DEMYSTIFYING ELLIOT WAVE PATTERN IN INDIAN …icmrr.org/global/pdffiles/IJFRR/f201610002.pdf ·...

DEMYSTIFYING ELLIOT WAVE PATTERN IN INDIAN STOCK

MARKET

SIBANJAN MISHRA

Assistant Professor, Xavier University, Bhubaneswar, India.

ABSTRACT

This study is aimed at discovering the current and future trends in stock price with the aid of

various patterns majorly Elliot Wave Patterns, displayed by the charts of Nifty and Sensex of Indian

Stock Market. Technical trading studies the historical price graph to derive the information,

considered by the ordinary investor for investment decision making. Such aggregate information

reflects the market behaviour through the patterns in the stock charts. Patterns are basically a special

shape formed in stock time-series chart which indicates a prospective trend in price. Pattern analysis,

an important branch of technical analysis, probes into the comparison between the strengths of the

longs (buy positions) and shorts (sell positions) indicated by the stock charts. Stock patterns are those

that occur recurrently in stock time series, containing valuable forecasting information. The paper

considers the Elliot wave methodology for making buy sell decision depending on the pattern

unfolded. The study concludes giving several trading strategies for the investors along with a

forecasted figure for Nifty and Sensex.

Key words: Technical Analysis, Elliot Wave Pattern, Impulse, Corrections, Chart Patterns.

Introduction

Chart patterns are useful gauges of momentum, support and resistance, and other indications

of strength or weakness in a stock. Chart patterns help traders to determine market direction as well

as time of entries and exits in the market. However a trader must be able to identify chart patterns

properly only then can a trader benefit from chart patterns. A careful analysis of those price patterns

on charts will reveal certain repeating patterns. It shows where the prices have been, where the

majority of buyers and seller participated and also the prevailing trading psychology in the market. If

human emotions drive buying and selling behavior, then chart patterns can help to determine where

such emotions may next surface.

Amidst several trading systems and theories, the Elliot Wave Principle makes particular sense

as a method of studying and predicting trader psychology. By identifying the beginning of common

Elliot patterns, it is possible to calculate the probability of those patterns completing and where and

when the market is likely to change direction. One of the basic tenets of Elliot Wave theory is that

market structure is fractal in character. The non-scientific explanation of this fractal character is that

Elliot Wave patterns that show up on long term charts are identical to or will also show up on short

term charts, albeit with sometimes more complex structures. This property of fractals is called "self-

similarity" or "self-affinity".

The Wave patterns unfold the crowd psychology i.e. the result of mass human emotion. In

financial market it is quite impossible to determine what one trader will do but it is possible to

determine the probability of what a large crowd of traders will do. As a result, when applied to liquid

markets, the Elliot Wave Principle can be uncannily accurate. Liquidity is essential for consistent

Elliot behavior. For instance, contracts based on the S&P 500, Nasdaq and currencies, often depict

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dependable Elliot wave patterns. These markets are driven by mass psychology or human emotion.

No individual trader, institution or government can manipulate these markets. They are truly liquid,

driven by supply and demand — the result of the "state of mind" of the crowd as it moves from fear to

hope and back again. Conversely, thinly traded markets, such as speculative stocks or commodities,

do not generally show consistent Elliot wave behavior. This is why markets that are manipulated by a

few large market participants can often be poor candidates for Elliot analysis.

Elliot has described about several chart patterns, basic amongst these are the Impulse and

Corrective waves. The impulse waves are classified as upward impulse which starts from a market

low and trends upward in the direction of the dominant trend and the downward impulse which starts

from a market high and trends downward. The corrective waves fall under the category of Flats (B

Failure, C Failure, Common, Double Failure, Elongated, Irregular, Irregular Failure, Running),

ZigZag (Normal, truncated, Elongated). Finally, the most difficult and important Corrective pattern,

Triangle (Contracting and Expanding). The following flowchart (Figure 4.1) briefs us about the

impulse and the corrective patterns found in the stock charts along with their variations.

