Elliott Wave Theory Ubs

8/18/2019 Elliott Wave Theory Ubs

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Elliott Wave Theory

Taso Anastasiou

Director: FX/PM Global Technical Strategy GroupUBS Investment Bank

Phone : +44 (0)20 7567 6870E-Mail : [email protected]


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3070446AL.ppt 1

Elliott Wave theory

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a

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Market Psychology SECTION 1


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Traders of my generation armed themselves with charts andcomputer-generated graphics that predicted future pricedirection. We sat day after day in front of these screens,

mesmerised by blinking lights and ever-changing numbersin a deafening cacophony of information overload.With the possible exception of Elliott wave theory, anintellectual framework for understanding the course of social,

political, and economic events was noticeably forgotten infavour of just making sure that one was part of the everquickening process.

Paul Tudor Jones II, The alchemy of finance by George Soros

A Quotation


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3070446AL.ppt 4

! The averages discount everything

! The market has three trends

!Major trends have three phases

! The averages must confirm each other

! Volume must confirm the trend

!A trend is assumed to be in effect until it gives definite

signals that it has reversed

Dow Theory - Important Elements


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3070446AL.ppt 5

Anatomy of Price Action

! Trend

! Consolidation

! Reversal

Market will always be in one of these 3 modes

S t r o n gd - t r e n d

C o n s o l i d a t i o n

W e a k r e s u m p t io n

W e a k t e s t

S t r o n g r e v e r s a l


S t r o n gr e s u m p t io n


W e a kr e s u m p t io n

W e a k t e s t

S t r o n gr e v e r s a l

s u r p

r i s

e

b u t

…

s u r p r i s e

b u t …


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3070446AL.ppt 6

Psychological Make up of a trend - Phase 1

! A trend is very difficultto detect at this stage

! Very few traders and

investors will actuallyopen positions inthis phase

! Economic news andcycles are generallystill bad but improving

! No public participation

! Most traders will stillbe trying to sell into

the rallies

1


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3070446AL.ppt 7

! Market exceeds previoustop trend is now identified

! Traders begin to buy asbearish sentiment fades

! Economic news generallyimproving

! Media starts to report anew bull phase

! Public begins to participate

! Traders are now buyingthe dips

! Is the most powerful phaseof the three and mostprofits are generated inthis phase

Phase 2

2


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! Market once again

exceeds previous topas trend is confirmed

! Fear of intervention makestraders wary

! Fundamental factorspeaking

! Media still reportingpositive news but

now wondering howfar we can go

! Increased publicparticipation

!

A few scares and profittaking causes concernstops are raised

! Blow off occurs as stopstriggered

! Generally the weakestof the three phases

Phase 3

3

1

2

3


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Awareness of market psychologyand how it affects trading activity isessential for a greater understandingof the Elliott Wave Theory.


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The Basics—Building on Dow theory SECTION 2


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! Elliott isolated 13 waves, or price patterns of directionalmovement that recur in markets and are repetitive intheir form

! His descriptions constitute a set of empirically derivedrules and guidelines for interpreting market action

!First we must look at the basic structure or the fivewave pattern

The Building Blocks

Th b i fi


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! Any major movement willunfold in a pattern of five wavesand in turn will be corrected bya pattern of three waves going

in the opposite direction

! The five wave movement can besplit into two distinctive

segments— the numbered phase

— the lettered Phase

1

2

3

4

a

b

c

5

The basic five wave structure

Th i l


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3070446AL.ppt 13

! The Trend phase is knownas the impulse

! This the numbered phase

! An impulsive segment (1-5)is itself constructed as a

series of five waves ofwhich 1–3–5 are impulsesof a minor degree

1

2

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4a

b

c

5Impulsive segment

The impulse

Th i l i t


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The impulsive segment

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b

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5Impulsive segment

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4a

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c

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a

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4 a

b

c

5

5

5Zoomed in

Phase

Th ti h


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! Trends move in a series ofpeaks and troughs

! The lettered phase is

known as the correctivesegment and is alwayscounted in threes, a–b–c

! Wave 2 corrects Wave 1

! Wave 4 corrects Wave 3

! a–b–c correctsWaves 1 to 5

1

2

3

4a

b

c

5Correction

The corrective phase

In Practice


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! Your start pointshould always bea significant highor low

! Start point islabelled 0, theimpulse segment in

this phase is labelled1 and is corrected bythe lettered phaselabelled 2

In Practice

0

1

2

Summary of wave structure


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3070446AL.ppt 17

1

2

3

4

5

Summary of wave structure

Summary of wave structure (continued)


