What Happens After Elliott Wave 5?
Elliot Wave theory describes market prices as fluctuating between an impulse phase and corrective phases, typically no further than wave 2’s extreme of lesser degree. Retracements usually follow zigzag patterns but may also take the form of complex corrections or diagonal triangles.
Elliott discovered patterns reoccurring on smaller and smaller scales, and claimed this knowledge could assist traders in anticipating where prices were headed.
Wave 3
As soon as a market begins correcting in Wave 2, participants who purchased at the beginning of Wave 1 begin taking profits, leading prices to fall and correcting in a strong three-wave pattern known as Wave 2. Usually this correction happens with low volume/volatility levels which indicates reduced buying pressure.
Complex corrections often feature wave B ending near its origination point in Wave A before transitioning into an expanded flat pattern known as an expansion flat correction, often followed by an impulse.
Many impulse waves contain extensions, typically in wave three. An extension is a motive wave with subwaves similar to those in its sequence; therefore it cannot overlap wave one and never represents its shortest wave; typically retracing back within range of the previous fourth wave in lesser degree.
Wave 4
After an impulse move, corrective waves typically retrace 50-61.8 percent of its prior movement. These waves tend to be relatively deep and are generally considered profitable; they may take the form of zigzags, flats, irregulars and triangles – other complex corrections may also exist but they don’t fall within this article’s purview.
Mistakenly closing trades due to indicator divergence can be extremely costly and should never be the reason to do so.
Keep an eye out for Wave 4 to be at least twice as long as W2 zigzag or three times longer than W2 flat, and should not overlap the start of Wave 1. If this occurs, your wave count could be suspect; chances are a larger ABC correction could be underway. Typically there will be a 1.618 ratio between Waves 1 and 4, the most prevalent ratio.
Wave 5
Wave 2 signals the beginnings of corrective phase by showing more choppy price action with low volume/volatility; this behavior indicates widespread recognition that the previous trend has concluded and a new one has started.
As waves B and C unfold zigzag-style and deeply retrace wave A, sentiment typically becomes increasingly pessimistic as markets retrace further; traders may become caught up in Wave 2 hoping that its momentum will resume soon enough and hope the market reverses course again to resume its previous path.
Impulse waves often experience extensions within just one of three actionary subwaves of Waves 3 and 5, giving a longer retracement than expected. Extensions usually align themselves with Wave 1 when they happen – known as “truncation”, signalling impending major trend changes as well as complex corrections rather than straightforward zigzags.
Wave 6
If the fifth wave fails to take the highs of the third wave in an impulsive move, this is known as bearish fifth wave failure – although similar phenomena could also apply for bullish impulse moves. These failures serve as an early indicator that a bottom is about to form or that a new trend has started up again.
This pattern illustrates a diagonal triangle. An diagonal triangle occurs when its a-b-c sequence always completes one of waves 2 or 4, at higher degrees than before. As with all diagonal triangles, Wave 3 must never be the shortest wave in any sequence, while Wave 4 cannot overlap with or form part of Wave 1. The basic rule states that these waves should never intersect each other either in height or length.
Failures also occur in flat patterns. A c-wave in such conditions must only retrace no more than 61.8% of its starting position on wave A; sometimes however, its length exceeds this threshold and becomes an expanding wedge pattern.
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