Elliott Wave Final Project

Elliott Wave Principle

Chapter 1

Introduction

 Introduction  Objectives  Scope of Study  Abstract  Research Methodology

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Elliott Wave Principle General Introduction The Elliott Wave Principle is a form of technical analysis that some traders use to analyze financial market cycles and forecast market trends by identifying extremes in investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson Elliott (1871–1948), a professional accountant, discovered the underlying social principles and developed the analytical tools in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners today call Elliott waves, or simply waves

Objectives of study  To understand the concept of Elliot wave theory.  To apply the concept in Financial Market.  To understand the changing trend of the Equity Market.  To prove that Elliott Wave analysis is the better tool to analyze the market.

Scope of Study  Will highlight the concept, features and applicability of the Elliot wave in the Equity Market.  Will help to understand the trend of the market.

Review of Literature

Abstract 1 Topic :- Stock Market Crashes, Precursors and Replicas Author :- Physicist Didier Sornette It is intriguing that the log-periodic structures documented here bear some similarity with the "Elliott waves" of technical analysis ... A lot of effort has been Page 2

Elliott Wave Principle developed in finance both by academic and trading institutions and more recently by physicists (using some of their statistical tools developed to deal with complex times series) to analyze past data to get information on the future. The 'Elliott wave' technique is probably the most famous in this field. We speculate that the "Elliott waves", so strongly rooted in the financial analysts‘ folklore, could be a signature of an underlying critical structure of the stock market. Link :-(http://en.wikipedia.org/wiki/Elliott_Wave_Principle)

Abstract 2 Topic :- Elliott "a classic," and one of "the four Bibles of the business" Author :- Paul Tudor Jones, the billionaire commodity trader. Technical Analysis of Stock Trends and The Elliott Wave Theorist both give very specific and systematic ways to approach developing great reward/risk ratios for entering into a business contract with the marketplace, which is what every trade should be if properly and thoughtfully executed. Link :-(http://en.wikipedia.org/wiki/Elliott_Wave_Principle)

Abstract 3 Topic :- Elliott Wave Heresy: Five Waves Followed by Three Waves is Not Always Right! Author :- Steven W. Poser The Elliott Wave Theory (EWT, also known as the Elliott Wave Principle) suggests that markets move in five wave impulse moves with the trend, which are inexorably followed by three wave corrective patterns. Many novices already fail to understand the fact that this means that five wave price patterns occur with the underlying price trend, whether that trend is to higher or lower prices. However, the author shows that even with this added information, the supposition that a neverPage 3

Elliott Wave Principle ending spiral of five-wave/three-wave couplets is not always the correct way to view the markets. Link:- http://www.mta.org/eweb/DynamicPage.aspx?webcode=journal-2003-summer

Abstract 4 Topic:-SCIENCE IS REVEALING THE MECHANISM OF THE WAVE PRINCIPLE Author :- ROBERT R. PRECHTER, JR., CMT It is one thing to say that the Wave Principle makes sense in the context of nature and its growth forms. It is another to postulate a hypothesis about its mechanism. The biological and behavioral sciences have produced enough relevant work to make a case that unconscious paleomentational processes produce a herding impulse with Fibonacci-related tendencies in both individuals and collectives. Man‘s unconscious mind, in conjunction with others, is thus disposed toward producing a pattern having the properties of the Wave Principle. Link:http://knowledgebase.mta.org/?fuseaction=kb.resource&kbDomainID=29CD92B5EAEE-E17F-C526BC22E1B6E50C&kbResourceID=29D9F4DB-C49D-B0B81D9E06D34802EFDF

Abstract 5 Topic:-THE METAPHYSICAL IMPLICATIONS OF THE ELLIOTT WAVE PRINCIPLE Author:- Jordan E Kotick B.A (Hons), M.A., CMT It strikes me that a philosophical discussion of the Elliott Wave Principle is a worthwhile and relevant pursuit, especially since some of its most noted practitioners, such as A. J. Frost and Robert Prechter, do not hesitate to discuss philosophical issues Page 4

Elliott Wave Principle in their writing nor do they fail to quote various philosophers in connection with their own advocations. I believe that Frost was the first to specifically articulate the connection between philosophy and the Wave Principle as evidenced by his observation that ―[i]t is possible to read into stock market behavior a philosophical significance under the basic tenets of the Elliott Wave Principle.‖ There is no shortage of philosophical issues that can be discussed in relation to the Wave Principle, but the limitations inherent in this paper force me to zero in on a select few. As such, I have decided to examine determinism and specifically whether it should be said from a philosophical point of view that the Wave Principle is inherently deterministic. This consideration also seemed to have occurred to Frost: ―It is an open question whether or not man is a puppet on a string. In the short term he is not, but over the longer period he may be‖ and Prechter, ―the Wave Principle form shows that a collective system is...deterministic.‖ Link:http://knowledgebase.mta.org/?fuseaction=kb.resource&kbResourceID=292331E80868-9928-B7C037D94813E3EC&r=1

Abstract 6 Topic:- SCIENCE IS VALIDATING THE CONCEPT OF THE WAVE PRINCIPLE Author:- Robert R. Prechter, Jr., CMT The latest scientific research is racing headlong toward validating the concept of the Wave Principle, and not just in its simple expression as a financial multifractal. It is also supporting its grander implications that nature‘s living fractals are robust, that they are governed by Fibonacci, that one of them governs the entire activity of social man, and therefore that the mathematical basis of man‘s sociocultural progress and of other natural growth systems is the same. The level of aggregate stock prices is not a m _ tiqsity but a direct and immediate measure of the popular valuation of man‘s total productive capability. That

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Elliott Wave Principle this valuation has aform is a fact of profound implications that should ultimately revolutionize the social sciences. Link:http://knowledgebase.mta.org/?fuseaction=kb.resource&kbResourceID=29F48E6FDDAF-854F-FC27D989DE2791AF

Abstract 7 Topic:- Riding the Waves: Applying Elliott Wave Theory to the Financial and Commodity Markets Author:-Robin Wilkin, Ex-Global Head of FX and Commodity Technical Strategy "the Elliott Wave principle ... provides a probability framework as to when to enter a particular market and where to get out, whether for a profit or a loss Link:- http://en.wikipedia.org/wiki/Elliott_Wave_Principle

Abstract 8 Topic:-An Introduction to the Elliott Wave Principle The Alchemist November 2005 Author:-Jordan Kotick, Global Head of Technical Strategy at Barclays Capital

"discovery was well ahead of its time. In fact, over the last decade or two, many prominent academics have embraced Elliott‘s idea and have been aggressively advocating the existence of financial market fractals." Link:- http://en.wikipedia.org/wiki/Elliott_Wave_Principle

Abstract 9 Topic:- Evidence-Based Technical Analysis Page 6

Elliott Wave Principle Author:- David Aronson The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong. Link:- http://en.wikipedia.org/wiki/Elliott_Wave_Principle

Abstract 10 Topic:- The (mis)Behavior of Markets Author:- Mandelbrot, Benoit and Richard L. Hudson Wave prediction is a very uncertain business. It is an art to which the subjective judgement of the chartists matters more than the objective, replicable verdict of the numbers. The record of this, as of most technical analysis, is at best mixed Link:- http://en.wikipedia.org/wiki/Elliott_Wave_Principle

Research Methodology

Statement of problem  Is Elliott wave applicable in Equity market?  Do market trend make a similar patterns over a period of time?

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Elliott Wave Principle Hypothesis  Elliot Wave is one of the best technical analysis tool to understand the trend of the Market. Methods of Collection of data  Secondary

data

from

Odin

Diet(Share

khan

Software)

and

www.netdania.com (Live Chart) Research Instrument  Odin Diet(Share khan Software) and www.netdania.com (Live Chart) Research Limitation  Elliot wave is complex concept and it takes lot of experience and study to implement it in the real market.