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Waves 1–3–5 are impulses moving in the direction of the trend


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a

b

c



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5

Waves 2–4 are counter trend movements




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a

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c

The complete structure


USD/CAD


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USD/CAD

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c

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Impulsive waves 1–3–5SECTION 3

Rule 1


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! There are three basic groundrules used when defining animpulsive phase

! The first inviolable rule is thatfrom your start point at 0(major high or low) Wave 2must never move below the

start of Wave 1 at 0

1

2

00

Rule 1

Rule 2


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3070446AL.ppt 24

! Wave 3 can neverbe the shortest

wave in the impulse

! This doesn’t meanthat it is necessarilythe longest

! In the example thealternative countprovides the clue as

Wave 3 is probablyextending

1

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3

4

5Incorrect count

1

2

i

ii

iiiAlternative count

Rule 2

Rule 3


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! Wave 4 should not overlapWave 1

! There are two exceptions to

this rule:! Wave 1 can be a leading

diagonal triangle and priceaction can overlap (wedge)

!

Wave 5 can be an endingdiagonal triangle whereprice action overlaps(wedge)

1

2

3

4

5

Rule 3

Impulse waves—the extension


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! An extension can only occur in one of the impulse waves 1–3–5.Most extensions will actually occur in the 3rd wave. Extensionsmay also occur in the extending wave itself

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Impulse waves the extension

Labelling the cycles


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Grand super cycle

0 1 2 3 4 5 A B C Super cycle

0 I II III IV V A B C Cycle

Primary

Intermediate

Minor0 1 2 3 4 5 a b c

Minute0 i ii iii iv v a b c

Sub-minuette0. i. ii. iii. iv. v. a. b. c.

Minuette0 1 2 3 4 5 a b c

0 I II III IV V a b c Micro

0 i ii iii iv v a b c Sub-micro

g y

1 2 3 4 A B C50

(0)(I) (2) (3) (4) (5) (a) (b) (c)

1 2 3 4 A B C50

Extensions


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7

Example of an extension


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0101092L.ppt 29

p

A

C

B

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iv1

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1

5

In Practice - GBP/USD


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1

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5



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The ending diagonal triangle


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3070446AL.ppt 34

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An ending diagonaltriangle is countedas a five wave upbut sub-dividesinto threes

! Diagonal triangles areformed by two converginglines, in its usual form. Thispattern occurs in fifth

wave positions

! The only exception to theoverlap rule between

Wave 1–4 can occur ina diagonal

! A diagonal can also belocated in the C wavepositions. As in a risingwedge this is to beconsidered atermination pattern

Ending diagonal triangles


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Ending diagonal triangles


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0101092L.ppt 36

1

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5

Leading diagonal triangles


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! In normal circumstances thispattern would be referred to asa rising wedge and is a bearishpattern as it is assumed that thepattern will break the support

! The target on the break wouldsuggest a re-test of the base

! This pattern is only found in

Wave 1 or A! All other rules apply

e.g. Wave 3 is not the shortestand 2 doesn’t break below thestart point then you must buythe dip as it will turn out to bea bullish pattern

1

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ii

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iv

v

The failed fifth wave


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! As Wave 5 is the weakestpart of the trend itsometimes has a tendencyto fail early, creating what

we traditionally calla double top

! The Internal wave

structure must stillcount up in five

3

1

2

4

53

Failed fifth waves & leading diagonal


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0101092L.ppt 39

1

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4

5

1

4

3

2

5

Failed fifth waves (continued)


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Incorrect counting as Wave (5) would only count up in 3

3

4

5

60

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80

90

100

1991 1992 1993 1994 1995

Failed fifth waves (continued)


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Correct count where (I) is a leading diagonal triangle,(III) has extended and (V) has failed

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(I)

(II)

(III)

(IV)

(V)

5

5

a

b

c

a

b

c

1

2

3

1

3

4

91.224

2

1991 1992 1993 1994 1995

The Trap...


