ELLIOT WAVE THEORY

INTRODUCTION
• According to the Elliot Wave Principle,
prices trend and reverse in recognizable
form.
• It provides a frame-work for market
analysis.
• The foremost aim of wave classification is
to determine where prices are in the stock
market’s progression.
• It is best used for indexes.
 BASIC CONCEPTS OF EWT
• Action is followed by reaction.
• There are five waves in the direction of the
main trend (Motive Waves) followed by three in
counter direction (corrective waves).
• A 5-3 move completes a cycle.
• The underlying 5-3 pattern remains constant,
though the time span of each may vary.
• Thus, the basic Elliot Wave pattern is made up
of 8 waves (5 up and 3 down) that are labeled
as 1,2,3,4,5,a, b, and c.
 BROAD CONCEPT

Wave 5 Wave A

Wave B Wave C
Wave 4
Wave 3

Wave1
Wave2

Motive (Numerical) Phase Corrective (Alphabetical) Phase

 THREE BASIC RULES OF EWT
• WAVE 2 NEVER MOVES BEYOND THE
START OF WAVE 1
• WAVE 3 IS NEVER THE SHORTEST
• WAVE 4 NEVER OVERLAPS TOP OF
WAVE 1, EXCEPT IN DIAGONAL
TRIANGLE
 CORRECTIVE WAVES
• ZIG ZAGS
• FLATS
• TRIANGLES
IDEALIZED ELLIOT WAVE
PROGRESSION

FINAL ADVANCE

POWERFUL WAVE

REBOUND Wave 5
Wave 4
Wave 3

Wave 2
Wave 1

SURPRISING DISAPPOINTMENT

BOTTOM

TEST OF LOWS
IDEALIZED CORRECTIVE WAVE
B
TOP

NARROW, EMOTIONAL ADVANCE

TECHNICAL BREAKDOWN

Wave A
Wave B
Wave C
A
WORST OF BEAR MARKET C
FIBONACCI NUMBERS & RATIOS
• FIBONACCI NUMBERS AS THE BASIS
OF THE WAVE PRINCIPLE
• FIBONACCI RATIOS AND
RETRACEMENT – 0.618, 0.500, 0.382
• ELLIOT WAVE APPLIED TO STOCKS
VERSUS COMMODITIES
 SUMMARY OF EWT
• A complete bull market cycle is made up of eight
waves, five up waves followed by three down waves.
• A trend divides into five waves in the direction of the
next longer trend.
• Corrections always take place in three waves.
• The two types of simple corrections are zig-zags (5-3-
5) and flats (3-3-5).
• Triangles are usually fourth waves, and always
precede the final wave. Triangles can also be B
corrective waves.
• Waves can be expanded into longer waves and
subdivided into shorter waves.
 SUMMARY OF EWT
• Sometimes one of the impulse waves extends. The
other two should then be equal in time and magnitude.
• The number of waves follows the Fibonacci sequence.
• Fibonacci ratios and retracements are used to
determine price objectives.
• The rule of alternation warns not to expect the same
thing twice in succession.
• The theory was originally applied to stock market
averages and does not work as well on individual
stocks.
• Theory works best in those commodity markets with the
largest public following, such as gold.