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Elliott Wave Principle

Chapter 2 Basic Theory

 A complete Cycle  Number of Waves at Each Degree  WHY 5 -3?  Elliott Wave personality and characteristics  Wave Patterns

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Elliott Wave Principle

According to physical law: ―Every action creates an equal and opposite reaction‖. The same goes for the financial markets. A price movement up or down must be followed by a contrary movement, as the saying goes: ―What goes up must come down‖( and vice versa). The Elliott Wave Principle posits that collective investor psychology, or crowd psychology, moves between optimism and pessimism in natural sequences. These mood swings create patterns evidenced in the price movements of markets at every degree of trend or time scale.

The Wave principle is governed by man‘s social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value. The market progression unfolds in waves. Waves are patterns of directional movement. More specifically, a wave is any one of the patterns which are formed naturally. In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, as shown in Figure 1.

A complete Cycle Price movements can be divided into trends on the one hand and corrections or sideways movements on the other hand. Trends show the main direction of prices, while corrections move against the trend. In Elliott terminology these are called Impulsive waves and Corrective waves. Thus two modes of wave development are formed: motive and corrective. Motive waves have a five wave structure, whilecorrective waves have a three wave structure or a variation thereof. Motive mode is employed by both the five wave pattern of Figure 1 and its same-directional components, i.e., waves 1, 3 and 5. Their structures are called "motive" because they powerfully impel the market. Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 2. Their structures are called "corrective" because they can accomplish only a partial retracement, or "correction," of the progress achieved by any preceding motive wave. Thus, the two modes are Page 10

Elliott Wave Principle fundamentally different, both in their roles and in their construction, as will be detailed throughout this project.

Figure 2

Impulses are always subdivided into a set of 5 lower-degree waves, alternating again between motive and corrective character, so that waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move against it. Thus a complete cycle of 8 waves is made up by this two distinct phases, At the terminus of the eight-wave cycle shown in Figure 2 begins a second similar cycle of five upward waves followed by three downward waves. A third advance then develops, also consisting of five waves up. This third advance completes a five wave movement of one degree larger than the waves of which it is composed. The result is as shown in Figure 1-3 up to the peak labeled (5). Page 11

Elliott Wave Principle

Figure 3

At the peak of wave (5) begins a down movement of correspondingly larger degree, composed once again of three waves. These three larger waves down "correct" the entire movement of five larger waves up. The result is another complete, yet larger, cycle, as shown in Figure 3. As Figure 3 illustrates, then, each samedirection component of a motive wave, and each full-cycle component (i.e., waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself. It is crucial to understand an essential point: Figure 3 not only illustrates a larger version of Figure 2, it also illustrates Figure 2 itself, in greater detail. In Figure 2, each subwave 1, 3 and 5 is a motive wave that will subdivide into a "five," and each subwave 2 and 4 is a corrective wave that will subdivide into an a, b, c. Waves (1) and (2) in Figure 1-3, if examined under a "microscope," would take the same form as waves [1]* and [2]. All these figures illustrate the phenomenon of constant form within ever-changing degree. The market's compound construction is such that two waves of a particular degree subdivide into eight waves of the next lower degree, and those eight waves subdivide in exactly the same manner into thirty-four waves of the next lower degree. The Wave Principle, then, reflects the fact that waves of any degree in any series

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Elliott Wave Principle always subdivide and re-subdivide into waves of lesser degree and simultaneously are components of waves of higher degree. Thus, we can use Figure 3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring. Now observe that within the corrective pattern illustrated as wave [2] in Figure 3, waves (a) and (c), which point downward, are composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (b), which points upward, is composed of three waves: a, b and c. This construction discloses a crucial point: that motive waves do not always point upward, and corrective waves do not always point downward. The mode of a wave is determined not by its absolute direction but primarily by its relative direction. Aside from four specific exceptions, which will be discussed later in this course, waves divide in motive mode (five waves) when trending in the same direction as the wave of one larger degree of which it is a part, and in corrective mode (three waves or a variation) when trending in the opposite direction. Waves (a) and (c) are motive, trending in the same direction as wave [2]. Wave (b) is corrective because it corrects wave (a) and is countertrend to wave [2]. In summary, the essential underlying tendency of the Wave Principle is that action in the same direction as the one larger trend develops in five waves, while reaction against the one larger trend develops in three waves, at all degrees of trend. The phenomena of form, degree and relative direction are carried one step further in Figure 4. This illustration reflects the general principle that in any market cycle, waves will subdivide as shown in the following table.

Number of Waves at Each Degree Impulse

+

Correction

= Cycle

Largest waves

1

+

1

=2

Largest subdivisions

5

+

3

=8

Next subdivisions

21

+

13

=34

Next subdivisions

89

+

55

=144

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Elliott Wave Principle

Figure 4

As with Figures 2 and 3, neither does Figure 4 imply finality. As before, the termination of yet another eight wave movement (five up and three down) completes a cycle that automatically becomes two subdivisions of the wave of next higher degree. As long as progress continues, the process of building to greater degrees continues. The reverse process of subdividing into lesser degrees apparently continues indefinitely as well. As far as we can determine, then, all waves both have and are component waves.

WHY 5 -3? Elliott himself never speculated on why the market's essential form was five waves to progress and three waves to regress. He simply noted that that was what was happening. Does the essential form have to be five waves and three waves? Think about it and you will realize that this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear Page 14

Elliott Wave Principle movement. One wave does not allow fluctuation. The fewest subdivisions to create fluctuation is three waves. Three waves in both directions does not allow progress. To progress in one direction despite periods of regress, movements in the main trend must be at least five waves, simply to cover more ground than the three waves and still contain fluctuation. While there could be more waves than that, the most efficient form of punctuated progress is 5-3, and nature typically follows the most efficient path.

WAVE DEGREE All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest: ―Grand Supercycle‖, ― Supercycle‖, ― Cycle‖, ― Primary‖, ―Intermediate‖, ―Minor‖, ―Minute‖, ―Minuette‖, ―Subminuette‖ Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor and sub-Minor waves. By using this nomenclature, the analyst can identify precisely the position of a wave in the overall progression of the market, much as longitude and latitude are used to identify a geographical location. When numbering and lettering waves, some scheme such as the one shown below is recommended to differentiate the degrees of waves in the stock market's progression:

Wave Degree

5s With the Trend

3s Against the Trend

Supercycle

(I) (II) (III) (IV) (V)

(A) (B) (C)

Cycle

I II III IV V

ABC

Primary

[1] [2] [3] [4] [5]

[A] [B] [C]

Intermediate

(1) (2) (3) (4) (5)

(a) (b) (c)

Minor

12345

ABC Page 15

Elliott Wave Principle Minute

i ii iii iv v

abc

Minuette

12345

abc

The above labels preserve most closely Elliott's notations and are traditional, but a list such as that shown below provides a more orderly use of symbols:

Wave Degree

5s With the Trend

3s Against the Trend

Grand Supercycle

[I] [II] [III] [IV] [V]

[A] [B] [C]

Supercycle

(I) (II) (III) (IV) (V)

(A) (B) (C)

Cycle

I II III IV V

ABC

Primary

I II III IV V

ABC

Intermediate

[1] [2] [3] [4] [5]

[a] [b] [c]

Minor

(1) (2) (3) (4) (5)

(a) (b) (c)

Minute

12345

abc

Minuette

12345

abc

Elliott Wave personality and characteristics Elliott wave analysts (or Elliotticians) hold that each individual wave has its own signature or characteristic, which typically reflects the psychology of the moment. Understanding those personalities is key to the application of the Wave Principle; they are defined below.

Five wave pattern (dominant trend)

Wave 1:Wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts. Page 16

Elliott Wave Principle

Wave 2: Wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd" haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern.

Wave 3: Wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone Page 17

Elliott Wave Principle looking to "get in on a pullback" will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three's midpoint, "the crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1.

Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three (see Fibonacci relationships below). Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.

Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed

Three wave pattern (corrective trend) Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets. Wave B: Prices reverse higher, which many see as a resumption of the now longgone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

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Elliott Wave Principle

Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

Wave Patterns A complete wave is divided into 5 impulse waves and 3 corrective waves. Various patterns are form to make a complete impulse wave and corrective wave. Studying the patterns is very important in order to apply the Elliott Wave Principle correctly. The pattern of the market action, if correctly determined, not only tells you to what price levels the market will rise or decline, but also in which way (or pattern) this will happen.