Figure 1.1: Elliot Wave patterns

The pattern studies are applied successfully in developed and emerging financial markets.

Robert Prechter‘s in 1980 forecasting the massive bull market where he predicted the 5th Wave in

Dow Jones Industrial Average will take it to 2500-2700 levels. His targets were achieved with the

average making peak of 2722 in 1987. His prediction again worked in US stock markets as he

predicted the crash of 1987 two weeks before it occurred. Be it a bull or a bear market, by utilizing the

theory we can predict markets. Cosimo Magazzino, Marco Mele, Giancarlo Prisco (2012) applied

Elliot wave theory on major world indicies and their finding showcased, that, in the case of turbulent

financial markets, technical analysis and the Elliot‘s theory adequately reflect the realities of the

financial markets. If one explores the portfolios constructed by mean-variance Markowitz‘s (1952)

model in the stages of turbulent market, compared with strategies pursued with technical analysis, we



may notice that a portfolio constructed on the basis of the first model would have been highly at a loss

compared to a different portfolio built with technical analysis. The reason of this lies on the fact that

with the second model it would be easier to draw up strategies in the short term, liquidating positions,

instead the complexity found in the alternative Markowitzian portfolio.

The requisite time frame for which Elliot Wave can be studied was studied by Mihir Dash and

Anand Patil in 2009 in the Indian Stock Market. The results of the study thus tend to support Elliot

Wave Theory, especially for short- and medium-length waves. The application of Elliot Wave in

different sectors was studied by B. Karthikeyan and Chendrayan Chendroyaperumal in 2011 where he

concluded that Elliot wave theory is applicable in India and hence it could be used as a technical

analytical tool to predict the future stock price of the companies on a case by case basis.

From the brief discussion it is evident that Elliot Wave is a useful tool in technical analysis

for market analysis but the complicated rules and guidelines propagated in this subjective theory make

it less acceptable. Moreover there is no evidence that the rules followed by the researcher‘s matches

the given rules. Therefore an attempt is made to verify whether the Elliot wave‘s rules can be

deciphered in a simpler manner during different economic phases in Indian Indicies mainly CNX

Nifty and BSE Sensex. The rationale behind is, we can build trading strategies based on such patterns

and enable the traders to be in the right foot at any juncture of the trend. Moreover it will help us in

proper money management.

The data for the CNX Nifty and BSE Sensex were retrieved from the database of the National

Stock Exchange and Bombay stock Exchange websites. The data include time series for the following

variables: date, open, high, low and close. The period of study ranges from 2003-2013. This duration

is divided into three sub-divisions i.e. pre-crisis period (2003-2008), crisis period (2008-2009), post

crisis period (2009-2011) to test the efficiency of wave principle in different economic situations.

This descriptive and analytical research studied the CNX Nifty and BSE Sensex to establish

the presence of Elliot Waves during the sample period. Such pattern identification is purely based on

rules prescribed by Elliot Wave Theory. The identification of patterns is observational and carried on

for different time frames. The Elliot patterns are classified broadly into two types namely Impulses

and Corrective. Impulses can form either upward or downward pattern. Corrective pattern comprises

of Flats, Zigzags, and Triangles.

Based on identification of such pattern during the sample period an attempt is made to

forecast both the indices under study. Elliot Wave are important since they can clue us about the

future market path and thus appropriate trading recommendation can be advised to the investors and

traders.

Chart & Data Analysis

The daily price chart of Nifty is divided into three phases namely

Pre-Crisis Chart (May, 2003-Jan, 2008)

Crisis Chart (Jan, 2008 – March, 2009)

Post-Crisis Chart (March, 2009 – Nov, 2010)

An additional section is added on Chart Analysis (Nov 2010 onwards) i.e. after the Crisis is over, to

forecast the market direction based on Elliot Wave Approach.



Nifty - Pre-Crisis Chart (May 2003-Jan 2008)

The Elliot Wave pattern identified for Nifty pre-crisis period is an Upward Impulse pattern as

shown in Figure 1.2. Evidence of the pattern, depicted in the chart, adhering to all the specific rules

for establishing an Upward Impulse is presented in Table 1.1 & 1.1(a). The first wave in an Elliott

sequence is Wave 1 as it has resulted out of an ending triangle consolidation phase since 2000.