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3070446AL.ppt 42

Successful Trend Definition Is Essential


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!Analysis and therefore positioningmust be biased in the direction of theprevailing trend

Trend Definition Is Essential


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Ground Rules


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! You can quantify trends and market positioning by biasing yourposition base in the direction of the underlying trend


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Corrective waves a–b–cSECTION 4

Corrective waves


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! We have seen that movements against the trend are known ascorrective waves, sometimes referred to as consolidations orlettered phase

! Identifying and fitting corrections into particular patterns inadvance is very difficult

! The complexity of corrective waves can increase or decrease

without warning

The three corrective wave types

Corrective waves fall into four categories


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3070446AL.ppt 48

! Zig-Zag 5–3–5 includes three variations single,double and triple

! Flats 3–3–5 includes 3 variations, regular,expanded, running

! Triangles 3–3–3–3–3 four types, ascending,

descending, contracting, expanding

! Double andtriple threes (combined structures)

Corrective waves fall into four categories

Zig-Zags 5–3–5


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Bear market correction

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Bull market correctionc

a

b

Zig-Zag corrections


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! Zig-Zags have a 5–3–5 wave structure

! These formations are usually found in Wave 2 position

! It would be fair to assume that they would also occur afterWave 5 as a traditional head and shoulders reversal patternis formed

!Wave C of the Zig-Zag will typically extend the same distanceas Wave A

Example of a Zig-Zag correction


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0101092L.ppt 51

A

B

C

1

2

3

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5

4

3

2

1

A = C

Flat corrections 3–3–5


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Bull market correction Bear market correction

a

b

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a

b

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Example of a flat correction


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0101092L.ppt 53

A

B

C

a

b

c

1

v

2

5

4i

ii

iii

iv

3

Irregular flats 3–3–5


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Bull market correction Bear market correction

a

b

c

a

b

c

Flats 3–3–5


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! Flats are counted as 3–3–5

! There are standard flats which are typically ranges

! There are irregular flats where the B wave exceeds the high,but can only be counted as a 3-wave affair

! Last but not least there are running flats

! Flat corrections are typically found in fourth and B wavepositions and tend to have lower retracement values

Bull market correction

Triangles 3–3–3–3–3


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Bear market correction

a

b

c

d

e

a

b

c

d

e

! Five waves – a / b / c / d / e

! Each wave subdivides into 3-waves

! Each wave tends to be relatedto a preceding wave by the0.618 ratio.

— Wave d will be 0.618 of wave b

— Wave e will be 0.618 of wave c

! This correction is typically foundin wave-4

Zig-Zag -x- Zig-Zag

Complex corrective forms (double threes) Zig-Zag


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g g g g


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x

Zig-Zag -x- flat



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g g

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xBull market correction

Zig-Zag -x- triangle



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3070446AL.ppt 59

a

b

c

i

ii

iii

iv

v

a

b

c

i

ii

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v

x

a

b

c

d

e


Zig-Zag -x- irregular flat



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3070446AL.ppt 60

a

b

c

i

ii

iii

iv

v

a

b

c

i

ii

iii

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v

x

a

b

c


Flat -x- flat

Complex corrective forms (double threes) flat


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3070446AL.ppt 61

a

b

ca

b

c

x

Flat -x- Zig-Zag



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3070446AL.ppt 62

x

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c

Flat -x- triangle



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a

b

c

d

e

a

b

c

x

Flat -x- irregular



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3070446AL.ppt 64

a

b

ca

b

c

x

Irregular -x- irregular

Complex corrective forms (double threes)


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b

x

a

b

c

ac

Irregular flat -x- flat



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3070446AL.ppt 66

x

a

b

ca

b

c

Irregular flat -x- Zig-Zag



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3070446AL.ppt 67

x

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c

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c

i

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b

c

Irregular flat -x- Zig-Zag



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3070446AL.ppt 68

x

a

b

c

d

e

a

b

c

To date e ha e looked at standard correcti e a es as ell as

Complex corrective waves


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To date we have looked at standard corrective waves as well asdouble complex waves. There is a third type of complex correctionwhich is called the complex triple three.

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v a

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Zig-Zag Irregular flat Trianglex x

Examples of complex corrections

b Bi

B


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0101092L.ppt 70

a

c

A

C

X

A

B

C

FLAT

1

a

c

b

A

B

c

2

ii

ZIG-ZAG

IRREGULARFLAT

FLAT

A

C

B

ZIG-ZAG

A = C


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The rule of alternationSECTION 5

The rule of alternation


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3070446AL.ppt 72

!This rule is relatively simple as it states that no two correctivephases are similar

! If Wave 2 is a Zig-Zag then Wave 4 will probably be a flat or

a triangle – typical scenario

! The rule also states that only one of the impulse waves will extend(and can itself extend)

! If two corrective phases are similar then one will differ inmagnitude or length

Alternation


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3070446AL.ppt 73

1

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The rule of alternation5


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0101092L.ppt 74

1

2

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3

a

b d

ec

b

a

c

TRIANGLE

FLAT


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The depth of corrective waves

SECTION 6

The depth of corrective waves

No market approach other than the Elliott Wave Theory gives a satisfactoryanswer to this question. The primary guideline is that corrections , especially


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3070446AL.ppt 76

when they themselves are fourth waves tend to register their maximumretracement within the span of travel of the previous fourth wave of onelesser degree which would also represent support (or resistance for a risingmarket).

