What Happens After Elliott Wave 5?
Elliott observed that market movements tend to occur due to changes in participant psychology; these manifest themselves through repetitive cycles known as waves.
As impulse waves end, more extensive corrections often follow – usually not crossing back over into their starting points as previously predicted by prior impulse waves.
Wave three is the strongest and most powerful phase of any market trend. At this point, most average investors begin buying into it and generally speaking the market reaches its major peak before beginning any significant correction.
Elliott Wave theory’s key principle states that corrective waves following extended 5th waves should not retrace more than half the extreme of their predecessor impulse wave at equal degrees; this rule of alternation.
An important rule to remember about impulse waves is that they always divide into five waves, with two of these waves typically alternating in shape, length, and severity. If the pattern involves leading diagonals then waves 2 and 3 may extend; otherwise they must not extend except in cases of zigzagging patterns. Following these rules will enable an Elliott Wave analysis that provides accurate forecasts.
Elliott Wave theorists believe that markets typically follow five-wave patterns. Each wave moves in the direction of an overall trend while corrective waves retrace some prior gains. Each wave possesses specific characteristics which enable Elliott Wave practitioners to identify which way a current trend is moving; for example, impulse waves tend to move swiftly while first corrective waves typically reverse less quickly than subsequent corrections.
Wave four typically follows suit with wave three in terms of its low energy or momentum levels and low prices compared to peak levels and volume, yet generally pessimistic feelings among investors remain.
Wave 4 should never retrace more than the extreme of wave 2, subdividing into a five-wave pattern and not overlapping with wave 1’s beginning; any deviation would require either an outlier leading diagonal or contracting triangle to take over and cause deviations from this rule.
Wave 5 of an impulse pattern occurs when late traders and investors join a trend, only to miss its start due to a significant price correction – typically an ABC move consisting of letters A-C.
At first, markets may appear very optimistic: Prices are moving impulsively higher and momentum indicators may reach new highs. Investors and traders may become excessively bullish; warnings by bears may even be disregarded (as happened at the peak of tech bubble in 2000).
Elliott’s rules dictate that corrective waves must never retrace more than 100% of their respective impulse wave in length, with alternated sideways movements between waves 1 and 4 (except inside triangles ). Furthermore, every corrective wave must have alternation: If wave 2 sideways, expect wave 4 also sideways.
The market never moves consistently; instead it rises and falls with waves that reflect investors’ optimism or pessimism, reflecting human psychology and driving market trends. The Elliott Wave Principle can predict market movements by analyzing impulse and correction waves of price patterns in the market.
Elliott Wave theory guidelines are fractal in nature, meaning they apply at all levels simultaneously of a chart simultaneously. Due to this characteristic, their rules and guidelines do not always hold 100% accurate when applied correctly, but still offer high degrees of precision when implemented effectively.
Elliott wave analysis starts by following this principle: Wave 3 cannot be shorter than Wave 1. Additionally, Wave 4 should not overlap with the territory occupied by Wave 1. As a general guideline, wave five duration should at least match that of wave 4. Tom Joseph’s Profit Taking Index study can give an indication of its duration.