# The whole theory of Elliott Wave can be classified into two parts

:
�Impulse patterns
�Corrective patterns
Elliott Wave Basics � Impulse Patterns
The impulse pattern consists of five waves.
The five waves can be in either direction, up
or down. Some examples are shown to the
riht and below.The first wave is usually a
wea! rally with only a small percentae of the
traders participatin. "nce Wave # is over,
they sell the mar!et on Wave \$. The sell%off in
Wave \$ is very vicious. Wave \$ will finally end
without ma!in new lows and the mar!et will
start to turn around for another rally.

The initial staes of the Wave & rally are slow,
and it finally ma!es it to the top of the
previous rally 'the top of Wave #(.

)t this time, there are a lot of stops above the
top of Wave #.

Traders are not convinced of the upward trend and are usin this rally to add more
shorts. *or their analysis to be correct, the mar!et should not ta!e the top of the
previous rally.

Therefore, many stops are placed above the top of Wave #.

The Wave & rally pic!s up steam and ta!es the top of Wave #. )s soon as the Wave
# hih is exceeded, the stops are ta!en out. +ependin on the number of stops,
aps are left open. ,aps are a ood indication of a Wave & in proress. )fter ta!in
the stops out, the Wave & rally has cauht the attention of traders.

The next se-uence of events are as follows: Traders who were initially lon from the
bottom finally have somethin to cheer about. They miht even decide to add
positions.

who were
stopped out
'after bein
upset for a
while(
decide the
trend is up,
and they
decide to
rally. )ll this
sudden
interest
fuels the
Wave & rally.

This is the time when the ma.ority of the traders have decided that the trend is up.

*inally, all the buyin fren/y dies down0 Wave & comes to a halt.

1rofit ta!in now beins to set in. Traders who were lon from the lows decide to
ta!e profits. They have a ood trade and start to protect profits.This causes a
pullbac! in the prices that is called Wave 2.

Wave \$ was a vicious sell%off0 Wave 2 is an orderly profit%ta!in decline.

While profit%ta!in is in proress, the ma.ority of traders are still convinced the trend
is up. They were either late in ettin in on this rally, or they have been on the
sideline.

They consider this profit%ta!in decline an excellent place to buy in and et even.

"n the end of Wave 2, more buyin sets in and the prices start to rally aain.

The Wave 3 rally lac!s the hue enthusiasm and strenth found in the Wave & rally.
The Wave 3 advance is caused by a small roup of traders.

)lthouh the prices ma!e a new hih above the top of Wave &, the rate of power, or
strenth, inside the Wave 3 advance is very small when compared to the Wave &

*inally, when this lac!luster buyin interest dies out, the mar!et tops out and enters
a new phase.
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Corrections are very hard to master. 5ost Elliott traders ma!e money durin an
impulse pattern and then lose it bac! durin the corrective phase.

)n impulse pattern consists of five waves. With the exception of the trianle,
corrective patterns consist of & waves. )n impulse pattern is always followed by a
corrective pattern. Corrective patterns can be rouped into two different cateories:
Simple Correction (Zig-Zag)
There is only one pattern in a simple correction.
This pattern is called a 6i%6a correction. ) 6i%
6a correction is a three%wave pattern where the
Wave 7 does not retrace more than 83 percent of
Wave ). Wave C will ma!e new lows below the
end of Wave ). The Wave ) of a 6i%6a correction
always has a five%wave pattern. In the other two
types of corrections '*lat and Irreular(, Wave )
has a three%wave pattern. Thus, if you can identify
a five%wave pattern inside Wave ) of any
correction, you can then expect the correction to
turn out as a 6i%6a formation.

