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Armlir-d to +hr-..Foreio n Excbance Markets0 c

. . . . . . . . . . . . . . . .tcooert tsaian!t

BBS Financial Publications.1\.)"'" 'aV'" ..lIaIY'"


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"

L"'Un ,av~ ""v'f"~ nf'f'''~u 'u U,~ u,~ '> I ' LAv"a,,~ .. ~am .....Robert Balan e. 1989 by Robert Balan and BBS Publications Ltd.A Vallion CompanyAll rights reserved. No part of this book may be reproduced in anyform or by any means without permission in writing from the publisher.Printed in the United Kinadom byDisk to Print Ltd."" L..UUt " nUdUWest HampsteadLondon NW63EWTel: 01 - 625 5225C 1'\ "" . '''A7The Wave Anaiyst> is a Trademark of Valli on Holding Ltd.Authorized distributor:ec vuno c. A.

33, route de St-Cergue1260 Nyon \SwitzerlandT "" """"00Fax 41 22 620396

./\J \nr 'av,," M"a'Y'''


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Contents

ForewordAcknowledgements

0

"Organization of the book -Introduction IThe fundamental conceots IIDevianons illGuidelines and nth", _'- TVPractical guidance VA typical Elliott Wave t ra din g p la n VI ,Case studies VIIConclusion VIIIIllustrations by topicIndex

A .IThe Wave Analyst N"W~ _- ~


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Foreword

The modern foreign exchange markets date from the early seventies More significantly the U.S. stock exchange crash of October 19th, 1987anathe eventual breakdown or the rsretron w ooos ana SmithsonianAgree- demonstrated the legitimacy of the lorex markets toDe consiOerea not onlyments on fixed parities. As from 1973 the currencies of the major "free" as the largest, but also one of the most liquid and transparent markets.;n..1nofr;,,1;


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derived from analysing chart patterns, but many do sowithout appreciating success of Robert 's commentaries clearly demonstrate the respect his~"" "" '" . . . .'" "V"""F'" u"""'u u'''''' . .,,,,, '"U'" "FF>V""" "," .,vn." ,nue :~:;~:;: ac ~ f~('t {)f'lif,:v~~~


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I T . . A ck now le d_ aemen ts - 1

Acknowledgements

1-\ Y"'" prior 10 uie p I U uti, DUUK in eany 1;10;11 Degan lU me U rmrate W;"i1IUill u"SKlUp-l'uDlislling, concuctec mouse, tagemakcrseriously think of the possibility of writing a "user friendly" book on theElliott WlVP. ~.' Fverv now and then Mir-has-lSalt mv ho" at and Macintosh in a symphony of text and graphics that rates a standingovationLlovds Bank in Geneva would urge me on, as did some friends in the foreignexchange field.

Mike Salt has since then left to become Director of Foreign. . .

The seed of the idea for this book was sown by Giacomo Ivaldi, myboss at Lloyds Bank, Hong Kong. Giac also contributed valuable editor ialadvice. Hans Moerkerken, a colleague at Lloyds Bank, Geneva helped in

. (U "'WI'S DlllK....VIl'UHtllUlllll LUllUUll . DUlllUl UIU" llldlUlIg,. '. . . . , ". lUI I"'-"Udl ""VIS II uic uuu!'..largely responsible for pursuing this project, he deserves part of any success- or blame - that the book may receive. I also decided to get even by asking

I also wish there were some way to thank the numerous individualswho have played a role in shaping up the ideas that eventuallv found their

him to write the Foreword, which he has done. way in the book. To those people, my thanks and appreciation.Some close friends in the forex field also extended a lot of "moral

suppor t" when the going became tough. Franklin Sevilla, Tony Garcia, andnnn Uo' ,M "M~ M,~,.\l ,),,\,f,,\ . , t~ . ",1

I also received a lot of feedback from readers of my Reuters andTelerate daily commentaries, which made more convincing the suggestionthat a "how-to-do-lt" manual of wave analysis has a contribution to make.rur mose reuow CUiollicians, my SIncere tnanks,

Frankly, the thought of writing this book was intriguing, but Iwondered whether I would fmd the collaborators who would translate theconcepts into required i llust rations, diagrams and charts. Marco Bernasconi,


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nl c of tr-adj no .

Organization of the book-------

1ne nOOKISuiviuea mLOeignt pans. l'art lIS a general mtrooucuon.. . Part VI outl ines a typieal Ell iott Wave Trading Plan from the init ial-.:u-I::lliID ravc " " " ' Y ' ' ' '


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Part I that are of a constantly changing nature. Substantial sums of money can be,.,,~r 1,,< litpr~l1" in ~ dnv Thp


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shots", the wave analyst is figuratively on top of the market, with a nosedive. An hour later itwas down two pfennigs: itwas 16pfennigs lowerpanoramic view ofthe unfolding battle between the forces of supply and de- ten days later.mand. With that kind of perspective, the analyst is sensitive to the mostsubtle change in market dominance by any of these forces. A fluke? A coincidence? Or was it a "self-fulfilling" prophecy?

A n"",nnn! will i1111trMp, thi, nnint T "ill rp.mpmhp,r T t " '" ' ma in!v t" "rCHrf' th"," _c. , cnr-h a c fh i c r-rru= ' X I " " ru-itwith some satisfaction an event in early June 1986; the dollar was surging .a fluke, not a coincidence, and definitely not a self-fulfilling prophecy thatin the Forex markets after the "G-5" initiated collapse of the Dollar had this manual on how to use the Elliott wave principle was written.reached the Japanese's initial threshold of pain. It was almost lunchtime intzurope; tnc lu-nunute chart for tne dollar/mark was gomg nownere in a nus manual does not aim to explain the rationale for the Elliottseemingly random manner. Two weeks before, the dollar had survived a Wave Theory, nor teach its basics. Several excellent books* on wavedownward test of the 2.15 lows, followed by a rally of more than 15 principle fundamentals have been written by highly acclaimed authors, sonfenni os amidst mounrino srx-culntion thnt the worst for thr- huck W"S now Trln nor inrr-nd tnf'nvprthi, wpll-hO"ntpn tilITnonin ThO"rnain nurnose of rhisover. Towave analvsts however the rallv was the ultimate phase ina con- manual is to show how to use the principles laid down bv Ralph N. Elliottsolidation pattern known in Elliot Wave terms as a "Hat correction". This in the early 1930's. To my knowledge, there is no book written as yet onwas to be the last hurrah for the dollar - a massive trap for the dollar bulls how to use these principles on areal-time basis. I hope this manual fills thiswnen tne pattern terminated ana tne DUCkesumed Its unuenymg neansn ODVIOUSeed.Ut;;IIU.

Ingoing through the trade recommendations in Part VII, I have at-I was paying particularly close attention to the market patterns tempted to take the reader through the deductive reasoning process. I havebecause earlier I had stated inmy daily commentary pages on thc Reuters also described the drama that accompanies everv success or failure; thenetwork (LBGB/LBGC) that we were expecting the resolution of the large reader will be there to share an insight as we weigh which of the probable"flat" pattern atanytime during the next 24hours. In anticipation, I had left patterns will be likely to occur. We will puzzle over a price activity thathalf of the screen space vacant with the promise that we would inform momentarily does not make sense. And I hope I have done descriptive':;~:" ,"'' '' WIO' ''' . ~"UIO"C,"wac":~,LaHY"',~v"':, wa""auy LVUH,,", JU'.""IOLV~H< 'LJUl~Ll~uy W11I011 " lllUVIO. '" 1'1t;;~:"Lt;;U,UUU urc


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. -~ . ~ . " ~. irrctpte can perlorm this multi-face eu aSKaumi amy.up' ,mmv, UHl~Ul ,~""" '" '~a...... ~""''' 'a'~ ~ ''''~~l''~' ~mv" ravc 1Inmv ownooinion the biaaest obstacle tosuccessful tradinz isin the Th~ oucstion asked hv somenconle who .~Whe rrrr-l irrtinar-v hookfailure even torecognize and accept that mistakes will bemade, that losses materials was this: "If such fantastic results can be gained in the foreignare a fact of life and as such must be accommodated. The analyst or trader exchange market, why isn't everyone doing it?".who does not accept this, or for that matter does not make provisions for

errors, isheaded for disaster. Errors are anunavoidable part ofElliot Wave There arc several reasons for this, but a few stand out. These can be. ... 11 T .I' orJL.

r-rr-orc h"t thr=ir-aioniir-aru-r= whirh rnab-e c the>,-1iffpT


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deliberate training to be objective - still succumb to the disease called"opinionitis". I sometimes have difficulty in believing what Isee in thewave patterns, cspcciauy m the lace or seermngty contrary rtundamentar>!lUaUU "

Nevertheless" all these obstacles can be One nurnose ofthis manual is to provide the framework for understanding why the fore xmarket does what it docs. Hopefully, my endeavours with the waveprinciple will encourage the reader to do his or her own research with1000minute and hourly f luctuations of the forex market unti l he or she too wil l..u","vv'" la" WU"aL" uvauIJ v, lav ulu,,,,,a, rctvvo"VCHHvUJ n.. . Law";n IQ,L Tt ",;11nA" h m >0 rAoel T.. . IA ,el, th" fA; 'V" . ... ," m- _ '0be likened to a Hawaiian surfer. The bigger the wave he tackles, the morechances of a "wipe out". But the occasional water dunk is the price onc hasto pay to be a master of the sport. Pursuing the analogy, the more often onegoes out to sca to meet the 'monsters", the more one learns how to "read'the characteristics of each incoming wave.

