What Happens After Elliott Wave 5?
A fifth wave extension often appears during bull markets. It may take the form of either a zigzag, flat, or combination formation and typically covers 161.8% of the distance covered by waves one and three.
News has been mostly positive and fundamental analysts are increasing earnings estimates, while prices quickly climb higher and most market participants become bullish.
Wave 5
Counting waves in an intricate corrective wave pattern may not always be straightforward, but there are some guidelines that can assist with counting them.
Rule of Alternation – this principle states that waves of equal magnitude must take alternative forms; so for example a sharp move in Wave 2 must be corrected with milder action in Wave 4.
Another important guideline involves waves of the same degree. Normally, wave 5 travels 61.8% further than wave 1, and this ratio can also be expressed as the ratio 0.618a:b.
Once you determine whether a price movement is an impulse or corrective, identifying patterns should become much simpler. You can draw a channel connecting waves 1 through 4 with an upward trend line to project up into wave 5.
Wave 6
Elliott Wave Theory provides us with guidelines that apply to each wave in an impulse, known as guidelines since they don’t need to hold up 100% of the time but should hold enough for traders to use. These guidelines play a big role in its success allowing us to find smaller patterns within larger ones and predict where markets may head next.
Wave three is often the largest and most powerful wave in any trend. By its end, news becomes positive and investors become bullish; this is when most average investors jump onboard, just prior to market tops.
Prices tend to retrace less than 61.8% of their wave one gains during this wave and tend to extend in a triangle formation. Furthermore, this wave follows the principle of alternation; which stipulates that any sharp move during wave two must be followed by more complex movement during wave four.
Wave 7
Elliott wave theory states that prices tend to move in cycles consisting of impulses and corrections on all levels of trend. A five-wave move upward in one trend will always be followed by three waves in its opposite direction; these tendencies do not dictate their course but can provide invaluable guidance for investors and traders.
Correction waves typically retrace much of the advance made during an impulse wave, which creates non-confirmations and subtle signs of weakness in the market, such as weaker stocks. The second wave typically unfolds as either double zigzags or flats and often coincides with expanding volumes.
The third wave typically extends the first, usually traveling 61.87% of its net length (wave 1-3). Wave four’s retracement usually averages approximately a.382, also being an important Fibonacci ratio in this pattern.
Wave 8
Truncation occurs when Wave 5 fails to advance beyond the pivot point of Wave 3. This typically happens more frequently after Wave 3 was particularly strong; therefore it should serve as an indication that overextension has set in and any subsequent decline could be deeper than expected.
An abrupt endpoint to Wave 5 could only occur due to an extended Wave 3, complex W4, or due to mislabeling.
Elliott wave traders frequently make the costly error of mislabeling impulse sequences incorrectly. One such costly error involves closing trades due to indicator divergence without validating it with price movement.
Comments are closed here.