PUG (Elliott) Wave Technical Analysis Tutorial(by PUG Stock Market Analysis, LLC)
The Elliott Wave Principle – Based on Ralph Nelson Elliott’s conviction that social or crowd behavior trends and reverses in identifiable patterns (waves) or cycles.
• Chapter 1: Elliott Wave Basics (pages 2-5)• Chapter 2: Wave Ratios and Measurements (pages 6-14)• Chapter 3: Corrective Waves (pages 14-20)
PUG (Steve) uses the Elliott Wave Principle, Channels, Momentum Oscillators and Pattern Recognition to Forecast Market Direction. Website: www.pugsma.com
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Chapter 1: Elliott Wave Basics
• The basic pattern of the market is the motive wave that unfolds in a 5 wave pattern.
• Waves 1, 3 and 5 move in the direction of the trend or impulse.
• Waves 2 and 4 are counter trend retracements of the motive wave.
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Chapter 1: Elliott Wave Basics• Motive Wave Rules (5 Waves - Numbered 1, 2, 3, 4, 5)
• Wave 2 can’t retrace more than 100% of Wave 1.
• Wave 3, often represents the strongest part of the market cycle, can’t be the shortest by price, compared with Wave 1 or Wave 5.
• Wave 4 cannot overlap the highest price of Wave 1 (Unless for the special case of a Leading or Ending Diagonal).
• Corrective Wave Rules (3 Waves - Lettered A, B, C)• Wave B can’t retrace more than 100% of Wave A (Unless for special case of an Expanded Flat).
• A complete wave cycle is 8 waves, 5 motive wave followed by 3 corrective waves.
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Chapter 1: Elliott Wave Basics• Motive (Impulse) Wave Structure (5 Waves - Numbered 1, 2, 3, 4, 5)
• Waves 1, 3 and 5 are 5-wave structures
• Waves 2 and 4 are 3-wave structures
• Corrective (Zig-Zag) Wave Structure (3 Waves - Lettered A, B, C) • Wave A and C are 5-wave structures.
• Wave B is a 3-wave structure.
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Chapter 1: Elliott Wave Basics• One of the keys to interpreting wave counts is to determine what degree the wave in question represents.
• Each wave could be part of another wave of a higher degree, which in turn could be part of another wave of an even higher degree.
• In Elliott’s original work, he identified nine degrees of waves, that could range from decades to intraday movements.
• Elliott’s labels read a little like the classification of living things:• 1) Grand Supercycle
2) Supercycle3) Cycle4) Primary5) Intermediate6) Minor7) Minute8) Minuette9) Subminuette
• PUG Wave Labeling: (Using only 7 of Elliott’s original 9 wave classification)• Super Cycle: SCI-SCV, SCA-SCC Decades
Cycle: C1-C5, CA-CC 2 to 10 yearsPrimary: P1-P5, PA-PC 1 to 2 yearsMajor (Interm): [1]-[5], [A]-[C] Several MonthsMinor: 1-5, A-C 1 to 2 WeeksMinute: (1)-(5), (a)-(c) Several DaysMinuette: i-v, a-b Several Hours
• Primary Count:• White/Green Labels (Bull Market)
• White/Red Labels (Bear Market)
• Alternate Count: Blue Labels
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Chapter 2: Wave Ratios and Measurements• This spiral, which takes the form of a Nautilus seashell, is commonly used to describe the
mathematical ratio that Elliott Wave theorists lean on to explain why the stock market follows similar patterns to those found in natural systems, including living creatures on earth and galaxies in space.
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Chapter 2: Wave Ratios and Measurements
• The Fibonacci ratio of 0.618, made famous by a 13th-century mathematician named Leonardo Fibonacci of Pisa, is based on a number sequence, in which the sum of two adjacent numbers forms the next higher number (1, 1, 2, 3, 5, 8, 13 ...).
• It is often referred to as the golden, or divine ratio, because it has been found throughout nature, such as in the DNA double helix, how petals on a flower are arranged, proportions of the human body, a galaxy spiral, and so on ad infinitum.
• In Elliott Wave, the five waves of a motive phase have a Fibonacci relationship with the eight waves of a complete cycle and each wave or phase tends to have a Fibonacci relationship with other waves or phases; thus a retracement phase is often close to 0.382 (1 minus 0.618), or up to 0.618, the length of the motive phase.
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Chapter 2: Wave Ratios and Measurements
• The price distance of each wave is measured as a vertical distance from the beginning of the wave to the end of the wave. The length is measured in price points or units.
• The first wave in a Motive (Impulse) is Wave 1. The measurement of Wave 1 is used to find ratios of other waves. These ratios are not rules, but guidelines in estimating the lengths of different waves.
• Ratios for Wave 2• Fibonacci Rule for Wave 2:
• Wave 2 is always related to Wave 1.
• Common Ratios for Wave 2:• Wave 2 typically is 50% of Wave 1
• or 62% of Wave 1• However there are times of 38% in strong markets
• or 78% to 88% retracements in weak markets.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 3
Wave 3 is typically related to Wave 1 by one of the following:• Wave 3 = 1.62 x length of Wave 1• or 2.62 x length of Wave 1 (extended Wave 3)• or 4.25 x length of Wave 1 (extended Wave 3)• However there are times of Wave 3 = Wave 1 or less in weak prices.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 4
Wave 4 is related to Wave 3 by one of the following:• Wave 4 = 23% of Wave 3• or 38% of Wave 3• or 50% of Wave 3
• The 23% and 38% are the most common ratios for Wave 4.