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Elliott Wave Principle

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Elliott Wave Principle Chapter 3 Motive Wave

 Impulse Wave  Extension  Truncation  Diagonal triangle

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Elliott Wave Principle

Motive waves subdivide into five waves with certain characteristics and always move in the same direction as the trend of one larger degree. They are straightforward and relatively easy to recognize and interpret. There are two types of motive waves: impulses and diagonal triangles.

A) Impulse Wave Impulses are always composed of five waves, labeled 1,2,3,4,5. Waves 1, 3 and 5 are themselves each impulsive patterns and are approximately equal in length. Waves 2 and 4 on the contrary are always corrective patterns. Figure 3 are example of impulse wave. Figure 5 shows the formation of impulse wave during bull and bear market.

Bull(motive)

Figure 5

Bear(corrective)

Rules and guidelines The most important rules and guidelines are:  Wave 2 cannot be longer in price than wave 1, and it must not go beyond the origin of wave 1.  Wave 3 is never the shortest when compared to waves 1 and 5.  Wave 4 cannot overlap wave 1, except in diagonal triangles and sometimes in wave 1 or A waves, but never in a third wave. In most cases there should not be an overlap between wave 1 and A.

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Elliott Wave Principle  As a guideline the third wave shows the greatest momentum, except when the fifth is the extended wave.  Wave 5 must exceed the end of wave 3.  The internal wave structure should show alternation, which means different kind of corrective structures in wave 2 and 4.

Formed in which wave?  Impulse patterns occur in waves 1, 3, 5 and in waves A and C of a correction( this correction  Could be a wave 2, 4 or a wave B, D, E or wave X).

Internal structure  It is composed of five waves. The internal structure of these waves is 5-3-5-35.  Note that the mentioned 3s are corrective waves, which should be composed of 5 waves in a corrective triangle.

B) Extension

Bull(motive)

Figure 6

Bear(corrective)

Most impulses contain what Elliott called an extension. Extensions are elongated impulses with exaggerated subdivisions. The vast majority of impulse waves do contain an extension in one and only one of their three actionary subwaves. At times, the subdivisions of an extended wave are nearly the same amplitude and duration as the other four waves of the larger impulse, giving a total count of nine waves of similar size rather than the normal count of "five" for the sequence. In a Page 23

Elliott Wave Principle nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure 6, illustrating extensions, will clarify this point.

It is quite common that one of these waves will extend, which is normally the third wave. The two other waves then tend to equal each other. In our pattern definitions we call it an Extension1 if the first wave Extends, an Extension3 if the 3rd wave extends and an Extension5 if the 5th wave extends.

Rules and guidelines

The most important rules and guidelines concerning an extended wave are:  It is composed of 5, 9, 13 or 17 waves.  Wave 2 cannot be longer in price length than wave 1, so it should not go beyond the origin of wave 1.  Wave 3 is never the shortest when compared to waves 1 and 5.  Wave 4 cannot overlap wave 1.  Wave 5 exceeds the end of wave 3.  The extended wave normally shows the highest acceleration.

Formed in which wave?  Extensions occur in waves 1, 3, 5, and in A and C waves, when compared to each other

Internal structure  As a minimum it is composed of 9 waves, though 13 or 17 waves could occur.  The minimal internal structure of the 9 waves is 5-3-5-3-5-3-5-3-5.

Note that the 3s mentioned are corrective waves, which could be composed of 5 waves in the case of a corrective triangle. Page 24

Elliott Wave Principle

C) Truncation

Bull(motive)

Figure 7

Bear(corrective)

Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, "truncation," or "truncated fifth." A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in 7. Truncation often occurs following an extensively strong third wave. Rules and guidelines The most important rules and guidelines are:  Wave 2 cannot be longer in price distance than wave 1, so it should not go beyond the origin of wave 1.  Wave 3 is never the shortest when compared to waves 1 and 5.  Wave 4 cannot overlap wave 1, except for diagonal triangles and sometimes in waves 1 or A, but never in a third wave. There should not be overlap between wave 1 and A.  Wave 5 fails to go beyond the end of wave 3.  As a guideline the third wave shows the greatest momentum.  As a guideline the internal wave structure should show alternation, which means different kinds of corrective structures.

Formed in which wave?  A failure can only occur in a fifth wave or a C wave, but normally not in the fifth wave of wave 3. Page 25

Elliott Wave Principle Internal structure  Composed of Five wave.

D) Diagonal triangle A diagonal triangle is a motive pattern yet not an impulse, as it has one or two corrective characteristics. Diagonal triangles substitute for impulses at specific locations in the wave structure. As with impulses, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, diagonal triangles are the only five-wave structures in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one. On rare occasions, a diagonal triangle may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. There are two type of diaonal:a) Ending Diagonal b) Leading Diagonal

a)Ending Diagonal

Bull(motive)

Figure 8

Bear(corrective)

An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it. A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple threes , they appear only as the final "C" wave. Page 26

Elliott Wave Principle In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement. Ending diagonals take a wedge shape within two converging lines, with each subwave, including waves 1, 3 and 5, subdividing into a "three," which is otherwise a corrective wave phenomenon. The ending diagonal is illustrated in Figures 8.

Rules and guidelines

The most important rules and guidelines are:  It is composed of 5 waves.  Waves 4 and 1 do overlap.  Wave 4 can‘t go beyond the origin of wave 3.  Wave 3 cannot be the shortest wave.  Internally all waves of the diagonal have a corrective wave structure.  Wave 1 is the longest wave and wave 5 the shortest.  The channel lines of Diagonals must converge.  As a guideline the internal wave structure should show alternation, which means different kind of corrective structures. Formed in which wave? 

Ending Diagonal triangles type 1 occur in waves 5, C and sometimes in wave 1.

Internal structure  The internal structure of the five waves is 3-3-3-3-3.

b) Leading Diagonal

When diagonal triangles occur in the wave 5 or C position, they take the 3-33-3-3 shape that Elliott described. However, it has recently come to light that a variation on this pattern occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. The characteristic overlapping of waves 1 and 4 Page 27

Elliott Wave Principle and the convergence of boundary lines into a wedge shape remain as in the ending diagonal triangle. However, the subdivisions are different, tracing out a 5-3-5-3-5 pattern. The structure of this formation (see Figure 9) fits the spirit of the Wave Principle in that the five wave subdivisions in the direction of the larger trend communicate a "continuation" message as opposed to the "termination" implication of the three-wave subdivisions in the ending diagonal. Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves. The main key to recognizing this pattern is the decided slowing of price change in the fifth subwave relative to the third. By contrast, in developing first and second waves, short term speed typically increases, and breadth (i.e., the number of stocks or subindexes participating) often expands.

Bull(motive)

Figure 9

Bear(corrective)

Rules and guidelines The most important rules and guidelines are:  It is composed of 5 waves.  Wave 4 and 1 do overlap.  Wave 4 can‘t go beyond the origin of wave 3.  Wave 3) cannot be the shortest wave.  Internally waves 1, 3 and 5 have an impulsive wave structure.  Wave 1 is the longest wave and wave 5 the shortest.  As a guideline the internal wave structure should show alternation, which means that wave 2 and 4 show a different kind of corrective structure.

Formed in which wave?  Leading diagonal triangles type 2 occur in waves 1 and A. Page 28

Elliott Wave Principle Internal structure  The five waves of the diagonal type 2 show an internal structure of 5-3-5-3-5.

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Elliott Wave Principle

Chapter 4 Corrective Wave

 Zigzags (5-3-5)  Flat (3-3-5)  Triangles(3-3-3-3-3)  Corrective Combinations

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Elliott Wave Principle

Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure. This struggle between the two oppositely trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend. As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves. Further, they occasionally increase or decrease in complexity as they unfold so that what are technically subwaves of the same degree can by their complexity or time length appear to be of different degree. For all these reasons, it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us. As the terminations of corrective waves are less predictable than those for motive waves, the Elliott analyst must exercise more caution in his analysis when the market is in a meandering corrective mood than when prices are in a persistently motive trend. The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections are never fives. Only motive waves are fives. For this reason, an initial five-wave movement against the larger trend is never the end of a correction, only part of it. Corrective processes come in two styles. Sharp corrections angle steeply against the larger trend. Sideways corrections, while always producing a net retracement of the preceding wave, typically contain a movement that carries back to or beyond its starting level, thus producing an overall sideways appearance.