For nn hool- not r"rn thr=rruvc ell '' ' ;11'.-1nel mod .-1p


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Part II 3) Wave 2 "corrects" Wave 1; Wave 4 "corrects" Wave 3. The entire_ . _ . . . . sequence ofWave 1to 5 is "corrected" bv the sequence a-b-c.I II~ IUIIui:lrnenull \iU..\it:n:.4) In a macro sense, the sequence ofWave 1through Wave 5 completesa wave of a "higher degree", or simply put, a wave belonging to the,. . ruevt hi ~hp~tip~~f ",o"p ,pnnpn~p T h . - . , ' thp from Wave 1u to Wave 5 comnletes either a Wave ill@ or @ while the a-b-c

3 /\ b sequence completes either a Wave or @. (see F ig. 2 )./\ / \ /\ m c : n ~_@/V V \ =-- ,-= ~51 4 a /\\/\ / '" ~ 7 \' b/ V /\1 \ / \/ re in" . .a 1 1 7 I. $I \'0 N \c/ 2 (6) or (!)1) Amajor movement untolds accordmg to a pattern at nve waves, alter / Figure 2which the entire sequence is "corrected" by a pattern of three waves

D, , ' '" ~yy " '6 " J'5) Ina micro sense, each ofthe waves in Fig. 2 may be broken down into

2) The "numbered phases", formerly called "cardinal waves" by R. N. smaller wave components according to the concept expounded in(3);Elliott, are now known as"impulse waves", a term popularised by R. Wave 2 corrects Wave 1;Wave 4 corrects Wave 3, while the a-b--cK. Precnter ana A. J.l:'rost. ine "Iettered pnases are now Known as sequence correc s me emire sequence or ave 1UllUU!;110 V"'V" J" , " " T '.' "'u~ ~v"~~u,~ "1V~ V " ...~" ... c-o 0 ""'P'Y '6AI' The Wave Analvst The fundamental concepts /1 - 1-


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8) There are 3 rules which are considered "unbreakable":,/\ i) Wave 2 will not retrace past the starting point ofWave 1. Ifthe

@ A f ~ A impulse waves are going up, wave 2 cannot gobelow the originof wave I (refer to Fig.4). If the impulse sequence is goingA b " A down, wave 2 cannot exceed the peak from whence wave 13 I V\ / 2 '!\/\/\A o iginated.( { v v - y \ " u) Wave 3 cannot be the shortest of the "impulse waves" (refer to@ 5 Fig. 5). Wave 3 is not necessarily the longest but it is almost- - -C D ~ I I . ! : Y V \ always the longest.' r \; / \ A , 2 iii) In an upward sequence, Wave 4 cannot overlap the peak of Wave 1.In a downward sequence, Wave 4 can not rally above.""r, T< . . .~/ c Fi;zure3 'v ~'J .~,t he r tar rir -u Ia r i, not irrrmtl cive in n"tllrp (rpfpr Fi o til/ Y 1 6 1

Figures 4, 5 an d 6 i ll us tr at e t he "wav e c oun ts " d is al lowed by the Principle.5 56) The basic rhythm of "fives" corrected by "threes", as well as the 1 / 3 /arious rules and guidelines of the Principle remain constant regard- II !l A

less of the time unit used as reference. Patterns in hourly charts are /\ 1 /\/ 1 /\ /"counted" in the same way as weekly or yearly charts. _l__ _ N 4 N T7\ T~ .F ,rt It} ,tho "I', " .F. ~ / 2 / 2. . , , ... ~ /atterns themselves. Waves may be stretched or compressed but the

underlying forms remain constant.-Pic" , . . e 4- -Picmrp s Fioure 6 u

J ' v . . .Jor .. \ The fundamental concepts 1/-2--


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_L -" ....~..~'''''''UUUUU''PUOv 'U'~O'""~"'''6 "-,,unpurse waves ~J like pattern formed by two eonverging lines, in its usual form. These.nancms occur in fifth wave positions usuallv after the prccceding1) A variation known as an extension may appear in one of the Impulse third wave has moved extensively in a short t ime. Usually, the subwaves. Extensions are exaggera co or etonga ec movements u a a e waves in the wedge subdivide into "threes" rather than "fives",totally out of scale when compared tothe other impulse waves. Expect Overlaps between the terminals of waves Iand 4 are also frequent,extensions tooccur in only one of the impulse waves (either the lst, although not obligatory. This is the only known exception to Elliott's3rd or StID-Most extensions occur in the 3rd wave. Extensions mav " " , ,__ "" -Ll. A 'vo~nlp ic ,mid.>LiT .r -also occur in the extending wave itself. in Fi oure Q3 _L 5 Diagonal triangles are also found in C wave positions during the~A / "lettered phase" or corrective waves. Asin wedges found in 5th wavec. a, ' ' ' '" posiuons. these tormauons rndtcate tne termmatron or me movemema n e xte nd ed W av ~3 iVy one degree higher. 5/ \'*' Fi~ure 7 C I DA I w av e ::.IS a Vmgona ll n ang l e CD~1/\

/ \ / (2) ~ I vV/ \/ V 3 /5 tt;f/ \(5) 3(3) /\ 1\Sequence ithrough v _i s a~ ;L V / \ / '6.. .


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A special type of diagonal triangle observed by Robert R. Prechter in1986 has sub-waves composed of five waves instead of the usual"threes". This type is ussually found only inA wave positions and is

Figure 10

A rare pattern isthe expanding-type of a diagonal triangle. It is amirrorimage ofthc "converging type" in all respects. This pattern was nevermentioned by Elliott; Prcchter and Frost did not provide for thisvariation in the latest edition of their book "Elliott Wave Principle",

occasions, the 5th leg will fail to exceed the extremity ofthe 3rd leg ina "failure". The 5th leg of the expanding type, however, must exceedthe extremity of the 3rd leg to qualify as such.

The fundamental conce ts " - 4


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3) A fifth wave sometimes fails to exceed the terminus of the preceeding Corrective waves'Irdwave. This inabilitv is called somewhat uninsniredlv. a "failure".This pattern can be verified by noting that the internal waves of the"failed fifth" conform to all the three rules governing impulse waves. I) Movements against the trend are called "corrective waves" or simply

"corrections". Sometimes, they are referred to as "consolidations" orA failure is a reversal pattern, and gives rise to what is known in "lettered phase" . t. ." ., " " 'T'~ '5 'J'

nri~p ,~t;"n h"t ic ""itf'oH~rn Foirh ror~;n no;h Ar m~~ld -- . "-) J :'5. ""u '''''''5 "vu"""v"o,"avP'" "" . 1'' '' '(;1111, III "UV"11""common in hourly charts. is very difficult. This is because corrective patterns have more vari-ations than imnu lse waves. At times a corrective nattern becomesapparent only in retrospect; that is; when they are completed andbehind us.

A f if th w a ve " fa ilu re " 3) The complexity of corrective waves can increase or decrease without"'U'""5' .w.,,~~Mmvo~pw V"vu~".


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I Basic corrective forms IZigzag corrections

' \

Triangle corrections

Irregular correctionsB

B u ll c or re e t io n Bear correc tionc

Bu ll c o rr ec ti o n Bear correc tion

Flat corrections

Bull correction Bear correction Bu ll c o rr ec ti o n Bear correc tion

The fundamental concepts 1 / - 6


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I Complex corrective form;; IDouble-Threes

! Zigzag complex

/~ B R. ; , t! 'v'\,,/\ '= !\" ~ ( 1 ) ) II ' ~v "\ ~/~ r I ~~A :./B / / A ,/ V \ / \ 1 \ r: /\ / / v V \ I V\ IV \/v~/ V i: \/ , / ~ V V " J ~ c //I ~'! _~

f---Zigzag I X I Zigzag---1 f---Zigzag X Triangle I

/~ B 1A A A ! It BB I A,/ ' v \ " / \ / \ / V \ I I \ ~ / \ -r/ V v "\ (V V \ I V \ A I ; VW \ A A A I ~ !I/ A / /I // V \ / \ / \ 1 / \A /"'1 V \ / V \ / \ /I ,(I V A C I V V VC A

Cf---Zigzag X Flat f---Zigzag X - - - + - - Irregular---1A

" The Wave Anslvst The fundamental concepts 1/-7- - ----_.-


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Flat complex 1

I

1

B

f--Fat X+--Z za f--FatI : : : Wave Analyst The fundamental concepts /I - 8


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B B

I Complex corrective forms I

/ c

Double-ThreesIrregular complex

ri// , /

l'

c A

f-- Irregular---+-- X -l---lrregular---1 f--Irregular --+ X -l---Flat ----1B

B

f--lrregular ---t-- X -l---Zigzag --1

l'I

III

cf------ Irregular X Triangle

The fundamental conce ts /I - 9The Wave Analyst


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/ Complex corrective f().rms"/

f-----Zigzag--+-X-i-zigzag - -+ -x +-Zigzag--j

Zigzag complex

c A cf--Zigzag-+-X--+--Flal ---l-X -t--Triangle-------j

)Ic c

The fundamenta l concepts 1 /- 10


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I Complex corrective forms ITriple- ThreesFlat complex

l'i

f---Flat --+x -t------Flat -~-X--t----Flat-l f---Flat - - - -+ -x --+--Zigzag -+x +-Triangle - - - - - - lB B B

II

f--Flat ------+-X-+-Zigzag --+x +-Irregu1ar-l f---Flat - - - -+ - X -+-lrregular_+_ X+-Zigzag---1


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Irregular complex

)"//I

f--Irregular -+X +-Irregular -+X +-lrregular---1 f--Irregular-+X---I------Flat --+X +-Triangle - - - - 1

A.II II1.

/I c c


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8) The inverse of the ratio 4.236 is 0.236, while the inverse of the ratioFibonacci Ratios

377,610, etc. 0.236 is 4.236. Example: 1+4.236 = 0.236; 1+0.236 = 4.236.1) The Fibonacci numbers arer l 1 2 3 5 8 1321.345589 144233

2) Adding any two adjacent numbers will yield the next number in thesequence. rsxampre: J 0 J .0 1.): 0 1.) L. ,1.) L.l

9) The ratio 1(equality) is an expression of the comparison between the.-: '-:.. 1. "1"the sequence; therefore 1+2 = 0.5 .

3) After thefirst four dizits dividing a Fibonacci number bvthe numberimmediately preceding it will produce the ratio 1.618. Example: 10) The Fibonacci numbers, by themselves, do not have any utility in34: 21 - 1.618. Furthermore, dividing that same Fibonacci numberby the one immediately following it will yield the ratio 0.618.Example: 34 +55 = 0.618.

forecasting the extent ofmarket movements interms of pnce and time.The key elements are the ratios between the numbers in the sequence.Elliott considers these ratios to be the primary determinant of thepvtpnt rrf nr;rp ~nrl t;~p ",,,,,p~pntc in ~n" ~

0.618 is 1.618. Example: 1+0.618 = 1.618, and 1+ 1.618 = 0.618.5) Dividing any Fibonacci number by the number which precedes ittwo

11) The most common and most reliable Fibonacci relationships can befound between alternate waves, rather than adjacent waves. Forexample, the length of Wave 3 In atlve wave sequence would be

places inthe sequence will turn upthe ratio ot z.o 11$.And, dlvunng thatsame number by the number which succeeds it two places in thesequence results in the ratio of 0.382. Example: 55 + 144 = 0.382.

uy UI" 1"llgU vi rave ,rau.". UIUll uy UIC IC1IgU VIWave 2.

12) Fibonacci targets usually show UP as important levels of support or0.382 is 2.618. Example: 1+2.618 - 0.382; 1+0.382 = 2.618.

resistance even if they are subsequently penetrated.) The inverse of the ratio 2.618 is 0.382, while the inverse of the ratio

I) Dividmg any +rnonacci number oy me number wrncn precedes ittnree .". .L ,..,,.., ~I"""C;> rn UI" >c;yu"u,",,, vrn I"VHY\., "'' ' oaHU '.LJU ~AU"'I"'"144+34 = 4.236. And, dividing that same number by the numberwhich succeeds it three places in the sequence will yield the ratio0.236. Example: 144 +6lO = 0.236.