Triangles are consolidating formation and on completion generate sharp market movements termed as

‗breakouts‘.

Figure 1.2: Nifty - Pre Crisis Chart

Impulse

May 03 – Jan 2008 Explanation of the Nifty Pre – Crisis Chart

Rule 1 Five adjacent segments (Wave 1, 2, 3, 4, 5) are present.

Rule 2 Three of the five segments (Wave 1, 3, 5) have thrust in the same direction.

Rule 3

Immediately after the first segment (Wave 1), a minor move in the opposite

direction takes place (Wave 2). This segment can never retrace the entire

first. Wave 1(1035 points) however was not retraced completely by Wave 2

(583 points).

Rule 4 The third segment must be longer than the second. Wave 2 measures

583points, whereas Wave 3 measures 2366 points.

Rule 5

Immediately after the third segment, a minor move in the opposite direction

of the third and same direction of the second must take place (segment

four). The fourth segment must never retrace all of the third. Wave 4

measuring 956 points, has not retraced all of the 2366 points covered by the

Wave 3 rather it is around 40% of Wave 3.



Table-1.1: Elliot Wave based explanation of the Nifty Pre – Crisis Chart

Impulse

Wave

Pattern

Rule 1 Rule 2 Rule 3 Rule 4 Rule 5 Rule 6 Rule 7

May 03 – Jan

08 Satisfied Satisfied Satisfied Satisfied Satisfied Satisfied Satisfied

Table 1.1(a): Rule wise conformation of Elliot Pattern

The additional guidelines for establishing a true impulse pattern are the rule of extension,

alteration, equality and channeling.

As per the rule of Extension, extended wave may be wave 1/3/5. It is the longest wave

amongst impelling (same directional) wave. In this chart, it is a case of fifth wave extension as shown

in Table 1.1(b)

Wave 1 Wave 3 Wave 5

1035 points 2366points 2489 points

Table 1.1(b): Extension Rule of Impulse

Alteration takes place in any of the said form i.e. pricewise, severity wise or time

wise. Here it is a case of price, severity and time wise alteration described in Table 1.1(c).

Alteration Rule Wave 2 Wave 4 Explanation

Price 583 points 956 points Alteration is present price -wise

Severity Flat Zig-Zag Alteration is present severity –wise.

Time 4months 1months Alteration is present time –wise.

Table 1.1(c): Alteration Rule of Impulse

The equality rule is applicable to the un-extended waves i.e. amongst waves

1-3-5. As the extended wave in this chart is wave 5, the equality rule is worked out between wave 1 &

wave 3 in Figure 4.3. Wave 3 is 261.8% of Wave 1.

Rule 6

The fifth segment will always be longer than the fourth, but only has to be

38.2% of the fourth segment pricewise. When the fifth is shorter than the

fourth it is termed as a failure. Wave 5 which is of 2489 points is more than

38.2% of wave 4 (956 points).

Rule 7

When the vertical price distances are measured for first, second and third,

the third does not have to be the longest but it can never be the shortest of

the three segments.

Wave 1-1035 points Wave 3 - 2366 points Wave 5 - 2489 points



Channeling Rule: There are two types of base channel lines in working with an Impulse

pattern. They are the 0-2 trendline and the 2-4 trendline shown in Figure 1.3. If the 0-2 trendline is

real no part of Wave 3 should break the trend line. Similar rule stands for 2-4 channel line.