Specific corrective patterns fall into four main categories:  Zigzags (5-3-5; includes three types: single, double, and triple);  Flats (3-3-5; includes three types: regular, expanded, and running);  Triangles (3-3-3-3-3; four types: three of the contracting variety (ascending, descending, and symmetrical) and one of the expanding variety (reverse symmetrical);  Double threes and triple threes (combined structures).

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Elliott Wave Principle Zigzags (5-3-5) A Zigzag is the most common corrective structure, which starts a sharp reversal. Often it looks like an impulsive wave, because of the acceleration it shows. A zigzag can extend itself into a double or triple zigzag, although this is not very common, because it lacks alternation (the same two patterns follow each other). Notice that the zigzag can only be the first part of a corrective structure. Figure 10 illustrate the example of ZigZag Wave.

Bull(motive)

Figure 10

Bear(corrective)

Rules and guidelines  It is composed of 3 waves.  Waves A and C are impulses, wave B is corrective.  The B wave retraces no more then 61.8% of A.  The C wave must go beyond the end of A.  The C wave normally is at least equal to A.

Formed in which wave?  Most of the time it happens in A, X or 2. Also quite common in B waves as a part of a Flat,

Internal structure  A single Zigzag is composed of 3 waves, a double of 7 waves separated by an X wave in the middle, a triple of 11 waves separated by two X waves (see pictures below).

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Elliott Wave Principle  The internal structure of the 3 waves is 5-3-5 in a single Zigzag, 5-3-5-3-5-3-5 in a double.

Example of a Double Zigzag

As you have noticed we have a more modern representation of the Double Zigzag using the labels WXY instead of ABCXABC. This is more consistent, since this way 2 zigzags of lower degree get connected to each other by waves of higher degree. On top if that, our automatic analysis needed such a consistent method of labeling to reach maximum performance. Instead of labeling 7 waves (ABCXABC), in our daily analysis we need to label only 3 waves (WXY). According to the same method a Triple Zigzag is represented by WXYXZ instead of ABCXABCXABC. This way the number of waves was reduced to five instead of eleven. Figure 11.

Bull(motive)

Figure 11

Bear(corrective)

Flat (3-3-5) A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 12. Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction, not surprisingly, seems to inherit this lack of countertrend pressure and terminates near the start of wave A. Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags Flat corrections usually retrace less of preceding impulse waves than do zigzags. They participate in periods involving a strong larger trend and thus virtually Page 33

Elliott Wave Principle always precede or follow extensions. The more powerful the underlying trend, the briefer the flat tends to be. Within impulses, fourth waves frequently sport flats, while second waves do so less commonly.

A) Regular Flat

Flats are very common forms of corrective patterns, which generally show a sideways direction. Waves A and B of the Flat are both corrective patterns. Wave C on the contrary is an impulsive pattern. Normally wave C will not go beyond the end of wave A. Illustrated in Figure 12.

Bull(motive)

Figure 12

Bear(corrective)

Rules and guidelines  It is composed of 3 waves.  Wave C is an impulse, wave A and B are corrective.  Wave B retraces more then 61.8% of A.  Wave B often shows a complete retracement to the end of the previous impulse wave.  Wave C shouldn‘t go beyond the end of A.  Normally wave C is at least equal to A.

Formed in which wave?

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Elliott Wave Principle  It occurs mostly in B waves, though also quite common in 4 and 2.

Internal structure  As mentioned before a Flat consists of 3 waves.  Both waves A and B normally are Zigzags and Wave C is an impulse form.

B) Expanded Flat or Irregular Flat

Bull(motive)

Figure 13

Bear(corrective)

This is a common special type of Flat. Here the B wave is extended and goes beyond the (orthodox) end of the previous impulsive wave. The strength of the B wave shows that the market wants to go in the direction of B. Often a strong acceleration will take place, which starts a third wave or an extended fifth. If the C wave is much longer then A, the strength will be less. Illustrated in Figure 13.

Rules and guidelines  It is composed of 3 waves.  Wave C is an impulse, waves A and B are corrective.  Wave B retraces beyond the end of the previous impulse, which is the start  of wave A. The C wave normally is much longer then A.

Formed in which wave?

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Elliott Wave Principle  This corrective pattern can happen in 2, 4, B and X. If it happens in 2 and C is relatively short, normally an acceleration in the third will take place.

Internal structure  It is composed of three waves, which have an internal structure of 3-3-5.

C) Running Flat

There are hardly any examples of this type of correction in the price record. Wave B goes beyond the starting level of wave A as the sentiments are towards the wave of higher degree but Wave C neither ends near the level of wave A nor above that. Wave C ends near 61.8% of Wave B.

Bull(motive)

Figure 14

Bear(corrective)

Rules and guidelines  It is composed of 3 waves.  Wave C is an impulse, waves A and B are corrective.  Wave B retraces beyond the end of the previous impulse, which is the start of wave A. The C wave do not goes beyond the starting of Wave B.

Formed in which wave?

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Elliott Wave Principle  This corrective pattern can happen in 2, 4, B and X. If it happens in 2 and C is relatively short, normally an acceleration in the third will take place.

Internal structure  It is composed of three waves, which have an internal structure of 3-3-5.

Triangles(3-3-3-3-3) Triangles appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles contain five overlapping waves that subdivide 3-3-3-3-3 and are labeled a-b-c-d-e. A triangle is delineated by connecting the termination points of waves a and c, and b and d. Wave e can undershoot or overshoot the a-c line, and in fact, our experience tells us that it happens more often than not. There are two varieties of triangles: contracting and expanding. Within the contracting variety, there are three types: symmetrical, ascending, and descending. A triangle is a corrective pattern, which can contract or expand. Furthermore it can ascend or descend. It is composed of five waves, each of them has a corrective nature

A) Contracting Triangle

.

Contracting Triangle is a pattern where the size of the triangle keeps on

contracting as the pattern is formed and wave E is the shortest wave and wave A will be longest.

Rules and guidelines  It is composed of 5 waves.  Wave 4 and 1 do overlap.  Wave 4 can‘t go beyond the origin of wave 3.  Wave 3 cannot be the shortest wave. Page 37

Elliott Wave Principle  Internally all waves of the diagonal have a corrective wave structure.  In a contracting Triangle, wave 1 is the longest wave and wave 5 the shortest.  Triangles normally have a wedged shape, which follows from the previous.  As a guideline the internal wave structure should show alternation.

Formed in which wave?  Triangles occur only in waves B, X and 4. Never in wave 2 or A.

Internal structure  It is composed of five waves, of which the internal structure is 3-3-3-3-3.

B) Expanding Triangle

Expanding Triangle is the pattern where the size of the triangle keeps on increasing as the pattern is formed. The last wave E will be the longest wave and wave A will be the shortest wave. Rules and guidelines  It is composed of 5 waves.  Internally all waves of the diagonal have a corrective wave structure.  Triangles normally have a wedged shape, which follows from the previous.  In an expanding Triangle, wave 1 is the shortest and wave 5 the longest.  As a guideline the internal wave structure should show alternation. Formed in which wave?  Triangles occur only in waves B, X and 4. Never in wave 2 or A.

Internal structure

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Elliott Wave Principle  It is composed of five waves, of which the internal structure is 3-3-3-3-3.

Figure 14

Corrective Combinations Page 39

Elliott Wave Principle Double and Triple Threes Elliott called sideways combinations of corrective patterns "double threes" and "triple threes." While a single three is any zigzag or flat, a triangle is an allowable final component of such combinations and in this context is called a three." A double or triple three, then, is a combination of simpler types of corrections, including the various types of zigzags, flats and triangles. Their occurrence appears to be the flat correction's way of extending sideways action. As with double and triple zigzags, each simple corrective pattern is labeled W, Y and Z. The reactionary waves, labeled X, can take the shape of any corrective pattern but are most commonly zigzags. Many kinds of combinations are possible. Below a rather complex example has been depicted in Figure 15.