13) An important adjunct to the Elliott Wave Principle is the recognition.. " .and the framework, while the Fibonacci ratio~'pr~vide the tool formeasuring the potential for any price movement, including the prob-able time windows for terminations of these movements. This isa verypowerful combination.

I," \ The fundamental concepts /I - 13


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Part III I Deviations from mathematical ratios]Deviations Ligzag1 \ /\ RjI \/\ 1 \ A/ ~ A A A !I V V V ~eviations from the norm seem to be the rule rather than the 1 l'exception in wave analysis, Difficulty in this aspect arises from two V v \ / A L I./Isources: A V V V V

C C'J '-


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I Deviations from mathematical ratiOS.]

Irregular BB A - - - -A "'"/ \ 1 \ t / \ 1 1 / ~I.W l'1 \ 1 \ / \ 1 1 \ r J \ / 1 / \ I\~ /t f Id- .1i1Rh // V \ / V ~f, V \ / V \ ,I e=.618c / \ /\ / \/\ / \ 1 \ / - - - -~,/ V ! V V /I V V V V v V// IA C /A

@ @ L-.5I5L fi L t:Ic= .618 ATriangle Expanding triangle @ l'/ C d )"' "/\ /\ ,/ I.W~ /

/ \ A /~ A I V \ / ~ n A J \ A 1 1 / \ A //d - lil!l" d - 1.illil h /e=.618c / V \ N \ / ~ e=1.618c - r \/ v \ / V \ // ~ ~ /-H/ \eI"'\ Deviations 111-2I The wave AnalYst


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B

I I S U b ~ t i t U t i ~ ~ O f P a t t e l ' ~ : ~ 1

B -+ Triangle

c

',1/

c

B -+ Double-Three(flat + triangle)


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Zigzags

! /c

Deviat ions II/ -4


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IS~bstitut.ion~f;patternslIrre ulars

/'/

B

cc

-1 1/

B

I

B

5A -->FlatB --> Doub le z ig z ag

Deviations 1 1 / - 5


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cTrianglesrregulars

Substitution of Patterns

/~ .

b +Zigzagc -s- Zigzagd --> Irregulare -s- Trian le

B -e - Irregular c a 'Flatb --> Zigzagc --> Flatd 'Z igzage ' a


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x -+ Irregular c

/x -- > D ou bl e t hr ee

(flat + zigzag)

x -+ Irregular

Deviations 1 1 / - 7


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1 1 / -

Substitution of PatternsDouble-Threes

B --> TriangleA --> Irregular Ac c

(ab c "abc)

ee

/x -+ Irregular /


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@

t'SUbstitution~f Patterns I BDiagonal

T rip le z ig za g i nto a d ia go na l t ri an gl e

A 5C

@ Triangles

B --+ D i ago na l t ri an g le

D ou ble z ig za g in to a d ia go na l tr ia ng le D ia go na l tr ia ng le a tW ave A and C


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r'allYGuidelines and other observations"_ ....1\1

'T'L. ,~ ~L _ .I. f -". ,app icanon 0 these rules daunting to the beginner is the added complexityofvarious guidelines that are supposed to bethere tomake life easier for thewave analyst in the first place.

lime1) There are no timeconstraints onmarket patterns. Waves belonging to. ..

In subsequent pages we have attemprea to categorize guidennes andobservations under several headings. Some of these observations were,~lran.- . u11: ' ;,; h,,' ~ .+ " ,1.. ~1. ,"right size".

'0" "r-own experiences with wave analvsis. 2) In terms of time spent in completing a pattern, corrective waves aremore closely related to each other than to the Impulse waves.It must be remembered that many of the relationships between

waves, especially those reflecting the aspect of Fibonacci ratios, are meretenaencies nOLpermanent relationships cast in concrete. 1\ tendency may

3) Turning points in the forex markets are easier to recognise as theyD('(,IITifnT,,;a~ti{)n< of tirne ~11r1 nrif''' -~". fal l into 'hi> o~"',.

..1. d' area, and are supported by the completion of an acceptable wave. .~, ~'6


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!Impulse Waves 3) The thrust of 3rd waves can be so'powerful that they are oftenmistaken for 5th wave "blow-offs" or "sell-offs". Compounding the

situation is the fact that 5th wave "blow-offs" or "sell-offs" are not. . . , """" 1A all that rare in the forex markets. The only possible indicator that can. . . . . . . . . . _ -make the distinction is volume. Ifthe thrust occurs inrecord or heavy1) Insofar as the aspect ofmomentum durability or "staying power" is volume, itis likely tobe a 3rd wave, possibly extended. Ifthe verticalconcerned Ist waves have nothing_to_llfove. It is only 3rd and 5th '.. . L ,ln~, _if_waves that have momentum standards to meet. Therefore, the most ,,.1 'n 'h:r'nrp"i"'~: imnnlse move), ;hpn it i~lik"l~;o be a 5theffective way to use rate-of-change indicators with wave analysis is wav~ "blow-off: or "sell-off'.

to downgrade momentum readings until a suspected "3rd of a 3rd"T . ,~: The general public, which normally resists the idea of a trendu ''-'-H. HU'- '''U'-uw" uu~. ~~ 'U' 'u 4).,t .+, ,.t . reversai, usually changes Its nunc uunng tne .srowave. Int rus pna,e,J -J , r'However if Wave I kicks-off to the accompaniment of a prominent investors find new reasons to buy in the case of bull markets, or sellin the event of declines. Since by then the economic backgrounddivergence between your indicator and price activity, the trend has heuins to irrmrove or as the case rna be fundamentalprobably changed; your wave analysis is almost certainly correct. reasons pile upon technical considerations to make 3rd waves as

powerful as they are. This makes it imperative for an analyst toThird Waves recognise the onset of 3rd waves (before the fact) as they offer1) The endinz noinr of the 3rd wave is the most difficult to forecast Immensely prontanre traumg opponunllies.

among the three impulse waves. Since the 3rd wave can be shorter 5) Third waves arenot always longer than lst waves. However, theythan the 1st wave, but rarely so, predicting it, terminus is a veritable are almost always more powerful technically (i.e., higher volume andtrap to the unwary analyst. If it is not shorter than Wave 1,Wave 3 stronger momentum).mayoe equal to, or LOlli nmes me iengrn 01 vvave L10me case 01 ._l. ~ " 10 -"'.Q _c" 6) The highest volume will USUallyoccur in the "jrd wave ot a .sroU 'J-='-''-uv-,~.uvu "O~_"~"6uv 'u

wave",2) One of the most effective wavs torecognise a 3rd wave ina five wavsequence is by its slope. It is almost always steeper than the 1st; 7) __Oru:.e_ ' l. rr l U1~Vf''Yr.pf'cl .~he lenzth.cf.Ws V' 1 nroif'rt irs lerioth as.experience shows that it is often represented by an almost vertical 1.618 times the length of Wave 1. If Wave 3 extends, the nextline. By its nature a 3rd wave is the most destructive of all impulse objectives are 2.618 or even 4.618 times the length of Wave Iwaves and should not hug a trendline drawn between the origin of (3.618 is not a Fibonacci ratio).n. __ .Cn. ". - '-

AJ \ ,a.uOll er OU'>"'I va"v ..~ - _,~ .~.~'-'J -


37/93

,Fifth Waves Extensionsr '1,


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ro , .

7) Corrections tend to be milder within extensions. The usual retrace-ment oercentaze ofthe preceedinz wave is 23.6%' corrections rarelv Principle of Alternationexceed 38.2%. 1) The Principle of Alternation despite the appellation, is just that, a

8) Expect ahigh probability of a 3rd wave being extended when the2ndwave retraces less than 50% of the 1st wave. This tendancy increases, ). '1. "Fl... A ";r"", rilcr" n~tt,.rn

valuable guideline, but not an unbreakable, rule under the WavePrinciple. Market experience shows that the principle holds true for90% of the time between waves 2 and 4 in a five wave sequence.

'0 r .-r-r, D 1I.T DI1 "h.

9) If the 5th wave extends in any five wave sequence, in about 80% ofcases this five wave sequence is Wave 3 in a larger formation.

I' 'I' 'I' 'J"occurrence of simple and complex corrective patterns inWave 2 andWave 4. A simple deep correction (zigzags, double zigzags) in

lDJ When Wave) IS extenucu, Its iengtn is very orten l~mes--m:e-entire price travelled from origin ofWave I tothe peak ofWave 3.Seediagram below:

Wave 2 should give rise to a complex, sideways correction (flats,irregulars, triangles, double or triple threes) in Wave 4.

3) Inmy experience in the forexmarket however, the Principle ofAlter-. .J.,.,,,.h "~"n" At nA~"n_

Y = 1.618Xlion, POTinstance if Wave 2 has retraced 61.8 oercent or more of

NWave 1, then Wave 4 would very likely retrace 38.2 percent or lessofWave 3.IfWave 2 has retraced 38.2percent ofWave 1,thenWave4 whould correct 23.6 or 50 percent of Wave3.lIle ruternatIOn ofpatterns may take place, OUt significant exceprior ,;may Deuu , , , . ,,,ufrom time to time. The more consistent alternation process occurs inthe extent or depth of corrections rather than in its patterns or forms.

Y

4) This principle also requires us to look for different formations indouble or triple-threes. In a double-three, the most common patternis a flat anda zigzag. Ifatriangleoccurs, itisalmostalwaysthe last

j_ L 2pu" "0" -r-flats or irregular patterns.

11) waves wurnn anextension may Demggermscaietnan me preceeaingr-

5) In a triangle, the principle entrusts us to look for different patternsbetween the adjacent and integral legs. Leg A willnot be the same asleg J : : S ; J : : S Will not Deme same as \..-,etc.

It. _ A


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ICorrective waves and retracements __/11 MpthNl, used to nredict the extent of corrective waves under the 7) A retracement that fails to ao beyond 38.2% of the preceeding

Elliot Wave Principle can vary, but the underlying approach involves movement indicates a pent-up, underlying strength. Similarly, athe application of the Fibonacci ratios 0.236, 0.382, 0.5 and 0.618 to consolidation that takes some time to finish is a prelude to explosivethe length of the preceeding impulse wave. action once the corrective pattern terminates.