Fibonacci Ratios inside a Zig-Zag Correction
Wave B
9sually 3:; of Wave )
Should not exceed 83; of Wave )
Wave C
either # x Wave )
or #.<\$ x Wave )
or \$.<\$ x Wave )

) simple correction is commonly called a 6i%6a correction.
Complex Corrections (Flat, Irregular, Triangle)
The complex correction roup consists of & patterns:
�*lat
�Irreular
�Trianle
Flat Correction
In a *lat correction, the lenth of each wave is identical. )fter a five%wave impulse
pattern, the mar!et drops in Wave ). It then rallies in a Wave 7 to the previous hih.
*inally, the mar!et drops one last time in Wave C to the previous Wave ) low.

Irregular Correction
In this type of correction, Wave 7 ma!es a new hih. The final Wave C may drop to
the beinnin of Wave ), or below it.

*ibonacci =atios in
an Irreular Wave
Wave 7 4 either #.#3 x
Wave ) or #.\$3 x Wave )
Wave C 4 either #.<\$ x
Wave ) or \$.<\$ x Wave )
Triangle Correction
In addition to the three%wave correction patterns, there is another pattern that
appears time and time aain. It is called the Trianle pattern. 9nli!e other trianle
studies, the Elliott Wave Trianle approach desinates five sub%waves of a trianle
as ), 7, C, + and E in se-uence.

Trianles, by far, most commonly occur as fourth
waves. "ne can sometimes see a trianle as the
Wave 7 of a three%wave correction. Trianles are
very tric!y and confusin. "ne must study the
pattern very carefully prior to ta!in action. 1rices
tend to shoot out of the trianle formation in a swift
thrust.

When
trianles occur in the fourth wave, the
mar!et thrusts out of the trianle in the
same direction as Wave &. When trianles
occur in Wave 7s, the mar!et thrusts out of
the trianle in the same direction as the
Wave ).

