Elliot Wave Anatomy

Impulsive Waves
➢The Impulsive waves are very powerful, driving moves The smart money enters the market -
The trend has changed but the market remains uncertain.

➢Retraces some of the first wave back testing the previous extreme - the initial burst has
petered out but the market does not seem to to have enough energy to resume the previous
trend.

➢Mass participation causes prices to explode in the direction of the new trend as the market
accepts that the trend has reversed.

➢Quite often a shallow retrace of the Third wave as the market consolidates its gain and
investors start taking profits.

➢Distribution phase - Profit taking increases as the last man standing is forced into accepting
that the trend has changed and is forced to liquidate his positions - Capitulation!
Wave 1 (Impulsive)
Wave one is rarely obvious at its
inception. When the first wave of a new
bull market begins, the fundamental
Discerption news is almost universally negative. The
previous trend is considered still strongly
in force.

Subdivide Always Subdivide into 5 smaller waves

First waves can take the form of a

Take Leading Diagonal which involves an
overlap of waves 1 and 4 but rarely will.
 Wave 2 (Corrective )
Wave two corrects wave one but can never extend
beyond the starting point of wave one.
Discerption As prices retest the prior low, bearish sentiment
quickly builds, and "the crowd" haughtily reminds all
that the bear market is still deeply ensconced.

Always Subdivided into 3 smaller waves

Subdivide
Often sharp and deep (ABC)

Volume should be lower during wave two than during

Take wave one, prices usually do not retrace more than
61.8%.
 Wave 3 ( Impulse )
Wave three is usually the largest and most powerful
wave in a trend (although some research suggests that
in commodity markets, wave five is the largest).
Discerption The news is now positive and fundamental analysts
start to raise earnings estimates. Prices rise quickly,
corrections are short-lived and shallow.

- Subdivide into 5 smaller waves

Subdivide
- Frequently extends into a 9 wave
Wave 3s are never the shortest impulse wave and are
the most likely to extend
Take Wave three often extends wave one by a ratio of
1.618:1 or more.
 Wave 4 (Corrective)

Wave four is typically clearly corrective. Prices may

Discerption meander sideways for an extended period, and wave
four typically retraces less than 38.2% of wave three
(see Fibonacci relationships below).

- Subdivide into 3 smaller waves

Subdivide - Often very complex Pennant moves
- Tend to be sideways and range bound moves
frustrating bulls and bears.

Volume is well below than that of wave three. This is

a good place to buy a pull back if you understand the
Take potential ahead for wave 5. Still, fourth waves are
often frustrating because of their lack of progress in
the larger trend.
 Wave 5 ( Impulse )
Wave five is the final leg in the direction of the
dominant trend. The news is almost universally
Discerption positive, and everyone is bullish. Unfortunately, this is
when many average investors finally buy in, right
before the top.

- Subdivide into 5 smaller waves

Subdivide - Distribution phases these usually display a
weakening of the trend in prices, breadth and volume
- Can take the form of an Ending Diagonal

Volume is often lower in wave five than in wave three,

Take and many momentum indicators start to show

divergences (prices reach a new high but the indicators
do not reach a new peak).