,+0 ~r" . "'. 'n. '0 hn'L e i 111""; are LWV " 'Y ' lVU"


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( Channels and trendlines~..

countertrend rally is viewed as the beginning of a new rally to new 1) An Elliot Wave trend channel is constructed by first drawing a [mepeaks. Fundamentally, the market appears bleakest at the bottom of connecting the terminal pomts or waves 1ann .J. fi paraue renuune2nd waves in a bull market, while the economic situation appears the is then drawn from the end of Wave 2. This trendline, in conjunctionbrightest at the 2nd wave peak of a major market decline. with a pertinent Fibonacci ratio, should provide insights asto the point

in tirrrss",inrlm" mhprp the 4th wave correction should end. Given the'" -r-a, '" Dr ~nL rI, n~t nr~"irlo wrrv .c Forer-act where a 2nd timinz reference the analyst should be able to deduce what pattern is'rrwave should end. It should not be overly difficult to recognise the likely to occur in the 4th wave.

terminus as it is occuring. But even the usually reliable Fibonacciratios are of no help in predicting the ending point in advance. All that If the 4th wave enos aoove or oeiow me trendline (as ;11l11"case ';1JElliot can offer isprojection ofprODa6fe stopping points. Ihatis Wily . . . .en "percemllrlIllOlllllt:), "11" lili" rs=crrzrwrrrorr .,,~~uuthe trading of 2nd waves should be avoided. through the terminal point of Wave 4. A parallel trendline is thendrawn from Wave 3. The specific purpose is to determine the probable,..,\n~ ,,,,.-nO" for ')nrl m~"po to h, simnle (a zip-zap-or double ending noint of Wave 5. As before, using Fibonacci derived objeczizzaa) and 4th waves to be complex (flat, irregular, triangles, tives, the analyst may project the time frame where the Wave 5 isdouble-threes or triple-threes, ctc.), likely to peak. If the slope of the projection derived by tms methodhas the same degree of steepness as Wave I , then the Fibonacci targets

14) Wave 2 normally retraces deepertlfan wave 'I. wave LLeIIUSl\Y are alIIlOSl ""H


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5) A normal 5th wave should be able to reach the channel objective. Flat correctionsFailure to attain this objective is a significant sign of the potentialstrength of the subsequent retracement . 1) If the corrective wave begins with a flat, the worst case is a .618 re-

6) R.N. El liot once observed that a market which hugs the innertrendline tracement of the previous wave, even if the correction is a second(the lower one in the case of bull markets; the upper line in bear wave.

,.t.a'.\ ~"t.a f"r nrornMi" rnrvvs-con"p thp ,rn "'~ II" null' awav '." ~ 'n .Lfrrrm that trendline and starts headinu for the oooosite channel line. L) m a na co 110"';Vll, n rc IOllUV1 , , ,V I O '" '" ,,~ v ': :: ':~An ;n n.,&Hl_ H r: "&' " 1"111"'uo T

7) A channel that tapers into a "wedge" shape is a sign that the movementcorrections that may be found in forex market movements.

is about to end. 3) IfWave A in a flat correction failed to retrace 38.2 percent of theadjacent impulse wave, Wave C is likely to be a "failure . Given the

Determining targets and objectives above situation, if Wave C has retraced at least 23.6 percent of WaveA and has already completed a five-wave sequence, it is likely that",. U. AI) Attemptmg to determine a pnce objective in aovance is userui ill 4) If a pattern starts with a 3-wave structure, and subsequent marketseveral ways. If a reversal occurs at that level, and the wave is valid,". action rules out a double zigzag, then the correction will very likely~J '1 trace out a flat or an ir regular formation,2) One sure sign that the end of a major trend is approaching, is what I 5) A flat formation is considered as a complex correction; an d so arecall the "multiplier effect". This is the sudden raising (in a bull

market) or lowering (in a bear market) of the speculative objectives irregulars, tr iangles, double threes and triple threes .01 the prevanmg Irena, usuauy oy several oegrees 11


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B 8) An irregular is considered a complex correction; and so are flats,1 \ T triangles, double threes and triple threes./ \ 1.: r l - . 9) The concept of orthodox tops and orthodox bottoms must Dewellunderstood to be able to accept the proposition that bull and bearX=y markets do not necessarily end atthe extremities ofprice movements.R";pf!v nnnrrwnrric five-wave an irregular pattern, then by definition, the peak of the irregularcorrection (Wave B) will exceed the orthodox top. The converse is

~\ '" r: ,j '~~nnl I hI 51t;~p, c c Irma true for anv five-wave sequence going downwards.~J'lSWave A.On r;r~'occassions Wave C may be 2.618 times as Ion;'but only ifWave B has beenmore than 1.618 times aslong asWave A. Horizontal triangles

4) Itis also fairly common for the distance between the Impulse wave s I) The triangle is one of the most reliable forms under the Wavepeax ana lOpor wave D 10 Deequai LOtnedtstance uctwccu rue cuu U t-rmcrptc. Itsappearence IS pracncauy a guaramee mal me prevailingWave A and the bottom ofWave C. Barring equality, the relationship trend will continue. A triangle is a holding pattern which separatesbetween the appendages is likely to be a Fibonacci ratio. two waves inthe same direction (Waves A and C,or Waves 3 and 5)So therefore hv inference the "thrust" from the trianzle is the last5) The normal retracement of an irregular correction is 38.2 percent movement in the prevailing trend.from the orthodox end of the adjacent impulse wave.

2) It isnormal for e waves of triangles (the last leg) to exceed the triangle0) Ina DUllrnarxe irregtrfat lAlIt:C;l;VII, urcUVlVllv> " 'V " ' "' ., "ill"" nounuary line ina raise oreaxout.. owever, DWave, never eJl.c;t:t:u. ...~ ,j u, r: 'T'~ t-r-r i, ;n 0 . . u r c.' C'"J 'e' 'H~~A


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8) Corollary to the above, if the first corrective pattern to evolve is ahorizontal triangle, then one can rule out further development into adouble- or triple-three.

9) The thrust that follows the termination of a triangle in the 4th waveposition will generally be of the same length asthe widest part of the

x=y

4) Alternative waves within symmetrical horizontal triangles are usu-

the ratio of 1.618.5) The principle of alternation within a triangle warns us toexpect that

no adjacent waves will be similar in form.6) When the triangle comprises the entire correction (rather than only a

entire correction can be situated even in the 2nd wave position. the more extensive the subsequent thrust.7) Ifa horiontal triangle occurs aspart of amultiple three pattern, it can 11) The extent of the thrust from a triangle in the B Wave position is

ween


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:J) In a GOUDIe tgzzag; uie lie wave can LaKta.ll] ~""l'v"L~!5L"!5' "heretorc, the subsequent thrust rrorn the mangle une L vvave) IS '" 7" ' . . . ,""-COl,)' tVoc co'!ua, lU UI" '""15'' ' Vi UICO ' "' '''VCO. ~ "'' ~b~b '0 , ,chapter).

6) X waves in a double zigzag often reach the same level as the12) If the first leg of the triangle (Wave A) is no longer intime scale then preceeding B wave. See following diagram:

one should normally expect from the dimensions of the preceedingsequence, expect the last leg (Wave E)to berelatively smaller m scalethan WaveA.

/\ fV\/ \ v \ ~Zigzags and double zigzags A n J ///1) Zigzags and double zigzags, often referred to asdeep corrections tend / A \T V\ /to retrace 61.):; percent or more of the Immediately preceeamg V A Vmpulse wave, especially when the deep correction is at the 2nd wave C.. TC, .~''"",'''''' H"" u, '1 ~H .", ,.'ic n


45/93

-~

Diagonal triangles Substitution of Patterns,~ ~, +, h i ,1",~,, 11 ~ f;"" "'. no. in" r: wave mav be substituted by a diagonal" '5 '0 - e - -positioned at the termination of the larger move (i.e. a 5th Wave or triangle, In some rare cases however, a deep correction, like a doubleaC Wave), or even triple zigzag, may replace the five-wave sequence. The occur-renee of patterns other than diagonal triangles in C waves was not

2) As a5th wave, the diagonal triangle usually exceeds the end of the 3rd discussed o y Elliott, outooservanons orme pllenomenoll inthe lUle}\.wave. But li ll ie diagonal pattern tails to surpass-wave -' , expect a =rrrarxcrrras UCCI1llCyUCW cuuub" 'v ,uu ~~~-lu' '6quick and sharp reversal, tenets of wave analysis.. ., ~ s ha rp r""pr


46/93

ignorant as often to be tempted to smile". Itis this harmony and beauty thatart VPractical Guidance is the centre of it all. This ISno romantic beauty tnat r'omcare was taucingauou . rfe mean classic lJCaUly, urar cvunc: ,vm U1y orderof the parts, and which a pure intelligence can grasp.

It is this sense of beauty which should make an analyst choose thefacts that contribute the most to this harmony. Usually, the facts by them-

Success in using wave analysis is not merely a question of applyingrules, anymore than, say, science or mathematics. 1l noes not mere y maxeme must .-pussime LVvcnrzuu ';ACU "" Vi rrrrcts:The combinations so obtained would be so exceedingly numerous, cum-bersome and practically useless. The true work of the analyst consists inchoosinz amona these combinations so as to eliminate those of limited

selves do not suggest much, or are worth much. Itis when the facts mergewith the matrix of the wave structure that harmony, and therefore success,

Poincare suggested some rules in classifying facts leading to amathematical hypothesis. With slight modifications, we can use his guide-lines in determining the heirarchy of facts that should lead to a proper

value, or rather to avoid the trouble of making them. The rules that must "count" of the wave structure.guide the choice are extremely fine and delicate. Itis almost Impossible tos tate them precisely; they must be felt rather than formulated. The more general a fact, the more relevant it is. Those which serve.' . >. :~h t, ,1:,,1 ch"n~p rvf rcr- .. rr-irro ""

, . r- '.pher, Jules Henri Poincare who lived at the tum of the century, wrote in his"Foundation of Science" about determining which hypothesis or whichfacts to examine in situations which "admit an infinity of others".