Figure 1.3. Nifty-Fibonacci relation between W1 - W3, 0-2 & 2-4 Channeling

Relationship between Fibonacci value & Actual values of respective waves:

Probable Fibonacci Relationship among Elliot Waves

Actual

Length

Wave 1

1035

Wave 2

28.2% of

W1 38.2% of W1 50.0% of W1 61.8% of W1

583

292 395 517 639

Wave 3

161.8% of W1 175% of W1 261.8% of W1

2366

1674 1811 2709

Wave 4

23.8% of

W3

38.2% of

W3 50% of W3 61.8% of W3

956 563 904 1183 1462

Wave 5

If W3>1.618 of W1 If W3<1.618 of W1

3346 =W1 1.618 of

W1 2.618 of W1

.618 of

W1 to

W3

= W1 to

W3

1.618 of

W1 to

W3

1035 1674 2709 1741 2818 4549



Table 1.1(d): Probable Fibonacci Relationship amongst Waves

If the wave count is an Upward Impulse Wave pattern, then one of the probable Fibonacci

relationships (given in Table 1.1(d)) will be reflected amongst Waves 1-2-3-4-5. In the pre-crisis

Nifty chart the deviations of actual values from the Fibonacci values were observed as depicted in the

Table 1.1(d). The reason for these deviations may be for the arithmetic plot of the data. If we plot the

chart in a logarithmic scale, these deviations can be minimized further.

Hence it is concluded, there exists upward impulse in the Nifty pre crisis chart and the

following trading options can be devised on the basis of the aforesaid rules prescribed by Elliot

Theory. Thus the trading recommendations in Impulse Wave Pattern are:

Trading Strategy for Wave 3

Go long as the third wave breaches the top of wave 1 with a stop loss below wave 1

considering the investors risk taking ability. As it is seen that wave 3 generally tends to be the

extended wave amongst all the impelling/trending waves and can move to atleast 161.8% or 261.8%

of wave 1.

Trading Strategy for Wave 5

The fifth wave trading strategy can be developed considering the Third Wave. If the Third

wave is less than 161.8% of Wave 1 then Fifth wave may be an extended wave. However if it is more

than 161.8% of Wave 1 fifth wave may be equal to the length of Wave 1. Thus accordingly go long

as the Fifth wave breaches the top of wave 3 with a stop loss below the top of wave 3 considering the

investor‘s risk taking ability.

Nifty—Crisis Chart (Jan 2008-March 2009)

As per the Elliot wave counts the Crisis period (Jan 2008-March 2009) took place with two

variations of Correction pattern shown in Figure 1.4. The first phase (Jan 2008- March 2008) is

identified to be a Zig-Zag (A-B-C) with a 5-3-5 formation followed by an X Wave explained in Table

1.3 & 1.3(a). The Second phase (March 2008-March 2009) is identified as Double Combination (5-3-

5 X 3-3-3-3-3) formation i.e. (a combination of Zig-Zag (A-B-C), (X) and a Contracting Triangle (a-

b-c-d-e).

Figure 1.4. Nifty - Crisis period Chart (Jan 2008- March 2009)



First Phase (Zig-Zag)

Table 1.3: Elliot Wave based explanation of the Zig-Zag


The zigzag is confirmed with all the three rules being satisfied. In Zigzag the tradable wave is

the C-Wave. The start of C-wave can be identified as the B-wave ceases to move beyond 61.8% of

wave A and breaches the low made by wave A.

Trading Strategy for C-wave of a Zigzag

Go short once the C wave moves below the bottom of wave A with a stop loss of top of Wave B,

looking at the investor‘s or trader‘s risk taking ability. Generally length of C-wave of zigzag‘s equals

to the length of A-wave. Next possibility is C-wave relates to wave A with either 1.618/.618 of wave

A. In this current chart the c-wave is 0.64 of wave A after breaching the bottom of wave A (see table

1.3(b)).

Calculation of Movement of C Wave

Wave A =1033points Wave B = 103points Wave C = 767points

Length of C-Wave after breaching bottom of Wave A = 767 – 103 =664 points

Movement of Wave C (%) = length of C Wave below the bottom of Wave A/Wave A*100

= 664/1033 *100 = 64.27% of wave A

Table 1.3(b): Movement of Wave C in a Zig-zag

The property of the X-wave: - X-Wave will be smaller in price action in comparison to the previous

Corrective phase (with less than 61.8%). It has happened in this case as follows:

Zig-Zag Jan’08

– March’08 Explanation of the Crisis Chart (First Phase)

Rule 1

Wave-A should not retrace more than 61.8% of the previous Impulse wave (if

present) of one larger degree. Wave-A only retraces 21% of length covered by

the Impulse Wave.