Figure 15

A Combination combines several types of corrections. These corrections are labeled as WXY and WXYXZ if it is even more complex. It starts for example with a Zigzag (wave W), then an intermediate X wave, then a Flat (wave Y) and so on. A socalled double or triple three is also a Combination, but this pattern combines Flats separated by X waves.

Rules and guidelines Page 40

Elliott Wave Principle  All types of corrective patterns can combine to form a bigger corrective  pattern.  The rules and guidelines, as mentioned for other corrective patterns apply.  A triangle in a Combination should normally occur at the end.  Corrective patterns in a Combination normally show alternation.

Formed in which wave?  Generally a Combination occurs mostly in B, X and 4, it is less common in A and rare in 2.

Internal structure  For example a Zigzag, followed by a Flat, followed by a Triangle has the following 5-3-5(Zigzag)-5-3-5(X)-3-3-5(Flat)-3-3-3-3-3(Triangle).

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Elliott Wave Principle

Chapter 5 CHANNELING

 Targets for wave 3  Targets for wave 4  Targets for wave 5  Targets for wave D and E  Targets in a Double Zigzag

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Channeling is an important tool not only to determine which sub waves belong together, but also to project targets for the next wave up.

Channels are parallel lines, which more or less contain the complete price movement of a wave. Although the trend lines of a Triangle are not parallel lines, they will also be considered as a channel. Underneath you see an example of a channel in an impulsive wave and all channels in a corrective wave. Note that all patterns in the section ―Patterns‖ show their channels.

The picture of the corrective structure labeled A, B, C shows clearly how channels indicate which waves should be grouped together.

Figure 16

Waves of the same degree can be recognized by drawing channels. Especially this is the case for Impulse (5) wave structures, Zigzags and Triangles. If these waves do not equate properly, you have a strong indication to search for an alternative count. Next is how to draw channels and how to project targets using channels.

Targets for wave 3

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Elliott Wave Principle To begin with you should draw a channel as soon as waves 1 and 2 are finished. Connect the origin of wave 1, which has been labeled as zero, and the end of wave 2. Then draw a parallel line from the top of wave 1.

Generally this channel is regarded as not being very useful, but it is. First of all, the parallel line serves as an absolute minimum target for the 3rd wave under development. If the 3rd wave can‘t break through the upper line or fails to reach it, you are probably dealing with a C wave instead of wave 3.

Furthermore the base line from 0 to wave 2 serves as a stop. When this base line gets broken, there is a strong probability that wave 2 (or B) gets more complex, thus wave 3 or C has not begun yet.

Keep in mind that wave 3 is normally the strongest wave and often will go far beyond the upper trend line.

Figure 17

Targets for wave 4

As soon as wave 3 is finished you can draw a channel by connecting the end of wave 1 and wave 3 with a trend line and drawing a parallel line from the end of wave 2. In this way you can project a target for wave 4. Keep in mind that normally Page 44

Elliott Wave Principle the base line from wave 2 will be broken slightly by the price action of wave 4. The base line serves as a minimum target for wave 4. If wave 4 doesn‘t come near the base line at all, this is a sign of a very strong trend. You are probably still in wave 3 or you should get ready for a blow off in wave 5.

Figure 18

Targets for wave 5

Method 1 As soon as wave 4 is finished you can draw a channel connecting the end of wave 2 and wave 4 with a trend line by drawing a parallel line from the end of wave 3. In this way you can project a target for wave 5. In most cases wave 5 will fail to reach the upper trend line, except when you are dealing with an extension in wave 5 or when wave 3 has been relatively weak. In an extension, which is also indicated by high volume and momentum indicators, a throw over can occur.

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Elliott Wave Principle

Figure 19

Mostly wave 3 is the strongest wave showing a very fast acceleration relative to waves 1 and 5. If wave 3 indeed shows a nearly vertical rise or decline, then draw a trend line connecting wave 2 and 4 and draw a parallel line from wave 1(!). This parallel line will cut through wave 3 and will target wave 5. Experience shows this to be a very valuable channel.

Figure 20

Targets for wave D and E

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Elliott Wave Principle As soon as wave B is finished you can draw a trend line connecting the origin of wave A and the end of wave B to get a target for wave D, provided a triangle indeed is developing. This is more certain after completion of wave C.

As soon as wave C is finished you can draw a trend line connecting wave A and the end of wave C to get a target for wave E. Wave E almost never stops at the trend line precisely, it either never reaches the trend line or it overshoots the trend line fast and temporarily.

Figure 21

Targets in a Double Zigzag

Drawing a channel is very useful to separate Double Zigzags from impulsive waves, which is difficult since both have impulsive characteristics. Double Zigzags tend to fit a channel almost perfectly, while in an impulsive wave the third wave clearly breaks out of the channel.

Figure 22

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Chapter 5 FIBONACCI RATIO

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The Fibonacci series are a mathematical sequence in which any number is the sum of the two preceding numbers. The sequence goes as follows: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on. The properties of this sequence appear throughout nature and in the arts and science. Most notable is the ratio of 1.618 which is called the ―Golden Mean‖. It was discovered even in ancient times. The number can be approached by dividing a Fibonacci number by its preceding number as the sequence extends into infinity. The ratio of .618 is also very prominent when analyzing Fibonacci relationships. The wave counts of the impulse and corrective patterns 5 + 3 = 8 are Fibonacci numbers.

Analyzing Fibonacci relationships between price movements is important for several reasons:  You can control your wave analysis.  The better the Fibonacci ratios of your wave count, the more accurate your count is, because in some way or the other all waves are related to each other.  You can project realistic targets once you have distinguished different scenarios, which point in the same direction.  Since Fibonacci manifests itself in the proportions of one wave to another, waves are often related to each other by the ratios of 2.618, 1.618, 1, 0.618, 0.382 and 0.236. This fact can help you in estimating price targets for expected waves. If , for example a wave 1 or A of any degree has been completed, you can project retracements of 0.382, 0.50 and .618 for wave 2 or B, which will give you your targets.  Most of the time the third wave is the strongest, so often you will find that wave 3 is approximately 1.618 times wave 1.  Wave 4 normally shows a retracement, which is less than wave 2, like 0.236 or 0.382. If wave three is the longest wave, the relationship between wave 5 and three often is 0.618.  Also wave 5 equals wave 1 most of the time.  The same relationship can be found between A and C waves. Normally C equals A or is 1.618 times the length of A.

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Elliott Wave Principle  You can even combine waves to find support and resistance zones. For example the next price movement of wave 1 and 3 times 0.618 creates another interesting target for wave 5.  It is worthwhile to experiment a lot with your wave count, Fibonacci will help you to solve the rhythm of the markets.

Expected Targets

Wave 1 The first wave of a new impulsive price movement tends to stop at the base of the previous correction, which is the B wave. The often coincides with a38.2% or a 61.8% retracement of the previous correction.

Wave 2 Wave 2 minimally retraces 38.2% and mostly 61.8% or more of wave 1. It often stops at subwave 4 and more often at subwave 2 of previous wave 1. A retrace of more than 76% is highly suspicious, although it doesn‘t break any rules yet.

Figure 23

Above Figure shows that when the correction is sharp the price retrace to 61.8% of the wave 1 and when the correction is side ways the price retrace upto 38.2%.

Wave 3

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Elliott Wave Principle Wave 3 minimally is equal to wave 1, except for a Triangle. If wave 3 is the longest wave it will tend to be 161% of wave 1 or even 26l%.

Wave 4 Wave 4 minimally retraces 23% of wave 3 and more often reaches a 38.2% retracement. It normally reaches the territory of subwave 4 of the previous 3rd wave. In very strong markets wave 4 could only retrace 14% of wave 3.

Wave 5 Wave 5 normally is equal to wave 1 or travels a distance of 61.8% of the length of wave 1. It could also have the same relationships to wave 3 or it could travel 61.8% of the net length of wave 1 and 3 together. If wave 5 is the extended wave it mostly will be 161.8% of wave 3 or 161.8% of the net length of wave 1 and 3 together.