"JO." P ask: which facts are likelv to annear? The simple facts. How to recoanise them? Choose those that seem simple. Either this simplicity is real, orthe complex elements are indistinguishable. Ifit is real, we are likely to meetthis simple fact again, either alone, or as an element in a more complex fact.nut star! wall me simple ones. uccam', razor is a , a'buwyu' lUi

The nr incinle of Par simon v. otherwise known as Occam's Razor,r'omcare suggested tnat tne seiec ion is maw; UJ wuai ne CaHt:U lilt:

"subliminal self', an entity that can be likened to "pre-intellectual aware-".""]' ':n ,1 ,pH, P~:. 'orp , 0 ; . . . 1 '",,1.0 M 0 ' ' 'reT'' rum-rl-se r- "f

solutions to a nroblem but onlv the interesting ones break into the domain holds that when tossing around explanations for a natural phenomenon youof consciousness. Mathematical solutions are selected by the subliminalsel f on the basis of "mathematical beauty", of the harmon y of num hers andforms, of geometric elegance. "This is a true aesthetic feeling which allmamematician, Know, Poincare said; Uut Vi vhich n rc l'iVHUl" ale ,u

should opt for the simplest theory that fits the facts. As the fourteenth-century philosopher William of Occam puts it: "Non sunt multiplicandaentia preater necessitaem" (Entities should not be multiplied beyond

D' In ..1 ,~~,,1

A. r " \I The Wave Analyst Practicel nuidance V- 1


47/93

Its proper to begin with the regular facts, but after a wave count isthp fort, in conformitv with it becomes blase because thev no

A) Lack of persistence and intellectual honestylonger teach anything new. Then its the exception that becomes important. An ascinna wave analYst needs a kind of "stubbornness" that is en-

gendered by intellectual honesty.There can be no short-cuts in wave analy-sis. A reci tation of aplausible scene in wave analysis will i llust rate the point .

So we seek not resemblances, but differences. And we choose the mostaccentu ated differences not onl y becau se they are the most str iking, bu t alsobecause they are the most instructive.

-0 the greatest chances of fail ing: assume either a very large movement IIIpnceor a very large movement in time. Almost always, we find that in theseextreme projections our wave counts are overturned. These "upsets" areimportant; they enable the analyst to see better the little Change that mayhappen near his point of reference. What we are trying to do here is less theascertainment of likenesses and differences but rather the recognition ofl;t'pnMcM h;,.J,1pn nn,1pT onnOTPnt oli"PTlpnrp,

~J' 0 ak I' 1'mind is already racing ahead to what should evolve, so Itu es a It t e umeto realise that this unclassified minor annoyance of a "non-regular" patternis not just irritating and minor. It has stopped you from proceeding anyfurther. You are now completely stuck. You can no longer amve at a soundwave count.

-.- r-common nroblern of all. For the analvst this is the worst of all moments.Ifwe focus on each individual rule or tenet in Elliot Wave analysisthe collective rules and tenets seem to be discordant at first. But looking Reasoning out is no good to you now. You do not need anyonemore closely, we will see IIIgeneral that they resemble eacn omer: oirrerem. .so W' lOIIlallt:l, UUl '"11\.1: 111.u.um , a11U >111111


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Ifone finds oneself inthis situation, obviously the solution isto findthe relevant fact orsetof facts that willenable you toput a label onthe wave

understanding or "feeling" is only acquired from practical experience; itcan not be developed inside the lecture room where the concepts are onlypattern, imported rather than "discovered".

According to the "doctrine of objectivity" we should keep our mindasa blank tablet which nature willfillfor us, and then reason disinterestedl yA Poin

A rigid set of values often leads to the inability to assess what onesees. If your values are too rigid, itbecomes very difficult to learn toaccept

One of the key requirements of a good wave analyst is this abilityto atientl select the relevant facts from the irrelevant ones, and toquickly

you ow w a e even ua ou come wi e. en is oes no appen,a revision isrequired, and, given the normally volatile forex cash markets,reassessment. You willhave to search for new clues, but before you can findem ou h ve to lear our head of " old" 0 inions. If ou are not flexible.recognise those errors as and when they occur. you may fail to see the real answer even when it is staring you right in the

The difference between a good wave analyst and a bad one is face.

is insufficient. You have to have a sense of "correctness", afeeling for whatis right. That is what will pull you through. This is a capability borne outof experience, persistence and intellectual honesty.

deliberately and go over ground that you have been over before. This is tosee ifthe things that you thought were important really were so, and tojuststare at the chart. Just l ive with it for a while. Watch it the way you watcha line while fishing. Before long you'll get a nibble; a new fact will comeespi e rigorous 0 s

dead-end occasionally. When this happens, it isbetterrto consider the event

the mind-logic plane. As stated before, the solution to a problem oftenappears unimportant at first, even undesirable. Passage of time usuallyallows the solution to assume its true importance. Yourmind, given enough

are a wave analyst.

Practical guidance V -3


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C) Too big an ego D) AnxietyT f ",,,, h, no. a hioh evaluation of vourself then vour abilitv to When you are so sure that you will do everything wrong, the

recognize new facts is weakened. Your ego isolates you from reality. When tendency is to feel like doing nothing at all. Often, this rather than laziness,the facts show that you just goofed, you're not likely to admit it. When false is the real reason you find it hard to get started. Anxiety which results frominformation makes you look good, you're likel y to believe it. On any wave over motivation can lead to all kinds of excuses stemming from excessiveanalysis, ego comes m ror rougn treatmen . r ou re arwuy s being IUUICU, c~ u -'.h .Mc .ho',.1, no' nppel rp]"hpll inu. . . ~~. . U J O ' : ~ : J " 'c. ip slter-nate r-rurnfc Von mill iumn to wild conclusionsyou re a~1111>l""C. "!.1lan:a:IY" auau~U '6"6at a terrific disadvantage. and build all kinds of rationale into the analysis. These errors, when made,will tend to confirm your original underestimation of yourself. This will

IfvOUknow enough analysts to think of them as a group, and your lead to further errors and into a self-stoking cycle.observation is the same as mine, Ihink you'll agree that analysts tend tobe rather modest and quiet. There are exceptions, but generally if they are The best way to break this cycle is to work out the anxieties on thenot modest and quiet at first, the work seems to make them that way. As well charts. Read everything you can on wave analysis. The more you read the. . 'T'h ,~p.,tPr .hp rrmfir!pnr'p bui ld into vour analysis,", '''''I'U''''I. ,"uu '''' UU


50/93

nnf' tbinc to riowhen workinz with charts as in many other tasks before atleast twice. This isa small price topay, knowing that thepenaltiesis to cultivate "the peace of mind" which according to Poincare "does not for sloth will sooner or later be great.separate one's self from one's surrounding". When that is done successfully,then most other things will follow naturally. Peace of mind produces rightthoughts, Kight tnougnts prouuce riglll anions, anu rrgtn action !-"VUU'-'- po, . .&

.' ." rrJ IIIIt"cn' .. " .....

wun' WIIU-wn:ru'" ...,,''-,,= ,'-". IVl'V .," This is almost similar to, but not quite the same as boredom.T 1 almost alwavs stems from one cause: anunder-estimation oftheE \ Boredom amount of time the analysis will take. This is particularly true when marketaction has settled into a lazy sideways consolidation. You can never be

This isthe opposite to anxiety and is commonly associated with ego certain what kind of pattern will tum up.problems. Boredom means that you are not seeing things freshly, and youranalysis IS vuTneraDie.When this occurs there is a rreetrto lU"US your mind T "ll"HDLC;d"""'~


51/93

J 7 " . \ A tvrvir-at ~//ir.tt IA. 'II" Trariina PI;w VI - 1

Part VIA Tvplcal Elliott Wave Tradina Plan

There is no way to smooth the swings except by changing the way peoplethink. And that is an even more difficult proposition than eliminating greedIII tne marketplace.

There's a price for too much arrogance,a nrire fnr Innmuch oreeri:The sin of ignorance is the most pervasive of the lot. With the

amount of money beinz shifted "ronnel M the sliahtest nerr-em ion ofAnd in comolacent ienorance impending market change, its not unreasonable to presume that playerswe've sown the whirlwind seed. involved in this zero-sum game actually understand the mechanics of price

change. But the moans of victims who were zero-summed in their tradingaccounts at some point in the game is actually on the rise. So one is temptedon Simpson, from the song "Serpent's Reach"

This last sin is one that nobody needs to suffer from. Even if thecauses of price change are not yet fully understood (nobody knows exactly

Errors in trading occur due to a variety of reasons, but the most why people decide to buy or sell en masse at a point in time), it is enoughto know what does not cause pnces to fluctuate. For instance, the laws ofcause and effect in the science of physics do not apply in the largelypsychological phenomenon of price change. In another, price movements~rp n"t mh,,11 r~nrl"rn;n oil r1PMPM "f"'''N,;hlp 'irrtr=r-vcc hptmppn n,;('p

common causes of trading disasters can be traced to three cardinal sins,namely arrogance, greed, and ignorance.

volatilitv in the forex markets has taken its toll Traders who n~"sl1mf'el tor- "

changes; the October 1987 stock market crash drove this painful lessonpossess the inside track on market movements, and speculators who triedto will the market to go their way before it is ready, did not survive this far.

home.There are not enough of the cocky traders left to make a mark on the casualty ita tool IS workable, It IS not of over riding Importance to know

I;;XdI,;LLYUI;; ' fLy'.; auu wherefore': as LUUg a, uie basic UUU behtrrd n is,;11


52/93

'1"" "C11' UT. n.. :- ~. lmm"l~rlo~ u,. . >h~ f;~ct >A Thic rna rli


53/93

,""J J

In drawing up a trading plan, its spirit should be what RobertBeckman once said: "We are not trying to beat the market. We are trying tojoin it." There are subtle implications in Beckman's plea. The objectivesnouiu oe less m nemg ngnt out more m oemg sUCCeSSfUl'In otner. . .WUIU, UU IIUI "1111'" ~""I1I~ ""UII"''' IUI"''''>L lUI "~U-UUU"III~ I"'''UII.Rather, aim at making money on the trade, even when the forecast waswronz.

There is no contradiction involved here, from the standpoint ofElliott analysis. Most of the time, the probability of likely occurrence areso evenly distributed that favoring one scenario over others becomes a:~all


54/93

A_


55/93

idaily momentum analysis for decision Isupport.

A typical Ell iott Wave TradingPlan VI- 4


56/93


57/93

Continued long term momenumanalysis.