Rule 2 Wave-B should retrace at least 1% of wave-a. Wave-B retraces 23.6% of

Wave-A.

Rule 3 Wave-C must move, even if only slightly, beyond the end of wave-A. It has

moved down by 61.8% of Wave A

Zig-Zag

Pattern Rule 1 Rule 2 Rule 3

Jan’08 –

March’08 Satisfied Satisfied Satisfied



Length of the previous corrective phase is 1697 points whereas the length of x-wave is 725points,

which is 40%, well below the limit of 61.8%. Thus the move is confirmed to be an x-wave.

Second phase (a double combination – Zig-zag & Contracting triangle)

A Double Combination of Zigzag and Triangles fall under the category of Non-Standard form

of patterns under Elliot wave theory. If such wave pattern unfolds the chances are greater that the X-

Wave will be smaller in price action in comparison to the previous Corrective phase (with less than

61.8%). We will analyse the double combination taking each part at a time. First the zigzag is

discussed in table 1.3.1 & 1.3.1(a) followed by description of the X-wave and then the contracting

triangle will be discussed.

Zig-Zag

Table 1.3.1: Elliot Wave based explanation of the Zig-Zag

Table 1.3.1(a): Rule wise conformation of Elliot Pattern

The zigzag is confirmed here also with all the three rules being satisfied. In Zigzag the

tradable wave is the C-Wave. The start of C-wave can be identified as the B-wave ceases to move

beyond 61.8% of wave A and breaches the low made by wave A.

Trading Strategy for C-wave of a Zigzag

Go short once the C wave moves below the bottom of wave A with a stop loss of above the

bottom of wave A looking at your risk taking ability. Generally length of C-wave of zigzag‘s equals

to the length of A-wave. Next possibility is C-wave relates to wave A with either 1.618/.618 of wave

A. In this current chart the c-wave is almost equal to wave A after breaching the bottom of wave A

(see table 1.3.1(b)).

Zig-Zag

May’08 – Nov’08 Explanation of the Crisis Chart (Second Phase)

Rule 1 Wave-A should not retrace more than 61.8% of the previous Impulse wave

(if present) of one larger degree. No preceding Impulse Pattern found.

Rule 2 Wave-B should retrace at least 1% of wave-A. Wave-B retraces 50% of

Wave-A.

Rule 3 Wave-C must move, even if only slightly, beyond the end of wave-A.

Zig-Zag

Pattern Rule 1 Rule 2 Rule 3

May’08 –

Nov’08 Satisfied Satisfied Satisfied



Calculation of Movement of C Wave

Wave A =1281points Wave B = 405points Wave C = 1668points

Length of C-Wave after breaching bottom of Wave A = 1668 – 405 =1263 points

Movement of Wave C (%) = length of C Wave below the bottom of Wave A/Wave A*100

= 1263/1281 *100 = 98.6% of wave A

Table 1.3.1(b): Movement of Wave C in a Zig-zag

Contracting Triangle

Contracting

Triangle

Nov 08 – Mar

09

Explanation of the Crisis Chart (Second Phase)

Rule 1

Elliot said there are five segments to a Triangle, no more, no less. This rule

applies no matter how simple or complex each segment is. In order of

occurrence, each segment of the Triangle is given a letter of the alphabet: (a, b, c,

d, e).

Rule 2 Each Segment of the Triangle a Complete Corrective phase having three

subdivisions denoted by (a ":3").

Rule 3

Unlike an Impulse pattern, which tends to trend up or down, the five segments of

a Triangle will oscillate over and over in the same price territory (overlap) with a

slightly Expanding or Contracting bias

Rule 4 The Triangle can drift slightly upward or downward without affecting these

general guidelines.