Figure below shows the expected movements of the price in wave 5 (When there is no extension in the entire wave).

Figure 24 Figure below shows the expected movements of the price in wave 5 (When there is extension in the entire wave).

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Elliott Wave Principle

Figure 25

Wave A After a Triangle in a fifth wave, wave A retraces to wave 2 of the Triangle of previous wave 5. When wave A is part of a Triangle, B or 4 it often retraces 38.2% of the complete previous 5 wave (so not only the fifth of the fifth) into the territory of the previous 4th wave. In a Zigzag it often retraces 61.8% of the fifth wave.

Wave B In a Zigzag wave B mostly retraces 38.2% or 61.8% of wave A. In a Flat, it is approximately equal to wave A. In an Expanded Flat, it usually will travel a distance of 138.2% of wave A.

Wave C Wave C minimally has a length of 61.8% of wave A. It could be shorter in which case it normally is a failure, which foretells an acceleration in the opposite direction. Generally wave C is equal to wave A or travels a distance of 161.8% of wave A. Wave C often reaches 161.8% of the length of wave A in an Expanded Flat. In a contracting Triangle wave C often is 61.8% of wave A. Page 52

Elliott Wave Principle

Figure 26

Wave D In a contracting Triangle wave D often travels 61.8% of wave B.

Wave E In a contracting Triangle wave E often travels 61.8% of wave C. It cannot be longer than wave C.

Wave X Wave X minimally retraces 38.2% of the previous A-B-C correction; a retracement of 61.8% is also common.

Explanation of the Fibonacci Retracement example.

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Elliott Wave Principle

Figure 27

Above is the chart of Nifty where we can see an impulse wave divided into: Wave 1 which is around 50% retracement of the previous subwave ‗c‘ from 4530 to 4800.  Wave 2 retrace around 78.6% of wave 1.  Wave 3 is around 223% of wave 1.  Wave 4 retrace around 23.60% of wave 3.  Wave 5 is around 78.6% of total length of wave 1 and wave 3.

Below is the hierarchy of the whole Elliott wave patterns which is divided into Motive wave and corrective wave. Both the wave are further divided into more sub-wave and various patterns are bifurcated. (Figure 28-1 and 28-2)

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Figure 28-1

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Further Subdivision of combined corrective wave.

Figure 28-2

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Chapter 6 TRADING WITH ELLIOTT WAVE

 Design alternative scenarios by labeling a chart.  Design a trading system  Control your emotions  Trading example  Practice

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The Elliott Wave Principle provides you with the most objective and disciplined method available for trading. Only a handful of patterns exist, sometimes easy to recognize especially in strong impulsive waves. The still validated patterns tell you where the market is heading, in what way (or structure) this will happen and under what circumstances the pattern will produce a stronger probability. Also the pattern will tell you when it is no longer valid due to the occurrence of an intolerable price action. This makes it possible to exactly determine your entry and exit points, which is an outstanding characteristic of the Elliott Wave Principle. Some people, mainly those who can not successfully apply the Elliott Wave Principle themselves, will tell you either it is too complex and subjective or that the waves don‘t exist at all, suggesting the market follows a random pattern. Obviously the Elliott Wave Principle can get very complex- especially in corrective waves- since you will have to look for patterns, which contain patterns, which contain patterns etc. etc. But it will never lose its objectivity if you apply the rules and guidelines. The only problem is that sometimes it is not totally clear if the internal structure of a wave is a 3 wave or a 5 wave. In that case you will have to determine alternatives for both internal wave structures and look for other confirmations, such as channels, indicators and Fibonacci ratios. Below the key steps for Elliott Wave analysis and supply basic trading patterns to search for. Now you can use the Automatic Analysis, to trade profitably. The more probable an outcome the better the opportunities. The more the alternatives point in the same direction the more certain that the market will move accordingly. The Automatic analysis will generate an ever objective and consistent wave count and will always present the most probable outcome first, through applying objective rules and guidelines and through implementing a true Elliott Wave model. Those who really would like to learn the Elliott Wave Principle must study the ins and outs. In the following, we offer some directives. These directives come from our own experience as well as from many publications on this subject. Of course every trader or analyst should find his own path to success.  Study the patterns mentioned under the section 1, 2, and 3 Page 58

Elliott Wave Principle  Know the rules and guidelines.  Learn the internal structure of the patterns, which will enable you to recognize a pattern within a pattern.  Remember that only waves 1,3,5, A and C can be impulsive waves.  All other waves are corrective, against the trend, and show overlap in their internal structure.

Design alternative scenarios by labeling a chart.

1. Start labeling a chart by taking into account the following rules and guidelines:  Separate impulses from corrections. An impulse normally shows acceleration and no overlap, a correction shows a sideways pattern.  Waves of the same degree should have the same proportions, which is especially important for waves 2 and 4. A minuscule 4th wave cannot belong to a big wave 2 and so on.  Wave 2 can never retrace more than 100% nor go beyond the origin of wave 1.  Wave 3 normally is the longest wave and shows the most powerful acceleration.  In wave 3 there is never an overlap between wave 4 and 1, as occurs in fifth waves and first or A waves.  Label the big picture, is it a three or a five?  Label more in detail, by labeling the smaller wave degrees initially, then go back to the large wave degrees, changing your labels if necessary.  Check if the required internal structure of your waves, comply with the rules and guidelines. For example a B wave never can consist of five waves and so on.  Check if the internal structure of the internal structure is correct. For example an (expanded) Flat consists of a 3 wave, again a 3 wave and a 5wave structure. If this is not true, change your labeling.  Check your wave count for alternation, especially with waves 2 and 4. If wave 2 showed a simple Zigzag, wave 4 should show a complex pattern. Page 59

Elliott Wave Principle  A corrective pattern mostly minimally carries into the territory of the 4th wave of the previous impulse wave.  Within a 5-wave impulse, two waves will tend to equality. If wave three is the longest, wave 5 will tend to equality with wave 1.  Use momentum indicators and volume to support your wave labeling. Wave 3 should have the highest momentum and volume (if it is the longest wave).  Calculate the Fibonacci relationships. If your wave count reveals a lot of reasonable Fibonacci ratios, you have found an interesting count.  Draw channels and determine if your wave count more or less fits these channels. The better the fit, the better the count.

2.

Design as many scenarios as the Wave Principle allows, with regard to the wave degree or time frame you are analysing.

3. Do the same for shorter and longer time frames (or lower and higher wave degrees) and try to narrow down alternatives by fitting them to a multiple of wave degrees. 4. Assess the probabilities of these scenarios by studying their compliance with the permitted internal wave structure, the outcome of the Fibonacci ratios and the fit of the channels.

5. Draw the expected price action and pattern of each scenario you have designed, mark price levels where you get signals to enter or exit the market.

Design a trading system

 Determine what time frame (or wave degree) you would like to trade.  Determine which patterns and alternative wave counts give the best trading opportunities, such as when several alternatives all produce a price movement in the same direction.  Determine objective entry points based on patterns.  Determine objective exit points, also based on patterns. You should for example exit a trade when a price movement makes your preferred wave count invalid. Page 60

Elliott Wave Principle

Control your emotions  Don‘t be afraid to take a loss if your stop gets hit. This means you will have to admit you were wrong on this trade. Don‘t be afraid of loosing the (little) profit you have made and only exit if your system or wave analysis tells you to.  Follow the rules of the Elliott Wave Principle and don‘t second-guess the market. Believe what Elliott Wave theory tells you, your stop will protect you.  Of course there will be loosing trades, a 100% score is impossible. But if you limit your losses (by executing your stop) and let your profits run, you should be very successful. So maintain your discipline and learn from all trades.