W ee kly P ric e C ha rt


58/93

Preparations for the Typical Elliott Trading Plan

Ascertain from the preceeding wave count that a five-wave se- Wave Scheme might be as short as 18 hours. On the other hand, it mightquence is highly probable from Point 0 (see Trade No.1). Preferably, the take all of 7 or 8 months for the market to travel from Point 0 to Point T onexpected five-wave move should be part of a larger pattern that could be the Long Term Wave Scheme.compnseu or five waves I tself. Intms weal situation. me move rrom i-omt . ...u iu rUllll 1 ~ '' ' 1 'Ulll1"UY"-WdY" IM1UUIU "H"'SI IH"~ t o c ' ' '', ) ' ltV" Vl" r c . v cWave of the larger pattern (see Short-Term Trading Plan). However, if a scheme to the next. Itcan range from 75 to 125 points in the tick-by-ticklarce ziczau or anv otherdeen is exnected from the wave count. chart to 200 nfennios in the Lone Term 1JSDfDEM chart, Anv choice ofthe Trading Plan may be activated. Just make it a point to remember that trading horizon, if a choice is available, will depend largely on the capacitythe potential movements are limited in this case. of the trader to take losses. The shorter the wave scheme being followed, the

smaller the risk in terms offace value. in percentage terms however , the riskDivide your trading capital into 10 equal units, if you are trading on in trading in accordance with the Very Short Term Wave Scheme should. . . . . .., ~

~~'" ua>!>.~1r: a~; Ll"UH1~;:;" l~1U'~H.lu~~"'~'u"yVU ,,.,""Il"'" 'HU "4U"lU'''">''~.th, .rl, .r,.,. " 'rrisking his entire stake in anyone trade. This also ensures that the trader will All of the trades described in the Typical Elliott Trading Plan followsurvive errors in judgement early in the trading exercise, and will have the a certain pattern, namely: I) initiation of trade, 2) setting-up of stop losswherewithall to continue the trading plan. levels, 3) case-by-case addition to existing posit ion, 4) provision for partial

profi t-taking, 5) case-by-case reinstatement of posmon, and 6) terminationThe nominal value represented by the leveraged capital is irrelevant of trade.

to the over-all scheme of this money management system. if you are taking. -o-rc ,n the>h~o;c nf, ",Hn~ li~;t, (~" ;n thp ~~cp nf, hgnlr fnTPV

trader) , the maximum net exnosure recommended in the trading DIan shouldcorrespond to about two-thirds of your limit.Finally, this typical Elliott Trading Plan maybe used with any of the

lour wave scnemes rnent torred; 'He very-snor '''''H, ure SHUl -terrn, uiemedium-term, and the long-term wave schemes. The tactics won't vary sig-ni ficantl y; only the time horizons of the recommended trades will differ. Forexample the time of travel from Point 0 to Point T in the Verv Short Term

AIn ,a In A ty pic al E llio tt W a ve T ra din g P la n VI-6


59/93

1, 3, 5---.I Trade No.1 - TradingthelsrWav~


60/93

Trade No.1I) A sharp rallv usuallv takes off from a pivotal iuncture like Point O.

Upon retracement of 50 to 61.8 percent of that rally, buy 3 units.Place a stoploss-reverse order just a few points below the level ofPoint O.

.." -r-t, .~. ,n 'c 'T'L~) ... ~ .. ,~.~, v,u, ~~'~'v' 'U~v'~U""~ 'UUO ,mv ..... yUpvo~ofthe net short position is to try to recover all orenough of the lossesfrom the long trade so as to prevent the capital from being impaired.A bigger stake on the downside is unjustified at this point.

3) Remember: your analysis indicated that Point 0 isprobably a pivotalpoint. If the analysis was wrong, it probably erred in identifyingnc: 1\ l- . ". c '"wac ;nrl""rlm>lrl"th"nrlrll:th>llP';;ntO isan "nrl;n(tn~i~t~~~':;:~:Wave 3 and therefore therally from Point 0 is part of minor Wave 4.The downside profit potential, namely minor Wave 5, is thereforelimited and should be traded as such. In this situation, being net shortor L. uruts IUlIllJStne expressea objective or tne reverse order, wrncnis to recoup losses from Trade No.1. Turning in a profit from thereverse trade is welcome, but not of overriding importance.

4) When the upmove from Point 0 has completed a five-wavesequence, thereby terminating Wave (D as well, sell 2units. Leaveoneunit long in case a low-probability extension occurs at this phase.ineprooaouny ror apeak or wave J may oecaicurateu oy rakmg me. , ,r 'H .. , ~ .Y"" u~" _~u "" p~u" v. 'u,~ _ UHU VU" v, "'v"multiplying it by the ratio 0.618 and adding the product to thetermination ofWave 4. Lets call this process the Fifth MeasurementMethod. Refer to Part IVfor other methods onhow topredict ending -points for 5th waves.

AIh ", w ;>v' " An;>/v,


61/93

. ., . . . - - .-

I Trade No.2 - Tradina the 3rd Wave I (5)Units from Trade No.1:

P O i n , i ' \~""~ vV"""' ''~U '"Trade NO.2: 6 / \

l'artlUl pro~tt raKing:Sell 7 un i ts ; l eav i ng 3 unitsin c ase W av e "extends"

/ \ /\Trade No 2A:Units remaining after Trades 103 / \ /\1 \ . 1 / V \\ / \

TradeNo. 2A:C ri tic al p oin t, w he re t he r al h; f ro m\ Wave e qu als th e r ally fr om P oin t 0 to (j). II 4 3 . _ \\ ~ ~ U"''''' "woe , ,, ,, m " '' '. V) U""" "'''6 LV}M aj or r es is ta nc e l ev el

\ A /\j! Midway stopprofit (C)\ /\ / \ Ij \ ' o J mu e o . L.", / V if th e m ar ke t fa lte rs a nd 2, 4,., nwves back below t he peak\/ \ I \ II ~ o f w av e 1, Sell 6 unitsv \ / V_-----TradeNo,2:

"..;;\ A t 50 to 61.8 pe r cen t r e tr acemen t of Wave (j) :B!l1/. 5 units\ I ~\. T ota l n um be r o f units long: 6 (5 + 1 u nit fr om T ra de N o.1 )f v1 a jo r s u p po r t l ev el .V \i_ - - - - Inital Stovloss:.r . Point 0 \ Reverse o f Trade 2: S el l 1 0 u ni ts


62/93

Trade No.21) When Wave:2l has retraced to 61.8 percent of Wave CD,buy 4) Ifthe statement in3) istrue, the ensuing drop below the level of Point5 units. The open position is now a total of 6 units long. Since 3rd o has a long way to go. The termination of Wave Z or Wave : : 1 :waves are generally the most powerful phase in any five wave mentioned above should be followed by a downmove as damaging,=~,nO~ oh '" UI' he-wave rauy projecteu rrom r'omr U to tomt't . (nat IS~o~ fr~", th~ tAll~:'" ." . . . . . ,,~reason for confidence nt th ix rim ,h - "'J '''~.' ,~'o~ 'UIO' 'V, "(lU,", "v"' BV lJllIy seeK' ro lCleVU!' ""Y0tion: a minor five-wave sequence has terminated in the previous losses from the upside trade, but also serve asgambit in a new tradingupwards pattern. So even if a major expectational error was made in plan oriented downwards.projecting the continuation of the move to Point T, the implication is

mal mere snoutd Deat least one more five-wave sequence to the 5) If the market moves higher according to expectations, contingencyupside emanating from the end of Wave ':2l.Commit up to 60 percent plans to preserve some of the profits have to be in place. The mostof your capital in this particular trade. critical point at this stage is located at (W), the level where the ~ .HL ~. _

~ ' .. ~ OJ ... ~ ,a.. ,um ,a,~ ~ "'-IU"" we Ul""JJ\.",>~H"v WU


63/93

Ifyou placed the stop profit level at the peak of Wave 1 (as suggestedabove), the most that can happen is that you will break even onTrade No.2 and No 2A ifthe market drops unexpectedly. The wholetrading effort has been geared towards this big moment. All the trades

m, tr!: Thp, ' ",'"tmel", ~r" wh at it . '~11 about

= c

7) When a sequence of five waves take shape from Wave , project theprobable terminal of Wave @ by using internal and external wave re-iauonsrnps. use me r utn measurement tactnoa 10 carcuiare meprobable end-point of Wave 5 in Wave @. Measure also the distancetraveled by Wave CD,multiply it be 1.618, then add ittothe bottom ofWave ' . The or ice obi ective nrovided bv this method should not Varymuch with the target obtained from the Fifth Measurement Method.

8) Sell 7 units at the expected peak of Wave 3 Fifth measurementmetnoa, leaving -' units lOng La taxe aovantage UI a lIigll-pruoaoililY~ " . ..,~ .~ 'u~ .~} .~,~

AIThe Wave Analvst A typical E ll io tt W a ve T ra di ng Plan VI-9------ __... ._------ --_ ... _-------_.


64/93

Trade No.3 Trading the Fifth Wave

Units remaining after Trade No.3: 0

T rade No 3:At 50 to 61.8 percent f .4 \ \ .\re t racement a Wave : ~

Wave ( re fe r 6 )l f u J L 3 u nits if W ave i s l on g er by \

\\ Ideal Stop loss:\ Reverse for T rade N o.3:. _ .

Point 0


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~rraue NO. . . : JI) After Wave @ has retraced 38.2 to 50 percent of Wave @, one of Any drop from the peak of this zigzag is therefore part of a large-

the following steps is recommended: degree decline which should travel way, way down the chart. Thestoploss-reverse strategy can therefore be very aggressive, as the oddsi) fu!y3 units if Wave @ i s 1.618 times as long as, orlongerthan for an extensive downward move IS very rugn in trus suuauon, rr tne

Wave CD; or stoploss-reveres level is rJil,.i iru uptolfiunirs, . VII rrrcrrcrr-- .1,>~~th ". long position in Trade No.3 .~ 'en .. .< :,Q 11) ~ J ,~m,,' u "yv= " '0 'i) Tf Wove @ was extended (i.e., it is at least 1.618 times as long as

Wave CD),and Wave @ has given indications of following a S O per-2) The reasoning for the above steps goes along this line: If Wave @ was cent retracement or less relative to Wave C, then a stoploss order maylonger than Wave CD,by aratioofl.618 or higher, Wave@isnotl ikely be placed at the level just below the corresponding 61.8 percent re-

to extend; its development IS liKefy to be normal, Moreover, ir tracemenToT cave '2).Wave \0 nao neen extrtrorrtirra iIYsrrorrg; auu uau ga ined bLVUIIU' 'Yquickly, Wave has higher chances of turning into a failure, which There is no hard rule being invoked here. This contrived stoploss

. oh';" t" uv~uurl thp re-ak of nrecursor Wave @. level will onlv be effective if the pattern of Wave @followsoneoftheTherefore beinz overlv ontimistic of the upside potential at this point sideways correction patterns (i.e., a fiat, an irregular, a triangle, or ais not justified. double-three). The basis for a limit below the 61.8 percent retrace-ment is the observation that if a correction pattern starts with a

3) If Wave @ was less than 1.618 times the length of Wave CD,Wave sideways pattern, the likely I imit of the retracement is 61.8 percent.has a very nign i UI oerng .w1111 v"", . .. ~ D," ., . m;,h Wevp 0~'J (E' "'" ~.,' -r- 2.n; m'rlrl1p nhocp Afon pvtpn" < : 0 " ' 1 0 ". 'J .r-Wave @. Being aggressively long at this phase is therefore reason- 6) Ifthe drop from the peak of Wave @ can be establ ished definitelyable. even desirable. as a three (composed of 3 waves) rather than a five, point Xbecomes a criticaljuncture for any rally to new peaks. Beyond rhis

