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Elliott Wave Analysis

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Introduction

• This concept was proposed by Ralph Elliott Nelson.

• Proposes that markets move in predefined patterns.

• Elliott Waves consist of impulse waves and corrective waves

• Impulse waves consists of 5 sub-waves and move in the direction of the trend.

• Corrective waves have three sub-waves and move against the direction of the trend.

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Elliott Wave Pattern

• The basic wave pattern consists of an impulse wave and a corrective wave.

• Impulse waves consist of 5 waves (Wave-1 to Wave-5) and moves in the direction of the trend.

• Waves 1, 3 and 5 move in the direction of the trend while Waves-2 and 4 move opposite to the trend.

• Corrective waves can be simple or complex.

• A simple correction consists of 3 waves (Wave-A, B and C) which retrace a portion of the impulse wave

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Impulse Waves

• A wave which moves in the direction of the trend is called a impulse wave.

• Waves 1, 3, 5 in an impulse wave.

• Impulse waves can be subdivided into 5 waves

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Impulse Waves

• Following guidelines can be used to determine if a wave is impulse,

o Wave 2 should not retrace Wave 1 completely.

o Wave 4 should not retrace Wave 3 completely.

o Wave 4 should not go below the top of Wave 1.

o Top of Wave 3 should be higher than the top of Wave 1.

o Wave 3 is generally the longest amongst Waves 1, 3 and 5.

o Wave 3 is never the shortest amongst Waves 1,3 and 5.

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Extension

• Extensions are elongated impulse waves.

• Wave 3 is most likely to show an extension pattern.

• Any of Waves 1, 3 and 5 can show an extension pattern.

• Extensions generally occur in only one of Waves 1,3 or 5

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Truncation

• A truncation pattern is formed when the Wave 5 is not able to break above the highs of Wave 3.

• Generally happen following a strong Wave 3

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Ending Diagonal

• These are generally formed as Wave 5.

• These indicate exhaustion of the prevailing trend.

• These are generally formed after sharp moves.

• A rising ending diagonal in an uptrend is a very bearish signal and leads to a sharp reversal.

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Corrections

• Corrective waves move against the broader trend.

• Corrections can be simple or complex.

• Corrections are never in 5 waves.

• Common corrective patterns areo Zigzagso Flatso Triangleso Complex Corrections: Can be combinations of the above

patterns. Example, a double Zigzag or Flat and Triangle joined by a X wave, etc

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Zigzags

• Three wave corrective pattern.

• The top of wave B is lower than the beginning of Wave A. Bottom of Wave C is lower than Bottom of Wave A.

• Wave A and C can be divided into 5 sub waves. Wave B can be divided into 3 waves.

• Complex corrections can take the form of double or triple zigzags joined by X waves.

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Flats

• This is a 3 Wave corrective pattern.

• Wave B ends close to the beginning of Wave A and Wave C ends close to the end of Wave A.

• Waves A and B are in 3 waves. Wave C is in 5 waves.

• Complex corrections can take the form of double or triple flats or combinations of flats and other corrective patterns joined by X waves.

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Triangles

• Triangles are consolidation patterns which consist of 5 waves.

• Each of the 5 waves can be subdivided into 3 sub waves.

• Complex corrections may be a combination of triangles and other corrective patterns joined by X waves.

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Elliott Wave Example

• The example shows a 5 wave move higher followed by a 3 wave corrective decline.

• At this stage the market may move higher in another impulse wave or a complex correction may take place.

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