendar days. However, neither this
or the previous point is noted in
or the previous point is noted in
Prechter
Prechter
/Frost.
/Frost.

Frost/
Frost/
Prechter
Prechter
notes the Benner
notes the Benner
-
-
Fibonacci cycle.
Fibonacci cycle.
Although I doubt it will be on the exam, this 20
Although I doubt it will be on the exam, this 20
-
-
18
18
-
-
16 year cycle has done a very good job of
16 year cycle has done a very good job of
forecasting panics and blow
forecasting panics and blow
-
-
offs.
offs.
Using Fibonacci
Using Fibonacci

When wave
When wave
-
-
3 extends, wave
3 extends, wave
-
-
1 and wave
1 and wave
-
-
5 end
5 end
to be equal in size.
to be equal in size.

When wave
When wave
-
-
5 extends, it tends to travel about
5 extends, it tends to travel about
1.618 times the distance traveled by waves 1
1.618 times the distance traveled by waves 1
-
-
3
3

When wave
When wave
-
-
1 extends, it will often travel 1.618
1 extends, it will often travel 1.618
times the distance of waves 3
times the distance of waves 3
-
-
5.
5.

Wave
Wave
-
-
4 often divides a whole move into the
4 often divides a whole move into the
Golden mean (
Golden mean (
ie
ie
, wave
, wave
-
-
5 is 38.2% or 61.8% of
5 is 38.2% or 61.8% of
the distance from the start of wave
the distance from the start of wave
-
-
1 to the
1 to the
bottom of wave
bottom of wave
-
-
4).
4).

In a contracting triangle each alternate wave
In a contracting triangle each alternate wave
tends to be 0.618 times the preceding alternate
tends to be 0.618 times the preceding alternate
wave (
wave (
ie
ie
, wave
, wave
-
-
e = 0.618 times wave
e = 0.618 times wave
-
-
a)
a)
Some Final Thoughts
Some Final Thoughts
Frost and Frost and Prechter Prechter note that wave theory is applicable to note that wave theory is applicable to
business activity. business activity. Prechter Prechter has extended this to the new has extended this to the new
science of science of Socioconomics Socioconomics. . Socioconomics Socioconomics is not mentioned is not mentioned
in the book, and is not likely to be tested on, but the Elliott in the book, and is not likely to be tested on, but the Elliott
Wave Principle is its basis. Wave Principle is its basis.
Note that this ties us back into the idea of Behavior Note that this ties us back into the idea of Behavior
Finance. It is not the news that counts, but how the market Finance. It is not the news that counts, but how the market
(or stock, or commodity) reacts to the news. In terms of (or stock, or commodity) reacts to the news. In terms of
Elliott, it is how that reaction is represented in wave forms. Elliott, it is how that reaction is represented in wave forms.
Dow Theory has some minor overlaps with Elliott. They Dow Theory has some minor overlaps with Elliott. They
both recognize the behavioral and psychological differences both recognize the behavioral and psychological differences
between bull and bear cycles. between bull and bear cycles.
Dow Theory divergences (Industrials at new high, Dow Theory divergences (Industrials at new high,
Transports not) couples well with momentum divergences Transports not) couples well with momentum divergences
often noted at the top of fifth waves. often noted at the top of fifth waves.
Dow bull and bear markets are not directly tied to any Dow bull and bear markets are not directly tied to any
specific degree and Elliott does not have a true bull or bear. specific degree and Elliott does not have a true bull or bear.
Charts to Discuss
Charts to Discuss
Charts to Discuss
Charts to Discuss
Charts to Discuss
Charts to Discuss
Further Readings and Sources
Further Readings and Sources

Robert
Robert
Prechter
Prechter
Jr.s site:
Jr.s site:
http://www.elliottwave.com
http://www.elliottwave.com

R.N. Elliotts Masterworks
R.N. Elliotts Masterworks
(edited by Robert
(edited by Robert
Prechter
Prechter
Jr.)
Jr.)

Applying Elliott Wave Theory Profitably
Applying Elliott Wave Theory Profitably
(by
(by
Steven W. Poser)
Steven W. Poser)

Note that my book does not

Note that my book does not
exactly follow Frost/
exactly follow Frost/
Prechter
Prechter
. It should be useful
. It should be useful
when you get beyond the exam and wish to start
when you get beyond the exam and wish to start
applying Elliott Wave in the real world.
applying Elliott Wave in the real world.

Pioneering Studies in
Pioneering Studies in
Socioconomics
Socioconomics
&The Wave
&The Wave
Principle of Human Social Behavior
Principle of Human Social Behavior
(by Robert
(by Robert
Prechter
Prechter
Jr.)
Jr.)