4) The ideal stoploss-reverse order for Trade No.3 should be placed point, the probabmty or runner rtectirres dimin ishes LV Ujust below the level of Wave CDpeak. If the decline which is being degree. With a 3-wave count from the peak of Wave @, the onlylabeled as Wave @ drops below the peak of Wave CD, the premise of remaining argument for an extensive, large degree decline de-

.. D,' cr'." HT T'l-e=rrrrrnr-rvr= to Wevp (3 ) ~t'rihprl in item 4) is for a small irrezular correction to be ending"1 ~


66/93

degree wave schemes are being traded). However, if themarket rallies 10) So, at any ofthe levels where either Wave 5 or Wave are expected.'v,t _? V _ ,. "~11 ,~_ ;,; ~_ .";,h",, "~I". "'onrl 0 irlp onrl \ X I " it For--.-, -J' '"b' .. t- -.- "b Wave (3) neak then the irre oul ar correction .cenario is n"Qat"rl annronriate conditions to trade the correction of the movement from

Point 0 to Point T.7) As in the earlier trades. a plan topreserve some profits should be inplace once themarket has sufficiently moved upwards. Ifthe market

nas gone as rngn as me peas or wave _, or wave ~, OUl sunse-. . ..lIm:II"; u,,'-''''''u 'u '11"n :m u .r UIIJl' , '11"" ~


67/93

--

1,3,5Trades No.4 and 5 - Trading the Corrective Waves If2\ Trade No 4

D",i"t T \ : : : ! . J At 5 0 to 61.8 percentc r ,Uni ts from Trade NO.3: 0 'J \ s el~ 3 u nT / Stoploss:Units commited in Trade No.4: -3 / R ev er se f or T ra deNn . 1 1 " ,ny;m" ...u,,~ vv, ev ,ave .v . ..,. -

/ '\~ /Uni ts after terminat ion of t rade 0 \ .11\ rr-; o f7 u nits/ \ ~/1 I, C/@) \ A- - Trade No. 5I 4 a , A t 38.2 to 50 percent'-= / '\\/\ l\/i \\ "retracem entafW ave (a),, \ \ C.,II 0 ./\ / ~ 7 1 \ i ~,3 \ / ,ICritical point: Z ---- ', j b/ \ w r r" '" 'i -i ve -wa v e s eq u en c e! , om """"-~ \, ;n rnnh~c /,,, A'OM no/ \~ OSSib le z ig za g, th erefo re, d eep \~orrection. ,,rA\ \/ \3f .r, .,;;. '- j ~\\ C D / fro m P oin t T, o r a t a p oin t w he re th e d ro p Termination: -\-ro m P oin t T has r e tr aced 38.2 p er ce nt o f t h e\ /\ / HUUW"," } omrr 0TTfrTT. ~UIl'"U ~1111 2 u ni ts l ea in nc 1 unit iorcomoletion of nositions\ / \ / \/ Wa ve ( c) . - . . : : : y2,4V \ / V\ / (g)\ /V

A Point 0


68/93

7) Finally, when a five-wave sequence from the peak of Wave (j)) hasTrades No.4 and 51) When Wave 2 [email protected], sell

3 units. Since the expected decline is a mere correction, although alarge one, the profit potential is limited. Tactics are therefore adjustedaccordingl y.

taken shape, compute forthe likely trough ofWave 5 inWave usingtheFifth Measuremenl Method. Project also the target for Wave byassuming equality between the length ofWave@ andWave Cover_" . . . . L '.

2) Puta stonloss-reverse order iustabove the level of Point T. Ifthe stopis elected, Q m : : a maximum of units. The size of the stake depends onhow the length of the previous Wave 3. IfWave 3 was not extended,reverse the position by buying up to a maximum of units. 8) Wait for a new sign of a rally to activate the Elliott Wave TradingProgram through another cycle.

3) Point Z confirms a five-wave sequence from Point T. The retrace-ment pattern of@is likely tobe a deep correction, probably a zigzag. Notes on trading corrections

4) The bottom of Wave 5, and therefore that of Wave @as well, way becalculated by using theFifthMeasurement Method. At the projectedpeak, . ! l ! . u : 2 units, leaving 1unit to take advantage of the hypo-

~." '. .lose it trading the corrections."

There isa lotoftruth inthis somewhat facetious observation. But are'< r - . . ~ ~ ~from Point 0 toPoint T. The rationale isthis: Ifthe counfofthe minor

waves can not precisely produce a five-wave count (as it oftenhappens in short-term wave schemes), then then probabili ty of a

reasonSfoil1avmg your skill in trading corrective waves. Themarket spendsabout 70 percent of the time inconsolidations, while impulse waves take upthe rest. Side-stepping corrections ofcourse mean that the trader willbe idlefor ~Ar~ th~n h~ I f Af t h~ tiITI'" Th",r", or", citu . - ",horo 0~rr00;"~ "~"Osideways correction (for example, a nat) is too high for comfort.

I aking some proms at jiS.L percent retracement level IS a very logicalaction.can be extremelv profitable, as in second waves for example. It is normalfor second waves to retrace 50 percent or more; full retracement of 100percent is not unusual.

5) When Wave (fu has retraced 38.2 ttl ':;;0nercent of WllVI' rm SI'II3 more units.

6) Move the stoploss (no reverse this time!) to above the 61.8 percentctracemcn eve 0 wave tgi ifthe stopross is erected cover ill.! snort

reliable way to predict where third waves will end. Many a pause suspectedof being the onset ofa 4th wave correction eventually tum out tobejust that-a minor retracement in a roaring 3rd wave extension.

Trade corrective waves if you require, but proceed with extremecaution.IThe WaveAneivst A typical Ell iott Wave Trading Plan VI-12


69/93

Part VII

What you have just read is probably more wave analysis materialthan you would care to know. Reading it was easy. Applying these variousrules, tenets and observations on market data, with the expectation of

that comes the way of the wave analyst from time to time.

lows of January 1987. Once the terminal point was identified, the next stepwas to determine the structure and objective of the ensuing C wave.

making money on the exercise. is something else. Wave A had conclusively ended in early March at 1.8750 - TheThe easiest way to learn is by looking at examples; wave analysis

learning process is further facilitated if crit ique of the performance isprovided.

of B should not go far from the 1.7650 area.The price action leading to the bottom of wave B was expected to

were actual recommendations made on the Reuters and Telerate networksrin i k I

been seen at near 1.7650 or. as the favored scenario called for, it may beseen at the lower 1. O's,

during this time. Hopefully, this will help prepare the beginner to therealities of forecasting wave analysis. It should be appreciated that WaveAnalysis is an ongoing process of deduction and evaluation, the period in

The prevailing sentiment atthis timewas one of extreme pessimismfor the US dollar's health. One New York analyst had even proposed thatthedollar was about to drop into a "bottomless pit". The Elliott wave outlook

Case Studies VII- 1


70/93

3.500~~ (iI1 T . .. . '" Ir..~~ TOT~


71/93

2.10

1.90 1 A ~ I

1""

5 ~ "V ~?~@ B? B?IU

f\, _" ,00:: . . .7 'J may;I TheWave Analyst Case Studies VII -2


72/93

fn\a ~~1.82 - ~ ~

US$IDEM Hourly II, " 13 April - 15 May 87 I1 1 1 ~ 1 . 'J I __u --"- I "1. . ._, - , .. .


73/93

CaseStudies VII-

1.7760 Friday, but I have nothing to replace itwith althemoment. We will have to look elsewhere for new direc-tions.

Wednesday 0745 GMT Thursday 0742 GMT

short-term profits. A small triangle in the 1O-mingraphics pro-vides atarget of 1.7660-1.7650. Thats one. The price travel from1.8005 May 11to 1.77100n May 18multiplied by0.618 and thensubtracted from the 1.7830 high Tuesday wil l yield the area of

ficiently close to the target of 1.7650-60. but itwas not enough,asthe hourly OEM chart will show only a 3-wave sequence from1.7830. The rally since thenfromthe 1.7670 lows rules out anim-mediate drop to 1.7650 to complete a 5-wave sequence. Inthe

l imited downside potent ial (and horrendous whipsaws) thestomach-churning gameof intra- andinter-day trading will proba-bly provide the best returns.

about it.


74/93

We are at the edge. With Friday's act ion be ing of nohelp. Soonce again. we look for very short-term tradingopportunities inthe meantime. We will likely get a breakof 1.7850 from the

a i n ow i t u rnsinto an ace. This view, which I had practical ly given upearly last week, cal ls for a ral ly t01.82-1.83, fol lowed by somenervous sel ling to test the nerves of the bul ls at the 1.78-1.80 Friday 0745 GMT

r ience, the l imits where these scenarios remain vaand specify whether an opinion is a product of analy

orplain 01'guess. And then its every man for himself. For a lostretch oftime sometimes, aclear and sharp assessment isof

halfof 1988. Abreakof 1.83wililikelyprovokea testofthe 1.8750 notoriously vague and where uncertainty often leads to fundlast wave ofthis minor sequence should make a new highoverthe next 24 hours. The 1O-minute graphics support this conten-t ion. The ver tica l nature of the price movement s ince asian

menta l er rors. The most common error is to adopt a concepThe one currently invogue isthat the Dollar can only go dowAnd then compounding that error by ignoring anything that co

Wednesday 0740 GMT opening today IScharacteristic of exstensions, so its safe tosaythat 1 8280 wOllld probably provide bllt the slightest resistancet r ad lC1S n :

The Dollar rally isvery healthy, and performing as per expecta-tions ifI may add, but short-termers should begearing upto takesome prof its dur ing the trading day. The slight pause in Asiatoday is partel a miAsr eSAsslidatklA piscess priOI to all assault

to this awesome dollar advance. Ifyou took you profi ts as sug-gested wednesday, look for levels to reinstate long bucks, withslight improvement to make the waiting worthwhile. The nexttrading target is now 1.8375-1.84. Ifwe altai nthis over the next

Adopti ngaconcept isthe opposite of having an open mind. Intformer, the analyst sticks to one theme and then proceedsbolster his case in every imaginable way. In the latter, tanalysts is not predisposed to favor any particular movementa CUll HlCY, vvlliel i Cdl l be up , down; 01 s id e w a ys . Obv io u sof 1.82-1.83, after which we will reapraise the medium term. So 2 41 10 01 S I 5 el io us ly s ug ges t t o r el uc ta nt lo n g- te rm b ea rs [ 0 s ta rrcovering-short positions because it would be such a waste to adopting a concept implies that a conclusion has already bekeep those long bucks for a Whilebut take some, if not all, short-

term profi ts at the 1.82-1.83 range and stand aside. We won'trecommend going short unless wave patterns indicate a sizableretrace or that the entire upmove is over. The Dollar isdoing just fine, soslight corrections like those inthe

arr ived at long before the evidence warrants i t, and that tprocess of sifting for pertinent data isan exercise tosupportthcontention. This blindness becomes even more pronounced

wait for indication at 1.87 before taking action. Break 1.83and atest of 1.87 can't befar behind.

