Ralph Nelson Elliott is the founder of the Elliott Wave Theory

Basic tenets of the elliot wave theory

Three important aspects of wave theory
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Pattern : refers to the wave patterns or formations ( the most important element of the theory ) Ratio : useful in determining retracement points & price objectives by measuring the relationships between the different waves Time : time relationships also exists and can be used to confirm the wave patterns & ratios ( but are considered by some elliotticians to be less reliable in market forecasting )

Describtion of Elliott wave with photos

1.

the theory says that the stock market follows a repetitive rhythm of a five wave advance ( from 1 to 5 ) followed by three waves decline ( A, B & C ) one complete cycle has eight waves ( five up + three down ) waves 1, 3 and 5 called impulse waves, they are rising waves waves 2 and 4 are corrective waves because they correct waves 1 and 3 after five waves advance has been completed , a three waves correction begins

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Elliott Waves degrees or magnitude

1. 2. 3. 4. 5.

many different degrees , ranging from Grand Supercycle spanning 200 years to a subminuette degree covering only few hours the basic 8 wave cycle remains constant no matter what degree is being studied each wave subdivided into waves of one lesser degree that, in turn , can also be subdivided into waves of even lesser degree a given wave divides into five or three waves is determined by the direction of the next larger wave ( Figure 13.2 ) Important : a correction can never take palce in five waves, in a bull market , if a five wave decline is seen , this means that its probably only the first wave of a three wave ( a,b,c ) and that theres more to come on the downside , in bear market , a three wave advance should be followed by resumption of the downtrend , a five wave rally would warn of a more substantial move to the upside and might possibly even be the 1st wave of a new bull trend

Figure 13.2

Corrective Waves
Are less clearly defined and tend to be more difficult to identify and predict ( compared with the impulse waves )

Three types of corrective waves : Zig Zag Flats Triangles

1. 2. 3.

Zig Zag
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2. 3.

a three wave corrective pattern against the major trend it break down into a 5-3-5 sequence wave B falls short of the beginning of wave A, and wave C moves well beyond the end of wave A ( breaking )

Double Zig Zag

A less common variation of the zig zag model Its in effect two different 5-3-5 zig zag patterns connected by an intervening abc pattern

Flats
1. 2. 3. 4.

follows 3-3-5 pattern wave A is a 3 instead of 5 the flat is more of consildation than a correction considered a sign of strength in a bull market

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in a bull market ,wave B rallies all the way to the top of wave A , the final wave C terminates at or just below the bottom of wave A
there are two irregular variation of the normal flat correction
a. b.

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in bull market example , the top of wave B exceeds the top of A and that wave C violates the bottom of A the other variation occurs when wave B reaches the top of A , but wave C fails to reach the bottom of A , naturally .. thats a sign of market strength

Triangles

usually occur in the 4th wave and percede the final move in the direction of the major trend ( they can also appear in the B wave of an A-B-C correction) there are five waves inside the triangle therere four types of triangles in elloitt theory : Ascending , Descending , Symmetrical and Expanding minimum requirement of a triangle is 4 points , two upper & two lower. To allow drawing converging trendlines minimum price target should be measured as usual

The rule of alternation

If corrective wave 2 was a simple a-b-c pattern, wave 4 will probably be a complex pattern, such as triangle & Vice Versa

Channeling

Fibonacci Numbers
1.

The Fibonacci number sequence (1,2,3,5,8,13,21,34,55,89,144,) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next number is 61.8 percent, which is a popular Fibonacci retracement number.

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The inverse of 61.8 percent is 38.2 percent, also used as a Fibonacci retracement number ( 0.618 1 = 0.382 )
It is the ratio of the Fibonacci sequence that is important and valuable, not the actual numbers in the sequence. the most common Fibonacci retracements ratios are 62% , 50% and 38% The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352

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Fibonacci time targets

The analyst expect that future tops or bottoms will occur on Fibonacci days, that is , on the 13th , 21st , 34th , 55th , 89th ( which is Fibonacci numbers)