Rule 5 The length of wave-b must fall between 38.2-261.8% of wave-a

Rule 6

Of the five segments in a Triangle, four retrace a previous segment. The retracing

segments are waves b,c,d & e. Of those four, three segments must retrace at least

50% of the previous wave

Rule 7 Only four of the terminal points (of the same degree) in a Triangle should be

channeled between contracting trendlines

Rule 8

The channel line crossing waves B & D in a Triangle should be thought of as the

Base line. Its function is similar to a 2-4 trendline in an Impulse wave. As a

general rule, the B-D trendline should not be broken by any part of wave C or E

in the Triangle (Figure 5~34a). In other words, mere should be a clear path from

wave B to D and from wave D until the end of wave E Figure 5-34b illustrates

behavior around the Triangle's B-D trendline which is not acceptable.



Table 1.3.2: Elliot Wave based explanation of the Contracting Triangle


The contracting triangle (see table 1.3.2 & 1.3.2(a)) is confirmed as all the rules mentioned

are abided by the price action. Triangles should be cautiously dealt with as the price action is limited

during this formation. However the risk taking traders can take trading opportunities between the

triangle boundary. Risk averse traders must wait for the post triangular break-out or thrust for any

type of trading option. Thus the complex correction under consideration so far is sensed to be

completed.

Nifty Post Crisis (March 2009- November 2010)

The post crisis chart of Nifty was divided into three sections, first the post triangle thrust

arising out of conclusion of previous correction, second a contracting triangle and third again a

triangle thrust.

Post Triangle Thrust

A ―thrust‖ (powerful, violent price movements) always follows a contracting triangle which,

depending on the variations may be large or small, long or short-lived. The thrust out of a contracting

triangle should always exceed the highest or lowest price obtained during the formation of the

triangle. Depending on subtle formational differences, the contracting triangle may be a 4th – wave or

b-wave or x-wave or the last phase of a complex Correction. It is related to the previous correction

with a Fibonacci relationship which is length of the thrust will be at least 75% and maximum of

261.8% of length of the previous correction.

Contracting

Triangle

Pattern

Rule 1 Rule 2 Rule 3 Rule 4 Rule 5 Rule 6 Rule 7 Rule 8

Nov 08 –

Mar 09 Satisfied Satisfied Satisfied Satisfied Satisfied Satisfied Satisfied Satisfied



Figure 1.8.Nifty Post Crisis Chart (March 2009- Nov. 2010)

Relationship of Previous Correction and Post Triangle Thrust (March 09-June 09)

Length of the previous Correction which was a Double Combination = 2655 points

Length of Thrust (added to the end of wave e in the Triangle) = 2082 points

Relationship (in %)= length of thrust / length of previous correction = 2082/2655*100

= 78.4 %

Table 1.5: Calculation of Post Triangle Thrust

Thus the post triangle thrust has attained 78.4% of the length of the previous correction

compared to the minimum retracement of 75%.

Trading Strategy for Post Triangular Thrust

As the thrust breaks above the b-d trend line of the triangle, go long with a stop loss of wave –e.

Contracting Triangle

Contracting

Triangle

July 09 – May 10

Explanation of the Post-Crisis Chart July 2009 – May 2010

Rule 1

Elliot said there are five segments to a Triangle, no more, no less. This rule

applies no matter how simple or complex each segment is. In order of

occurrence, each segment of the Triangle is given a letter of the alphabet: (a,

b, c, d, e).

Rule 2 Each Segment of the Triangle a Complete Corrective phase having three

subdivisions denoted by (a ":3").

Rule 3

Unlike an Impulse pattern, which tends to trend up or down, the five

segments of a Triangle will oscillate over and over in the same price territory

(overlap) with a slightly Expanding or Contracting bias

Rule 4 The Triangle can drift slightly upward or downward without affecting these

general guidelines.