~ Wave Analyst Case Studies VII - 4


75/93

Monday 0820 GMT of prefered scenario. I t p roposes that a large Ccomposed offive waves isenrouteto 1.93OEM, an

change play the same tune, it will t ake more than acouple ofdays or couple of weeks for the power to bedissipated. Long term investors should do well to startI to this new music.

Tuesday 0750 GMT

i3rd waves are most difficult to pinpoint. and I am not quite sureifthe minor 3rd wave isover. Even assuming that the 3rd waveis over, the current decline/consolidation is but a 4th wave. and

The retrace was a real k il le r, a s lammer , a Volker , or al l of theabove. Butthe drop did nothing to change the medium-term out-look. Itdid point out though that my short-term wave count was

assessed by Elliott principles, are too numerous and too codictory at this point. So aside from this very short-termsales, no other contingent moves are warranted until and uwe reach 1.8075.

Imoney on intra-dayselling, but ifyou doso, besureto rememberthat intra-day space and not to overstay your dol lar shorts.

I soweto draw short-term trading tactics with this wave count in mind.A rally back to 1.8150 is not an unreasonable assumption since Our 1.8075 objective has been satisfied, though the Dollatick down again to 1.8070 bid within the hour. But the sce

previous 1.7660-1.77 lows. look for 1 .8150 being reachedtoday, and a subsequent decline during the end of the week orearly next week.

shorts taken yesterday and initiate purchases, with an objeof 1.85, with a less l ikely target of 1.84. The retracement1.83took exactly 50 percent, which istypical of small degwaves. Put stoploss at below 1.80. because if this current

ing to rule of alternation gets steady support at the 1.82-1.8210area. Sounless this retrace pattern develops into a real killer likea double zigzag or triple three slammer, I am recommendingbuying short-term trading bucks at the 1.82-1.8210 area for an-


76/93

C1.84 !)_ . . , . H i ii li i I ~ f ~ ,!Tcct/rH:';\,r rs,

,~~, ~ ~L"~ " ! , _ I ~ 1 . J i l I 1_11 Afm 1) T, 117":J J 3 V ~ \1.1 !

i (High-Law-Close ).!lln~ I\' \ ?1.82 ! ' N ~ r ~ _I 1 11

/~ [I I ~ t I f I I~ ,J ' ~ ~ r ~J }~ I I I 1 . 1 1 Jfj ' i I J 1 1~~~1 ~ .. I~~.

q

1IIIt 1 1 ~ ~ I I IJ

1.80 Ill~ II - \ R l ~ r t " I ~ . , I I " , ~ ~I I" n 3 l~~~,7~ t~~. 0 ' 1 1 '

b r ~ I I " ' ~ \ ~1 V - i " ' / ' r J a t 1 ' ) ~ 51.78 C.i~ -~, 111~1'~I'~""'" V~~ In J I t . " ~ If 7La ~llr\~'~ ;.:cR1.76

May 1822 May 25 - 29 June 1- 5 June 8 -12

.tv.


77/93

0750 GMT

medium-term dol lars at the 1.78-1.77 area in a fewdays.

T h 0800 GMT

I am afraid the dol lar did exactly as what we expectewhichchanged. and wefret and itch with the rest aswe waitWednesday 0750 GMT

We have attained the 1.7850target provided by atriangle thrust,so its buying time again, at least forthe short term. Iam also rec-ommending to medium-termers to start accumulating Dollars ind l lt ic i p at io i i o r t il e l I. o st p o vv 8 rr ul p a rl 0 ) t il e ra lly , tile 3r d waveina sequence offive. The worst scenario now defines the risk asa possible 2nd wave bottom at 1.775, but even that viewconcedes a prior move to 1.8030, at least. Technical analysisstudents wil l f ind a ful l discussion of the alternatives below. Asour regular readers know, we have been wai ting for today'sdollar 10'" since last "'eek to iss~e a fAajor buy recommendation,atarget derived byprojecting the likely counterpart of the Volkerdrop after that brief reversal. The 1.7850 objective was furtherref ined yesterday by a triang le in the hourly char t, a doublewhammyin myvocabulary. Go long bucks, despite how you feel

R.N. Elliott once observed that corrective phases, or "retrace-ments" are often complex and are the most difficult aspect ofthewave sequence. A wave analyst can recognize points where theend may beoccurr ing, but the only certainty isthat when itdoesend, 11Willnave traced out one of the eight patterns which aret ypical of correct ions The most straight f orward and I believethe mos t likely, pat tern being followed by the 2nd wave is adouble zigzag, which is quite typical at this juncture. The firstzigzag isthe Volker drop from 1.8405, with its dramatic reversaldoing the job of an X-wave, the link between two juxtaposedsimple p a tt sm s . T ile 2 Fld z ig za g Indy I la v e j us t teil/dllated a t1.7825 asI write this, culminating ina diagonal triangle or fallingwedge which should be obvious to anyone keeping hourlycharts. There is no guarantee that this indeed is the 2nd wavebottom. Forinstance, the double can develop into a triple, butthe

traEleligures to induce SOffleaction. Tile blitisll electiisthe biggest non-event of the year, insofar as the forex marisconcerned, and Icommiserate with the guys who have tocomin at4 inthe morning to watch the sterl ing ral ly, orfall . Nothiof that sort happened, no sustained ral ly. Blame iton the Baof England and that i tself is omnious. Yes, I sti ll bel ieve its tright time to get Olltof Sterling There are parallels to the c~rresituation. Most ofthe Sterl ing rise from the lower 1.60's to 1was fueled by expectation of Mrs. Thatcher calling forelection As soon as she did the pOl!Od lost 4 cents Then tral ly from 1.61 was basical ly in expectation of a conservativictory ill Ine polls. I~owInattney nave n , Iwonder how may centhe Sterling will give away this time. This sounds irrational oifyou are convinced that forex rates are tied to current evenThis isn't saying that Ell iotters know what is going to happnext , merel that wave forms don 't f it rat ionall into chan es

2nd wave of a major ral ly . In a major bear market , the publicpsychology during 2nd waves is one of unbriddled enthusiasm. wave principle, which is assessing probabilities. And right nowthe odds favor a major turn-around.

TheWave Analyst Case Studies VII - 6


78/93

This is just the start of a cannonball explosion wementioned las t Thursday. We are not even on thebooster-stage 3rd ofa 3rd. How tocope with the rally on

Tuesday 0740 GMT

ral ly as a Bwave inZigZag. Itshould end at about 1.8240, andshould be followed by a fairly persistent slide to 1.8240-1.8125.

Iin late New York or ear ly Asia. The next run should see 1.84

not give a clear intra-day picture atthis point, so we look at thesterling pattern for clues. A minor degree five-wave sequence

1.8330 peak to the 1.82 area is .236 of the distance travelethe move from 1.7825 to 1.8330. This Fibonacci ratio of .2

w i tl lo u t I ll uc l ld i ff ic u lt y. v ve lo o k a l 1 . 8 48 s [ ll ee li d o t [ ti e lS I waveof the 3rdof C, where typically skepticism still runs rampant onthe longevity of the bull move. Medium-termers would be betteroff side-stepping the correction from the expected 1.84 high bytaking profi ts. Unrepentant bears wil l probably look at this so-

is susceptible to adjust one more slight dip to 1.6210 area. This forex market, and usually finds expression as minor 4th w

called formidable res istance as one more excuse to sel l on.There is no way of predioting ROWow tReir sel ling frenz) wil l

should befollowed by a recovery to 1.64-1.65Iastlng 2 or3 days.InUSD/DEM terms, this translates into a possible test of 1.8350which completes the five-wave sequence from 1.7825. A less-likely possibility isforthe buck tospiral down to 1.8170 areafromcurrent levelsto complete a minor 4thwave that metamorphosed

depress the buck. But its a safe bet that it won't be rnuch,probably not more than 50 percent ofthe run-up from 1.7825 to1 84 The S' Ibsequent explosion, tho 3rO W,l!'e gf t~ e 3rO, "'ill

from zigzag toan irregular. Ifavor the first scenario, sowe shouldflf)YU sl9it tsl9ol' t - tsln i s tl a te gy flO II) bu yi l 1 9 fa 5811 ; l lg . 81101 tDol la rs

or as Inilial stopping pOintsof major retracements. Itthe cuconso lidat ion is par t o f a sizable 2nd wave correction, anewest wave count suggests, then the buck should rise to a1.8275 before coming down inearnest. Inthe current consotion isa4th wave alesser possibility. then expect another s

run the tolerable risk of afinal surge to 1.8360, or at worst, 1.84.But a run-up to new highs definitely completes the 1stof the 3rdorc. ~eiling ~~asizasle sRortlerffl deeliM. MiAifflulfi doviliside

upmove to 1.84 area before the 2nd wave correct ion canF lu lI ) a t la d ilig p O ill t o f v ie w ill Eu r ope t il l I e t ll 9I ef or e, Igoing long. that is , i f you point a gun at my head andsay tOtherwise, I 'l l wait for new tops or break of 1.8170 to sel l.

follow with the waning of the selling pressure. targel therefore is 1.8170.I ' : : : WaveAnalyst Case Studies VII - 7


79/93

Tuesday 0730 GMT Wednesday 0700 GMT Friday 0700 GMT

was I a correction to just below 50 percent of tentire ral ly. So the dol lar is set for another ral ly which shoclarify the short-term direction, once and for all. The situationthis. I bel ieve we are looking atthe start of the fabled 3rd of

stab to a new peak, say, 1.8530, after which the buck goes intoconsolidation mode once more. Tracking this 2nd wave of the we need isto see five waves from the 1.85peak to conclude thatthe 2nd wave retracement isover, and the3rdofthe 3rdis onthe

Izigzag, a move which should br ing the buck to at least 1 .83before level ing. No ifs, no buts. Short-term and medium-te

as arguments pointto one thing. Thedownmove is not qui te over, and despi te my references of i tproviding buying opportunity at 1.8350-1.83 area, the most wecan expect on the upside isa tickup just below 1,84,il 1.85was

much too great to miss. Ifthe buck goes through 1.84, forgetthprognosis of the doom-and-gloomers because the rocket's nstop is 1.90.

palpable, and Iam tempted to maintain that i t is a B wave inanirregular correction. But th