1

2

3

4

5


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The Fibonacci sequence and its applicationSECTION 7

! Ratio analysis has revealed a number of precise price

Ratio analysis


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3070446AL.ppt 78

y p prelationships that occur often among waves. There are twocategories of relationships: retracements and multiples

Retracements

! Fairly often, a correction retraces a Fibonacci percentage ofthe preceding wave

! Sharp corrections tend more often to retrace 61.8% or 50%of the previous wave, particularly when they occur as Wave 2of an impulse wave, Wave B of a larger Zig-Zag, or Wave X in

a multiple Zig-Zag

RetracementsTypical retracement levels


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0

10024.6

38.2

50.0

61.8

76.4

100Typical of Wave 2 Typical of Wave 4

Impulse wave multiples


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When Wave 3 has extended, waves 1–5 will tend towardsequality (1.00) or a 0.618% relationship. All three impulsewaves tend to be related by Fibonacci mathematics whether

by equality, 1.618 or 2.618 whose inverses are 0.618 and0.382

Impulse wave multiples (continued)

3rd wave extension 5th wave extension 1st wave extension


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3070446AL.ppt 81

1

2

3

4

5

1

2

3

4

5

1

2

3

4

5

1.00

1.00

.382

.618

.618

.382

Double Zig-Zag

Corrective wave multiples

Zig-Zag


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3070446AL.ppt 82

a

b

c

x

a

b

c

1 . 0

0

1 .

0 0 /

. 6 1

8 / 2

. 6 1 8

1 . 0 0

1 . 0

0 / 6

. 1 8 / 1 . 6

1 8

Corrective wave multiples (continued)


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Flat Irregular flat

a

b

c

a

b

c

1.00

1.00

.618 1.618

Calculating targets

3 ? 1


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3070446AL.ppt 84

1

2

W a v e 3 = 1

. 0 0 / 1 . 6

1 8 / 2 . 6 1 8 o f W a v e

i

ii1

2

3

4

5 ?

W a v e 5 c a n b e e q u a l t o w a v e 1

0 . 6 1

8 o f 3 0 r . 3 8

2 o f w a v e s 1

a n d 3

Fibonacci relationships

Wave 2 retraces justabove the 61.8% level


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0101092L.ppt 85

1

2

4

35

i

ii

iii v

iv

of wave-1

Wave 4 retraces justabove the 38.2% levelof wave-3

Failed5th

Wave (V) is 1.00 multiplied by the length of wave (I)(V)

Fibonacci relationships (continued)

1.9000

1 8500

1.8904


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3070446AL.ppt 86

Wave (II) retraces Wave (I) by 50%

Wave II retraces Wave I by 62%

Wave (III)and III retraces Wave (IV) and IV by 24%

Wave III is 2.62 multiplied from the length of wave I

(0)

(I)

(II)

(III)

(IV)

I

II

III

IV

V

1.6000

1.5000

1.4500

1.4000

1.3500

1.6500

1.5500

May-96 Nov-96 Nov-97May-97May-96 Nov-96

tmta3 © DEM-USD Weekly Bar 06-Mar-95—28-Nov-97 [Zoomed] 1.8904 1.3455 1.7635 0.3685 0.0000V 2.980014 Copyright 1994-1997 Tradermade International Ltd.

1.7000

1.7500

1.8000

1.8500

1.3811

1.5489

1.6618

1.7207

May-95 Nov-95

A word on momentum

2

! Di b t i


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3070446AL.ppt 87

1

3

4

5

! Divergence between priceand momentum warns oftechnical weakness in atrend

! Divergence between priceand momentum is typicalduring the 5th and final

wave.

! One would also expectsuch a set-up to develop

during wave-C

Fibonacci Relationships - S&P Cash


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3070446AL.ppt 88

0.618 of wave 1 (1175)

1.00 of wave 1 (1246)

Potential for bearish divergence in momentum

1

2

3

4 ?

Fibonacci Relationships - S&P Cash


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3070446AL.ppt 89

1

2

3

4

5

i

ii

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iv

v

Analyse


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Analyse


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Analyse


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Analyse


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3070446AL.ppt 93


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