Rule 5 The length of wave-b must fall between 38.2-261.8% of wave-a

Rule 6

Of the five segments in a Triangle, four retrace a previous segment. The

retracing segments are waves b,c,d & e. Of those four, three segments must

retrace at least 50% of the previous wave

Rule 7 Only four of the terminal points (of the same degree) in a Triangle should be

channeled between contracting trendlines

Rule 8

The channel line crossing waves B & D in a Triangle should be thought of as

the Base line. Its function is similar to a 2-4 trendline in an Impulse wave.

As a general rule, the B-D trendline should not be broken by any part of

wave C or E in the Triangle (Figure 5~34a). In other words, mere should be

a clear path from wave B to D and from wave D until the end of wave E

Figure 5-34b illustrates behavior around the Triangle's B-D trendline which

is not acceptable.



Table 1.5.1: Elliot Wave based explanation of the Contracting Triangle


The contracting triangle is confirmed as all the rules mentioned are abided by the

price action. Triangles should be cautiously dealt with as the price action is limited during this

formation. However the risk taking traders can take trading opportunities between the triangle

boundaries. Risk averse traders must wait for the post triangular break-out/ thrust for any type of

trading option.

Post Triangle Thrust

Relationship of Previous Correction and Post Triangle Thrust (May 10- Nov 10)

Length of the previous Correction which was a Contracting triangle = 1124 points

Length of Thrust (added to the end of wave e in the Triangle) = 1395 points

Relationship (in %)= length of thrust / length of previous correction = 1395/1124*100

= 124 %

Table 1.5.1(b): Calculation of Post Triangle Thrust

Thus the post triangle thrust has satisfied the minimum retracement level of 75% of the length

of the previous correction.

Trading Strategy for Thrust: As the thrust breaks above the b-d trend line of the triangle, go long with

a stop loss of wave –e.

Nifty Post November 2010

For Nifty it was perceived that the correction which lasted from January 2008 to November

2010 is over and it has resumed its up move post 2010, however the Elliot Wave counts suggested that

the correction is yet to be completed and it is going to re-test the lower levels since it has not

completed its Wave C of a flat formation (A-B-C) as shown in Figure 4.10. The point marked as A in

Figure 4.10 is the terminating part of Wave A (Jan 2008-March 2009) of A-B-C, point marked as B

terminates Wave B 9March 2009-Nov. 2010) of A-B-C and post November 2010 it will complete the

Wave C (November 2010- December 2011).

Contracti

ng

Triangle

Pattern

Rule 1 Rule 2 Rule 3 Rule 4 Rule 5 Rule 6 Rule 7 Rule 8

Jul 09 –

Jun 10

Satisfied Satisfied Satisfied Satisfied Satisfied Satisfie

d

Satisfied Satisfied



Figure 1.10. Nifty Chart (2008-2011)

The complete correction since 2008 to 2011 is identified to be a FLAT as per the Elliot Chart

Patterns. The Flat pattern structure comprise of a 3-3-5 formation for Wave A-B-C respectively.

FLAT

Table 1.7: Elliot Wave based explanation of a Flat


Following Wave B retracement level i.e. between 81-100% of Wave A, the formation is referred to as

Normal B-Wave.

Flat

2008-2011 Explanation of the Chart

Rule 1

Wave B must retrace atleast 61.8% of Wave A. Wave B has retraced 99.64% of

Wave A.

.

Rule 2 Wave C must be at least 38.2% of Wave A. Wave C is 48 % of Wave A

Flat Pattern Rule 1 Rule 2

2008-2011 Satisfied Satisfied



Normal B-Wave

The b-Wave, to be considered "normal," should fall between 81-100% (inclusive) of Wave-a.

Under these conditions, the c-Wave will most likely retrace all of Wave-b. If the length of Wave-c

falls between 100-138.2% of Wave-b, the pattern should be considered a Common Flat. If the c-Wave

is more than 138.2% of Wave-b, the market is forming an Elongated Flat. If the c-Wave is less than

100% of Wave-b, the pattern is a C-Failure.

Thus the flat variation falls under a C-failure category as Wave c has retraced only 48% of

Wave a.

It is concluded from the above analysis that Nifty has completed a cycle of 1-2-3-4-5-A-B-C.

