So it’s important for the investor to carefully assess the probability of each interpretation. At any time, two or more valid wave interpretations usually exist. Instead, it gives you an objective means of determining the probability of a future direction for the market. It does not provide certainty about any one market outcome. This illustrates an important point concerning the Wave Principle. According to each of these interpretations though, the next imminent movement is likely to be upward. Another possibility is that the waves labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger impulsive downtrend, as shown in the “Alternate” interpretation at the bottom of the chart. It is also possible that wave (2) hasn’t ended yet it could develop into a more complex three-wave structure before wave (3) gets underway. Figure 2īut this is not the only possible interpretation. So far we’ve seen a five-wave move up, followed by a three-wave move down. Say we’re studying a market that has reached the point shown in Figure 2. Only then can he interpret where the market is and where it’s likely to go. Step 2: Trends and Turns The analyst’s first task is to look at charts of market action and identify any completed five-wave and three-wave structures. These corrective waves are themselves made up of three subwaves. Waves labeled with a B, however, are corrective waves they move in opposition to the trend of the next larger degree (in this case, they move upward against the downtrend). (In Figure 2 below, waves A and C are in the same direction as the larger wave (2).) Note that because they are impulsive, they themselves are made up of five subwaves. This means they too move in the same direction as the next larger trend. Within a corrective wave, subwaves A and C are usually smaller-degree impulsive waves. Note that regardless of the size of the wave, each wave one peak leads to the same result a wave two correction. At that point, again, a three-wave correction of the same degree occurs, labeled as wave 2. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree, labeled as wave 1. It also warns us to expect a three-wave correction - in this case, a downtrend. The next larger degree of trend is also upward. The impulsive structure of wave (1) tells us that the movement at In the above illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive sequence, labeled wave (1). As Figure 1 shows, these basic patterns build to form fiveand three-wave structures of increasingly larger size (larger “degree,” as Elliott said). It moves against the trend of the next larger size. A corrective wave is divided into three subwaves. It moves in the same direction as the trend of the next larger size. The Basic Pattern Elliott’s pattern consists of “impulsive waves” and “corrective waves.” An impulsive wave is composed of five subwaves. Elliott some 60 years ago in the financial markets. And it is precisely the model identified by R.N. This emerging science is called “fractal geometry.” It is one of the most exciting branches of Chaos Theory. The patterns then build on themselves to form similar designs at a larger size, and then the next size up, and so on. Generally, these systems unfold in patterns of “punctuated growth” that is, periods of alternating growth and non-growth, or even decline. Examples include the weather, botany, geography and even human physiology. Recent discoveries have confirmed that patterns exist in many natural systems even systems that previously appeared to be random. The idea that market prices are patterned was intensely controversial just a few years ago. Step 1: Pattern Analysis At its most basic level, wave analysis is simply the identification of patterns in market prices. And that, in turn, gives you guidance as to where you might enter and exit positions for the highest probability of success. The Wave Principle also gives you a method for identifying at what points a market is most likely to turn. The Elliott Wave Principle The Concept When investors first discover the Wave Principle, they’re often most impressed by its ability to predict where a market will head next.
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