Alteration Rule
If Wave Two is a simple correction, expect
Wave *our to be a complex correction.
If Wave Two is a complex correction,
expect Wave *our to be a simple correction.
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Elliot discovered that the ever%chanin path of stoc! mar!et prices reveals a
structural desin that in turn reflects a basic harmony found in nature. *rom this
discovery, he developed a rational system of mar!et analysis.
9nder the Wave 1rinciple, every mar!et decision is both produced by meaninful
information and produces meaninful information. Each transaction, while at once an
effect, enters the fabric of the mar!et and, by communicatin transactional data to
investors, .oins the chain of causes of others> behavior. This feedbac! loop is
overned by man>s social nature, and since he has such a nature, the process
enerates forms. )s the forms are repetitive, they have predictive value.
Wave Patterns
In mar!ets, proress ultimately ta!es the form of five waves of a specific structure.
Three of these waves, which are labeled #, & and 3, actually effect the directional
movement. They are separated by two countertrend interruptions, which are labeled
\$ and 2. The two interruptions are apparently a re-uisite for overall directional
movement to occur.
)t any time, the mar!et may be identified as bein somewhere in the basic five wave
pattern at the larest deree of trend. 7ecause the five wave pattern is the overridin
form of mar!et proress, all other patterns are subsumed by it.
The 3 wave pattern is often followed by & corrective waves labelled as )%7%C.
Wave o!e
There are two modes of wave development: impulsive and corrective. Impulsive
waves have a five wave structure, while corrective waves have a three wave
structure or a variation thereof. Impulsive mode is employed by both the five wave
pattern and its same%directional components, i.e., waves #, & and 3. Their structures
are called ?impulsive@ because they powerfully impel the mar!et. Corrective mode is
employed by all countertrend interruptions, which include waves \$ and 2. Their
structures are called ?corrective@ because they can accomplish only a partial
retracement, or ?correction,@ of the proress achieved by any precedin impulsive
wave. Thus, the two modes are fundamentally different, both in their roles and in
their construction, as will be detailed in an upcomin section.
Wave su"!ivision
Waves can be repeatedly subdivided into lower derees as follows:
Some o"servations
• Wave 2 never overlaps or enters the area of wave #. )n overlap means one shd
consider the possibility of )%7%C corrective
• )n exception to the above is a 3th wave endin diaonal
• Wave & is never the shortest.
• Wave & A 3 are related to wave # by a *ibonacci ratio 'e-uality or #.<#B or \$.<#B(
• In any corrective, wave C is related to wave ) by a *ibonacci ratio 'e-uality or #.<#B
or \$.<#B(
• In any corrective, wave 7 is related to wave ) by a *ibonacci ratio ':.<#B or e-uality(
• Compared to impulses, correctives are difficult to trade. There are more than \$&
types of patterns. Sometimes the best thin to do is let the mar!et ma!e up its mind and then
decide what to do.
• In an impulse, it is common for a wave & or wave 3 to extend.
• )ny correction followin a 3th wave extension will typically end at wave \$ of the
extension
• )lternation: if wave \$ is a sideways correction, wave 2 will be fastC straihtC swift 'and
vice versa(.
• Waves are fractal and principles apply across all time frames. ) #%\$%&%2%3 impulse
could be a part of larer ) which in turn can be a part of a larer #
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W#at is support
Support is the price level at which demand is thouht to be stron enouh to prevent
the price from declinin further. The loic dictates that as the price declines towards
support and ets cheaper, buyers become more inclined to buy and sellers become
less inclined to sell. 7y the time the price reaches the support level, it is believed that
demand will overcome supply and prevent the price from fallin below support.
Support does not always hold and a brea! below support sinals that the bears have
won out over the bulls. ) decline below support indicates a new willinness to sell
andCor a lac! of incentive to buy. Support brea!s and new lows sinal that sellers
have reduced their expectations and are willin sell at even lower prices. In addition,
buyers could not be coerced into buyin until prices declined below support or below
the previous low. "nce support is bro!en, another support level will have to be
established at a lower level.
W#at is resistance
=esistance is the price level at which sellin is thouht to be stron enouh to
prevent the price from risin further. The loic dictates that as the price advances
towards resistance, sellers become more inclined to sell and buyers become less
inclined to buy. 7y the time the price reaches the resistance level, it is believed that
supply will overcome demand and prevent the price from risin above resistance.
=esistance does not always hold and a brea! above resistance sinals that the bulls
have won out over the bears. ) brea! above resistance shows a new willinness to
buy andCor a lac! of incentive to sell. =esistance brea!s and new hihs indicate
buyers have increased their expectations and are willin to buy at even hiher
prices. In addition, sellers could not be coerced into sellin until prices rose above
resistance or above the previous hih. "nce resistance is bro!en, another resistance
level will have to be established at a hiher level.
Support "ecomes resistance (an! vice versa)
)nother principle of technical analysis stipulates that support can turn into resistance
and visa versa. "nce the price brea!s below a support level, the bro!en support
level can turn into resistance. The brea! of support sinals that the forces of supply
have overcome the forces of demand. Therefore, if the price returns to this level,
there is li!ely to be an increase in supply, and hence resistance.
The other turn of the coin is resistance turnin into support. )s the price advances
above resistance, it sinals chanes in supply and demand. The brea!out above
resistance proves that the forces of demand have overwhelmed the forces of supply.
If the price returns to this level, there is li!ely to be an increase in demand and
support will be found.
Conclusion
Identification of !ey support and resistance levels is an essential inredient to
successful technical analysis. Even thouh it is sometimes difficult to establish exact
support and resistance levels, bein aware of their existence and location can
reatly enhance analysis and forecastin abilities. If a security is approachin an
important support level, it can serve as an alert to be extra viilant in loo!in for
sins of increased buyin pressure and a potential reversal. If a security is
approachin a resistance level, it can act as an alert to loo! for sins of increased
sellin pressure and potential reversal. If a support or resistance level is bro!en, it
sinals that the relationship between supply and demand has chaned. ) resistance
brea!out sinals that demand 'bulls( has ained the upper hand and a support brea!
sinals that supply 'bears( has won the battle.