Hence we may witness an up move post 2011.

Elliot Wave Cycle

Figure 1.11 portrays a complete Elliot Wave Cycle (2003-2011) as 1-2-3-4-5-A-B-C. The

Cycle comprises of Wave 1(1-2-3-4-5) and Wave 2(A-B-C) of a larger degree. Basing on these

observations the pattern henceforth determined is an Impulse Pattern because if we investigate the

chart, it is evident that it is following all the rules of a Impulse like the retracement of Wave 2 is not

100 % of Wave 1. Wave 1 is a proper 1-2-3-4-5 formation. Wave 2 is a Flat (A-B-C formation).

Thus currently the Wave 3 is underway and basing on Elliot Wave Theory we have calculated

the probable length of Wave 3 for Nifty as 13120** by 2017 (see table 1.7 & 1.7.1(a)).

Start Year Nifty Figure End Year Nifty Figure Length

Wave 1 2003 936 2008 6144 5208

Wave 2 2008 6144 2011 4693 1451

Wave 3* 2011 4693 2017-2020 13120

** 8426

Table 1.7.1: Calculation of Projected Wave 3 basing on Impulse pattern



Figure 1.11. Projected Nifty Chart (2003-2017)

Table 1.7.1(a): Estimating Wave 3 of Impulse Pattern

Conclusion

It can be established that Elliot wave patterns are found within real market data. Moreover

such patterns are witnessed in all the phases of an economic cycle. By using this theory one can gauge

which way the market or the stock is headed. The important aspect to consider is proper wave counts.

A proper or correct wave count is that which takes into account all the rules and guidelines laid down

by the theory. Thus it can be concluded that if the wave counts meet the requisite rules and guidelines

it can be proven that the market, scrip or any financial instrument is behaving as per the Elliot Wave

Theory and can be of utmost use for the traders and the investors to be on the side of mass movement

as it is supposed to be an indicator of the mass emotion. However the limitation of the study rests on

the fact that the Elliot Wave Principle is based on and developed entirely by "personal" observation

rather than objective statistical analysis.

Reference

1. Dash, Mihir and Patil, Anand, (2009) ―An Exploratory Study of Elliot Wave Theory in Indian

Stock Markets‖. Available at SSRN: http://ssrn.com/abstract=1412733.

2. Chendroyaperumal, Chendrayan and Karthikeyan, Bask, 2011, ―Empirical Verification of

Elliot Wave Theory in Indian Stock Market‖. Available at

SSRN:http://ssrn.com/abstract=1887789orhttp://dx.doi.org/10.2139/ssrn.1887789

Probable

Length of

Wave 3*

**

161.8% of W1 added to the

end of W2

161.8% of 5208 + 4693=13120



http://ssrn.com/abstract=1412733

3. Cosimo Magazzino, Marco Mele and Giancarlo Prisco (2012), ―The Elliot‘s Wave Theory: Is

It True during the Financial Crisis?‖, Journal of Money, Investment and Banking ISSN 1450-

288X Issue 24:pp 100-108

4. Robert Prechter, CMT - Robert Prechter first heard of the Wave Principle in the late 1960s

while an undergraduate studying psychology at Yale. In the mid-1970s, he began

investigating the literature and labeling waves in hourly records of the Dow Jones Industrial

Average and prices for gold. In 1976, while a Technical Market Specialist at Merrill Lynch in

New York, Prechter began publishing studies on the Wave Principle. In 1978, he co-authored,

with A.J. Frost, Elliot Wave Principle - Key To Market Behavior, and in 1979, he started The

Elliot Wave Theorist, a publication devoted to analysis of the U.S. financial markets. During

the 1980s, Prechter won numerous awards for market timing as well as the United States

Trading Championship, culminating in Financial News Network‘s conferring upon him the

title of ―Guru of the Decade.‖ In 1990-1991, he was elected and served as president of the

MTA in its 21st year. Prechter‘s firm Elliot Wave International, now serves institutional

subscribers around the world 24 hours a day via on-line intraday analysis of the world‘s major

markets.



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