Trading example

In this section you will be shown how to recognize an impulsive wave from a corrective wave. In the same way as these basic patterns are compared and analysed here, you can do it yourself with all other patterns. Suppose the market has experienced a big sell off. From the low it starts to rise. Wave 1 (or A) and wave 2 (or B) have been completed and the market starts to rise again. The first picture shows two scenarios possible, either an impulse (1,2,3) or an A,B,C correction. The pictures thereunder demonstrate which price action to expect in an impulse or in a correction:

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Elliott Wave Principle The pattern can be an impulse only if the 4th wave does not overlap the first, a level indicated by the horizontal ―stop‖ line. As soon as the price drops under this line- before wave 5 has been completed- you have your first signal of a pending correction (picture above at the right). This correction will be confirmed when the price drops under the origin of wave C, which is the end of wave B. Provided it doesn‘t drop under the ―confirmation‖ line, it could still be an extended 3rd wave that subdivides. In that case the C or 3 wave is only wave 1 of the third wave! You will find the pattern called extension under the chapter ―Patterns‖.

Practice Now we will try to apply the theory above in practice, step by step.

Figure 29-1

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Elliott Wave Principle In the previous graph you have already recognized a structure consisting of three waves. Because there are three waves, we are dealing with a correction, which is a movement against the trend. Therefore the long-term trend is up and a new high will be reached. Underneath will be shown what happened next. Basically there are two scenarios which could develop. Firstly the correction could be terminated at point C and (2), finishing a Single Zigzag. Secondly a Flat or Expanded Flat could be developing. Then this market at the minimum will reach its high in a 3-wave structure, decline again to approximately point C and (2). Thereafter the larger uptrend will resume and the market will reach uncharted territory. With the above in mind it is crucial to determine if the rise will have the form of a 3 wave or a 5 wave. Let‘s take a look at the picture:

Figure 29-2

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Elliott Wave Principle To conclude, let‘s take a look at the following price action: By just looking at its form- the pattern has no overlap, you can tell this definitely is a 5 wave, not a 3 wave and indeed it reached the old high at 3000. This 5- wave is the first wave of a larger wave degree, also composed of five waves. Therefore a minimal price increase of 25% (the same as wave 1) for the larger wave 3can be

Figure 29-3 calculated, which projects a target of approximately 4000.

Since the above chart displays the price action of the Dow Jones, we all know what happened. The market corrected a bit, accelerated again and met a major resistance at 4000 as the following picture demonstrates. Around 4000 again a correction developed, indicating that the main trend was still up and projecting even higher targets.

The same patterns evolve over and over again, enabling you to forecast the markets and explain what happened afterwards. Simple, but effective trading strategy. Since all patterns or their sub patterns are either 3 wave or 5 wave structures, it Page 64

Elliott Wave Principle follows that at the minimum always three waves will occur, no matter what happens. Therefore if you concentrate on the 3rd wave, which will be a wave 3 in an impulse or wave C in a correction, you have a strong probability of making a profit.

The charts in the following pictures give an example of this strategy in a rising, as well as a declining market.

Figure 29-4

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Figure 29-5

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Elliott Wave Principle

Chapter 7 ELLIOTT WAVE AND OTHER INDICATORS

 Relative Strength Index (RSI)  Moving Averages  Moving Average Convergence Divergence (MACD)  Momentum  Rate of Change

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Relative Strength Index (RSI) Relative Strength Index (RSI) is an oscillator developed by J. Welles Wilder, JR. It is a very popular indicator and useful when applying the Elliott Wave. RSI measures the strength of any price action by monitoring changes in its closing prices. It is a leading or a coincident indicator, it never lags the price action. The RSI indicator fluctuates between 0 and 100. Horizontal reference lines in the RSI are often drawn at 30 and 70.

Trading RSI

RSI can give several buy or sell signals, which are divergences, patterns, trend lines and the absolute level of RSI, the RSI levels as already mentioned. Divergences are the most important signals.

Tip : Look for a divergence in the RSI within an impulse wave of any degree, which is very helpful to determine a third wave. Normally a third wave shows the most extreme reading of the RSI, the fifth wave should fail to surpass the low or high of the RSI, set in the third wave of the same degree.

Divergences between RSI and prices give the strongest buy and sell signals. Normally this happens at tops and lows in an impulsive wave, which consists of five waves. If the C wave is equal in length to wave A, the RSI should also show a divergence. Generally a divergence indicates that the trend is weak and ready to reverse.

A bullish divergence gives a buy signal, when prices fall to a new low but RSI fails to make a new low. You can buy as soon as the first RSI low has been below its lower reference line (for example at 30) and the second low of the RSI happens above the reference line. See below Figure 30

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Elliott Wave Principle A bearish divergence works exactly the same, but the other way round. It gives sell signals. You can sell as soon as the first RSI high has been above its higher reference line (for example at 70) and the second top of the RSI happens underneath the reference line. Trend lines, support and resistance lines, and patterns, like ―head and shoulders‖, work fine with RSI. Because RSI leads the price chart, it often gives early warnings of likely trend changes. RSI trend lines are enetrated before it happens in the price chart and patterns can be completed a few days before completion in the price chart. Of course the fifth wave of a RSI mostly is a failure, except when the fifth wave is an extension.

RSI levels indicate that above 70 the market is overbought, which calls for a correction, although the RSI can reach 80 and more in a bull market. Under 30 the market is oversold, so a rise can be expected, but be careful because in a bear market

Figure 30

a RSI beneath 20 is quite common. So when the RSI goes above 70 and certainly above 80, look for a selling opportunity. Beneath 30 and certainly 20 look to buy.

The chart above is shows the price movement of Tata Steel. After the completion of impulse (motive) a correction of sideways is formed. Now have a look Page 69

Elliott Wave Principle at RSI indicators. A divergence is seen from a mid of Jan to Feb which gives a selling signal. But Elliot Wave counts show a expanded flat pattern followed B wave(Zig Zag) and then a impulse wave in final C wave. RSI is above 70 right from the wave , which indicate selling signals. But price is making a higher high and failing to go below base of wave 4.

Moving Averages

Moving averages can be calculated as a simple moving average, which gives each day an equal weight. Also, an exponential moving average can be calculated, where the latter days are heavier weighted.

A 10-day MA shows the average price for the past 10 days, a 30-day MA shows the average price for the past 30 days. A moving average normally will be displayed in the price chart as a line, by connecting each day's MA values.

Tip: Experiment with different time periods for a moving average and try to figure out for the waves in a pattern if and by how much the MA line gets penetrated by prices when using a specific period.

For example in a third wave or a C wave- if the time period has been set correctly- the moving average line should not be penetrated after it has been broken by the price. Wave 4 will break the moving average line, which tells you the end of the trend is near.

With a moving average you can see the main trend more easily, because it filters out the small price movements. When it rises, the moving average shows that investors become more optimistic. When it falls, investors become more pessimistic.

An exponential moving average (EMA) is a better trend-following indicator than a simple MA, because it responds faster to the latest price changes than a simple MA and skips older data which are less relevant. Page 70

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Trading Moving Averages

For the investor moving averages are most helpful in following the trend. The direction of its slope in each time frame tells you what the trend of this specific time frame is. Be sure to trade in the direction of the trend of the time frame you use. When you are trading a trend, you can use a short term MA as a stop

In the price chart you could also display a short term MA and a longer term MA. When the shorter term MA crosses the longer MA in upward direction this is a buy signal, which confirms the uptrend. When it dips under the longer term MA this is regarded as a sell signal. Be careful with this signal, because a sideways market shows a lot of crossovers and thus a lot of false signals.

You can also use a moving average as a stop. The shorter your investment horizon the shorter your moving average should be. As soon as prices break the moving average line you can close your position. This can be very useful if you want to invest in a third wave only.

In Figure 31 you can see the moving averages (10, 25, 50). A signal is given when a shorter days of moving averages cross a longer days of moving averages. A 10-MA crosess 25-MA at a price of 4850 and 25-MA crosses 50-MA around 5150. Both signal are given when the Wave 3 was started. A Elliott wave analyst would have entered the rally either at the start of wave 3 (after confirmation) or wave 1. Thus Elliott wave helps to enter the market at the right timing.

