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Learning the Basics in Corrective Waves and Triangles



In its broadest sense, then, the Elliott Wave Principle proposes that the same law that shapes living creatures and galaxies is inherent in the spirit and attitudes of men en masse. The Elliott Wave Principle shows up clearly in the market because the stock market is the finest reflector of mass psychology in the world. It is a nearly perfect recording of man's social psychological states and trends, reflecting the fluctuating valuation of his own productive enterprise, and making manifest its very real patterns of progress and regress. Whether our readers accept or reject this proposition makes no great difference, as the empirical evidence is available for study and observation. Order in life? Yes. Order in the stock market? Apparently.


Triangles are overlapping five wave affairs that subdivide 3-3-3-3-3. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles fall into four main categories as illustrated in Figure 18. These illustrations depict the first three types as taking place within the area of preceding price action, in what may be termed regular triangles. However, it is quite common, particularly in contracting triangles, for wave b to exceed the start of wave a in what may be termed a running triangle, as shown in Figure 19.

Elliott Wave

Figure 18

Elliott Wave

Figure 19

Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, triangles nearly always occur in positions prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse, wave B in an A-B-C, or the final wave X in a double or triple zigzag or combination (see next section).

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. Figures 20 and 21 show two examples of double threes.

Figure 20

Elliott Wave

Figure 21

Elliott Wave

For the most part, double threes and triple threes are horizontal in character. One reason for this trait is that there is never more than one zigzag in a combination. Neither is there more than one triangle. Recall that triangles occurring alone precede the final movement of a larger trend. Combinations appear to recognize this character and sport triangles only as the final wave in a double or triple three.

All the patterns illustrated here take the same form whether within a larger rising or falling trend. In a falling trend, they are simply inverted.


QQQQ Chart



Putcall Ratio

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Sector Performance (Safety Stocks Are The Worst) Which would suggest reason number 297 says "interest rate" hikes are over for the time being. Voice update will explain.

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The Wave Principle is unparalleled in providing an overall perspective on the position of the market most of the time. Nevertheless, the Wave Principle does not provide certainty about any one market outcome. One must understand and accept that any approach that can identify high odds for a fairly specific outcome will produce a losing bet some of the time.

What the Wave Principle provides is an objective means of assessing the relative probabilities of possible future paths for the market. What's more, competent analysts applying the rules and guidelines of the Wave Principle objectively should usually agree on the order "of those probabilities." At any time, two or more valid wave interpretations are usually acceptable by the rules of the Wave Principle. The rules are highly specific and keep the number of valid alternatives to a minimum. Among the valid alternatives, the analyst will generally regard as preferred the interpretation that satisfies the largest number of guidelines and will accord top alternate status to the interpretation satisfying the next largest number of guidelines, and so on.

Alternate interpretations are extremely important. They are not "bad" or rejected wave interpretations. Rather, they are valid interpretations that are accorded lower probability than the preferred count. They are an essential aspect of using the Wave Principle, because in the event that the market fails to follow the preferred scenario, the top alternate count becomes the investor's backup plan.

The best approach is deductive reasoning. Knowing what Elliott rules will not allow, one can deduce that whatever remains must be the most likely course for the market. By applying all the rules of extensions, alternation, overlapping, channeling, volume and the rest, the analyst has a much more formidable arsenal than one might imagine at first glance.

Most other approaches to market analysis, whether fundamental, technical or cyclical, disallow other than arbitrarily chosen stop points, thus keeping either risk or frequency of stop-outs high. The Wave Principle, in contrast, provides a built-in objective method for placing a loss-limiting stop. Since Elliott Wave analysis is based upon price patterns, a pattern identified as having been completed is either over or it isn't. If the market changes direction, the analyst has caught the turn. If the market moves beyond what the apparently completed pattern allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately.

Of course, there are often times when, despite a rigorous analysis, the question may arise as to how a developing move is to be counted or perhaps classified as to degree. When there is no clearly preferred interpretation, the analyst must wait until the count resolves itself, in other words, to "sweep it under the rug until the air clears," as Bolton suggested. Almost always, subsequent moves will clarify the status of previous waves by revealing their position in the pattern of the next higher degree. When subsequent waves clarify the picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.

The ability to identify junctures is remarkable enough, but the Wave Principle is the only method of analysis which also provides guidelines for forecasting. Many of these guidelines are specific and can occasionally yield results of stunning precision. If indeed markets are patterned, and if those patterns have a recognizable geometry, then regardless of the variations allowed, certain price and time relationships are likely to recur. In fact, real world experience shows that they do. The next section addresses some additional guidelines that are helpful in the forecasting exercise.


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