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Chapter 2: Wave Ratios and Measurements • Ratios for Wave 5
Wave 5 is related to Wave 1 by one of the following:• Wave 5 = Wave 1• or 1.38 x length of Wave 1• or 1.62 x length of Wave 1
• The Wave 5 = Wave 1 is the most common ratio.
• If Wave 3 is extended to 2.62 to 4.25 x Wave 1, then Wave 5 could be truncated at 0.62 x Wave 1.
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Chapter 2: Wave Ratios and Measurements • The first wave of a Simple A-B-C Corrective (Zig-Zag) is a Wave A.
• Ratios for Wave B
Wave B is related to Wave A by one of the following:• Wave B = 38% of Wave A• or 50% of Wave A (most common)• or 62% of Wave A• or 78% of Wave A
• Ratios for Wave C
Wave C is related to Wave A by one of the following:• Wave C = Wave A (most common)• Wave C= 1.62 x the length of Wave A• Wave C = 2.62 x the length of Wave A
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Chapter 2: Wave Ratios and Measurements
• Once the 5th Wave starts, the Elliott Channel Technique can be used to project the end of the 5th Wave. Once Wave 4 has been completed, draw a straight line between Waves 2 and 4 forming the lower channel line.
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Chapter 2: Wave Ratios and Measurements • Now draw two lines parallel to the lower channel line connecting the tops of Waves 1 and 3.
• Expect Wave 5 to end on one of the two upper channel lines. Usually, if Wave 3 was a normal wave, Wave 5 tends to end on the channel drawn from the Wave 3 top. If Wave 3 was extended and a runaway type of wave, Wave 5 tends to end on the channel drawn from the top of Wave 1.
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Chapter 3: Corrective Waves• Corrections are very hard to master. Most Elliott Wave traders
make money during motive (impulse) waves and lose during corrective waves.
• A motive (impulse) pattern consists of five waves. The corrective pattern consists of 3 waves, with the exception of a triangle.
• An Impulse pattern is always followed by a Corrective pattern.• Corrective patterns can be grouped into two different
categories:
1) Simple Correction (Zig-Zag)2) Complex Correction (Flat, Irregular Exapanded Flat or Triangle)
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Chapter 3: Corrective Waves• Simple Corrections (Zig-Zag):
• A simple correction has one pattern only.
• This pattern is called a Zig-Zag correction.
• A Zig-Zag correction is a 3-wave pattern(A-B-C) where the Wave B does not retrace more than 78% of Wave A.
• Wave C will make new lows below the end of Wave A.
• The Wave A of a Zig-Zag correction always has a 5-wave pattern. Wave B is 3 waves and Wave C is 5 waves (5-3-5).
• In the other two types of corrections (Flat and Irregular Flat), the Wave A has a 3-wave pattern.
• Thus, if you can identify a 5-wave pattern inside Wave A of any correction, you can then expect the correction to turn out as a Zig-Zag formation.
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Chapter 3: Corrective Waves• Flat Corrections:
• In a Flat correction, the length of each wave is identical (A = B = C).
• The waves A & B are 3-waves. Wave C is 5-waves.
• 3-3-5 Wave Pattern.
• After a 5-wave impulse pattern, the market drops in Wave A.
• It then rallies in a Wave B to the previous high.
• Finally, the market drops one last time in Wave C to the previous Wave A low.
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Chapter 3: Corrective Waves• Irregular (Expanded) Flat
Corrections:
• In an Irregular Flat correction, the B Wave makes a new high.
• Wave C may drop to end of Wave A or below (more common).
• The waves A & B are 3-waves. Wave C is 5-waves.
• 3-3-5 Wave Pattern.
• After a 5-wave impulse pattern, the market drops in Wave A.
• It then rallies in a Wave B beyond the previous high.
• Finally, the market drops one last time in Wave C to the previous Wave A low or below.
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Chapter 3: Corrective Waves• Triangle Wave Corrections:
• The Elliott Triangle is a 5-wave pattern where all the waves cross each other.
• The five sub-waves of a triangle are designated A, B, C, D, and E in sequence.
• Each sub-wave is a 3-wave move.
• Prices tend to shoot out of the triangle formation in a swift “thrust.”.
• Triangles are by far most common as fourth waves. One can sometimes see a triangle as the Wave B of a 3-wave correction.
• When triangles occur in Wave 4, the market thrusts out of the triangle in the same direction as Wave 3.
• When triangles occur in Wave B, the market thrusts out of the triangle in the same directions as the Wave A.
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Chapter 3: Corrective Waves
• Alteration Rule:
• For an impulse if Wave 2 is a simple correction, expect Wave 4 to be a complex correction.
• For an impulse if Wave 2 is a complex correction, expect Wave 4 to be a simple correction.
• 1) Simple Correction (Zig-Zag)• 2) Complex Correction (Flat, Irregular Expanded Flat or Triangle)
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