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Figure 31

In Figure 31 you can see the moving averages (10, 25, 50). A signal is given when a shorter days of moving averages cross a longer days of moving averages. A 10-MA crosses 25-MA at a price of 4850 and 25-MA crosses 50-MA around 5150. Both signal are given when the Wave 3 was started. A Elliott wave analyst would have entered the rally either at the start of wave 3 (after confirmation) or wave 1. Thus Elliott wave helps to enter the market at the right timing. However moving averages help us to confirm the trend of the market.

Moving Average Convergence Divergence (MACD) Gerard Appel has constructed a more advanced indicator, called the Moving Average Convergence-Divergence, or MACD, which is built of three exponential moving averages. It is displayed as two lines, the MACD line and a the Signal line. The MACD line is built out of two exponential moving averages (EMAs). The signal line is built from the MACD line smoothed with another EMA. The MACD line responds more quickly to changes in prices. Buy and sell signals occur when the fast MACD line crosses above or below the slow Signal line.

Trading the MACD Page 72

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You can use the crossovers of the MACD and  signal lines to trade with the trend of the market.  The fast MACD line crossing above the slow Signal line gives a buy signal,  The fast MACD line crossing below the slow Signal line gives a sell signal

Also you can look for divergences as explained with the RSI to determine the momentum of the market. Again a wave 3 should have the lowest (bear market) or highest (bull market) MACD. Divergences in the MACD don‘t work on longer term.

Figure 32

The above figure shows the price movement of ABB where the price has formed a triangle shaped falling wedge (Ending Diagonal). But when you have a look at MACD indicator the indicator is showing a divergence which gives a rising signal of the price. The price of the stock is making a lower low but the price MACD indicator is making a higher low. Normally this gives a buying signal but the falling diagonal which divides into a, b, c, d and e states a fall in price.

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Elliott Wave Principle MACD can be used as a indicator as a divergence which states that there is a end of the current corrective trend and the new wave or reversal trend is going to start. Thus thought MACD is a lagging indicator it helps to forecast the change in trend.

Momentum The Momentum indicator shows how strong the trend is by measuring its acceleration. The faster Momentum gains or loses speed the more the trend accelerates. This is a leading indicator, which usually reaches a peak before prices reach their highs and reaches a low before prices reach their lows.

Trading Momentum The trend is up as long as Momentum gets higher and higher, you can normally hold on to your bullish positions. As long as it keeps reaching new lows, you can hold on to your short trades. Every time Momentum reaches a new high, the uptrend is still accelerating. Every time Momentum reaches a new low, the downtrend is still accelerating.

When the direction of Momentum changes, without having set a divergence already, be prepared for a reversal. You can use Momentum to catch large trends, for this purpose use a longer time frame. If you want to spot changes in the trend quickly, then use a shorter period Momentum.

When the direction of Momentum changes the pattern could be the third of a C wave or the third of a five wave. A small correction will take place to form the 4th wave. The fifth wave still has to develop in the same direction of the trend. When this fifth wave is underway, you can cover your shorts or sell your longs.

Again a divergence is one of the most powerful signals, which normally occurs in every five-wave structure. The bigger the divergence the sharper the reversal can be. If Momentum fails to make a new high or low, this could be a C wave or a five-wave structure, which depends on the wave structure of larger degree.

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Elliott Wave Principle If you can recognize five waves in a C wave in a larger trend, which points to the opposite direction, and at the same time Momentum makes a lower top or a higher low, it is better to close your (trend following) positions at once. After a C wave the reversal could be quite sharp. On the other hand, if the larger trend is still up, this only could be wave 3 with wave 4 and 5 to follow. Here you could hold on to your positions depending on the wave degree you have determined. In a larger degree a bigger reversal can be expected, making it worthwhile to exit. Later on you could possibly reenter at a better price.

You can also draw trend lines or channels to identify support and resistance in indicators. Usually Momentum breaks through its resistance a long time (relatively speaking) before prices do. See chart below Figure 33 for example.

Figure 33 The gold have now completed the correction pattern of wave ABC . As you can see in the chart that wave C went up forming a 5 wave pattern. After a correction of wave 4 the price of gold went up again higher then wave 3, but the momentum indicator made a lower high. Thus this indicated that the end of wave C.

Rate of Change

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Elliott Wave Principle Rate of Change is quite similar to Momentum, since it also measures the strength of a trend. The only difference is that Rate of Change is calculated differently. It divides today's price by a past price. The faster Rate of Change gains or loses speed the more the trend accelerates. This is a leading indicator, which usually reaches a peak before prices reach their highs and reaches a low before prices reach their lows.

Trading Rate of Change (ROC) The trend is up as long as Rate of Change gets higher and higher, you can normally hold on to your bullish positions. As long as it keeps reaching new lows, you can hold on to your short trades positions. Every time Rate of Change reaches a new high, the uptrend is still accelerating. Every time Rate of Change reaches a new low, the downtrend is still accelerating.

When the direction of Rate of Change changes, without having set a divergence already, then be prepared for a reversal. You can use Rate of Change to catch large trends, for this purpose use a longer time frame. If you want to spot changes in the trend quickly, then use a shorter period for Rate of Change.

When the direction of Rate of Change changes, the pattern could be the third of a C wave or the third of a five wave. A small correction will take place to form the 4th wave. The fifth wave still has to develop in the same direction of the trend. When this fifth wave is underway, you can cover your shorts or sell your longs.

Again a divergence is one of the most powerful signals, which normally occurs in every five-wave structure. The bigger the divergence the sharper the reversal can be. If Rate of Change fails to make a new high or low, this could be a C wave or a five-wave structure, which depends on the wave structure of larger degree.

If you can recognize five waves in a C wave in a larger trend, which points to the opposite direction, and at the same time Rate of Change makes a lower top or a higher low, it is better to close your (trend following) positions at once. After a C wave the reversal could be quite sharp. On the other hand, if the larger trend is still Page 76

Elliott Wave Principle up, this only could be wave 3 with wave 4 and 5 to follow. Here you could hold on to your positions depending on the wave degree you have determined. In a larger degree a bigger reversal can be expected, making it worthwhile to exit. Later on you could possibly reenter at a better price. See momentum chart below Figure 34 tops for example.

Figure 34 The chart above show the similar type of pattern and formation where the price is in the corrective trend and the wave 5 structure is formed downwards which state that the either end of wave C or Wave A. The formation of pattern in ending diagonal and the ROC indicator is moving positive. The price of the stock is making lower low and the ROC is making higher high, thus stating the end of the current trend and reversal can be seen ahead.

Below are the figure of us dollar index (Fig 35) and Nifty (Fig 36) which shows that the formation of Elliott wave patterns are formed and once the patterns is confirmed the market move into predictive movement.

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Figure 35

Figure 36

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Findings After completion of the project and analyzing the charts in chapter 6 and 7 I have came down to various findings:  Elliott wave theory is applicable in the equity market to forecast the movement of the price.  Price move in similar patterns over a period of time.  Other Technical indicators are lagging indicators as compared to Elliott wave analysis.  Elliott wave theory help us to be precise about the expected movement of the price in stock.  However other technical analysis indicator can be used to identify the changing trend of the market.

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Conclusion  The Elliott Wave theory requires a high degree of subjectivity, which is one reason why using the theory can be so problematic - finding agreement among Elliott Wave practitioners can be rare.  The most basic tenet of Elliott Wave theory is that market movements are based on crowd behavior, which can be predicted.  Traders, however, may often recognize a market move only after it has occurred.  Trading with Elliott Wave means applying a principle that is true for all trading in general: expectations must be realistic, and money management is key to profitability over the long-term; that is, losses must be kept small and profits must be allowed to accumulate.  One way to use Elliott Theory is to find specific parts of the theory and transform them into a workable trading system in which risk can be carefully controlled.  Approaching Elliott Wave may also mean putting less emphasis on the correct wave count, and more attention on determining the count that has the least penalty for being wrong. A trader can still be profitable if he or she determines the primary direction of the trend, properly differentiates between the primary and corrective waves, and uses tight stops and realistic profit targets.

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Recommendation  One can make use of the various Elliott Wave trading software program to analyze the price movement and wave.  Use of GANN chart and Fibonacci Time Wave Sequence can be used for identifying the changing trend.

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