E,lliott Wave Simplified

Making 'Stode: Market Pro,fits With R.N. ell~ott~s Simple Theory

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Mark,etpla,ce Books Col urnbla, MD

Copyr~!llnt C 200(l1 by Clil11Droke Jlubli:S:h!FNllly Mark:e~place DQoks.

.Repoodlll~tiOIl 'O( ·~r.ll~latio.n of any part of this. work beyond that permitted by K:ct-i[QiI.~07 (It 1(18 of the ]9'76 UIli~~d St:al~s Copy.right Act wltl:!(]ut. Ihe pcmmi!d,'Q~ Qilhecopyli'lght QWfI(:J" ~ ~wfttl, Req,uests fQf pel'1ni&!lion or fwt.b'tr iilU'omla;tklll 5ho~!,;l be addre.sscd too the !l"r:rmi&Sio.ntl De,p~ent at Th'at:1Ii:li:'5' Liibm:ry, (Ii'INntt fi.8()'()'272-2855 ~utQ~ TJ40)

"J'ha:; lPubfi~t.lon is ;j~lgncd to pi"-.ovide It.c·Cl!ir,l're md:liu,tnonu,tav'e mrotlrul,· ticnln n:~rd to '!:hc ~ublc,~ .IW!.~!:' ¢[J\i\e:red. U is soM with the un.der8twd, Ing lirlat 1iIl,:;idler' the author nor the publisher Is ,engaged if! KfiAering le,iP1. il/;;oolll1tiIlg, or other proft:S5lomd !;c::rvke. IT I.eg;ll advtce '0. I)ther e~pe,n: ~~i1jt.~m;;e is :rrequu~d, rhe servtces of a competent proQfe~$:I('j,.MI person ~hQ~.dd be :S011l,~t.

P,'O"~ a D~(;k+.r~lkm. a.jPrlndples jointl.y .adopted by '* C~mmj'f~ if l1;Je Amll'f"-tmn Bar Assot:M'iton, oifnd a COJnmltlell'oj'PuWfshr:r'i!,

This h-ook,. Ollong. with other books, are .-V<l!l::Jhl" :lit dlsi:mmts tl:i!U milill::Il it r<.::;ilis~ic to [lFCIl'.I!dc them <I~ 8ifu··ro }'QlJlrr ~l1il'l:r6. cik:ms, ~mL ri't!l!ff, Fm more ifiItlt.lllliltion 00. iIlcsc ,IoJJI\! l~tlng, (._t l:-ffe~tiVC p~1llI'I;5, please ;;:1II11Jo1m ~"Cr ai: 800.424.4:550 Qr c-rnaillltm. OI,,!: jghB~tu:aden;]jJ:m!j!"f,~QJa1,

Contents _ I

Introduction Otaptel"

The Basks of E1!Iiotl: Wave Theory Chapter 2

What is the ElDi<>,rt \"faye Theory?

Cha,pter3

. Correcttons

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5

29

Chlpter4

PitfuUs of theaHott W,1V1;l Theory ClfliJJ;lbil"5

EllioitWave and Technkilll. Analysis Cifiiiptel"6

The Fan PrlllC~pl,e Cbaptair';

WblottWil:\,t: and Channel Analysd.s ullaplt,el' .g

The! Rule of Alternatlon

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Chapttlr' '9

ElliuttWar~ and Volume lUlalys:is ,anapter 10

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:t:iIllott\v<!'f\o"'e and Cnntmry Opinjon Chapter 11

Fil:rered \'i;ra.ves

Chapter 12

Cencluston

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93

Appendix 1 Appendix 2 C~:apwr 13

D:ictiiOiJ1ary ofTeclmb:al Terms ,,A,bout the A"utholl'

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Suggested Reading list Internet Sites N~W5letters

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Many books haCV'C been written on !i:he Elliott Wltve Theory in recentyears, MOSit of them concern the nJdiJID'lit:nts of the theory and pcrbaplS an ,exposhJon on how the theory' may be; app:lied tttoforecasting maT'ket trends. AJ.It!()~[ v/ritllOut exceptlon.~oweve.:1~ aJ1 oi. them prc:,.;c;::ntthe theory ina rigid.. mecheriical ,~1' and ~ay down certain :ru(es~hat: are, presumed tl) he ulv!,Qll3!te. Wbat most ofthese a uthors have done is to take It. N, IDliott's original working theory-much of it hypothesis-.an.d ':ili!tt~mpt to male <'i l"entable ~a~r of lt, They merdy regurgltare what ElUion himself wrote about ills theory of technical :,ul.alys,js m die 193Us' and 194o.s with no attempt at terming or expeunding on these baste princip,]eswha1t."'Oe\'er~

It is almost tta,gk the 'way thts incredible theory of market aua.lysiis blt.;;; been left ill its primal state for. over 60 ye-an> v..-'ith op~y mar,girud impro¥em.f:fI[s made aJong the way. Ally ethe r theory Qof rech1'lk:al :ana~sis would have long since been reflned and c:mbelLished to conform to the ever-changing standards of '[,oday's Jbst-mQ,ving markets .. Not so the EUio'[t Wave Theory,

, Because it is so smgulady remarkahle and Wlique in its import and application.",few have fd.t: the ncoc:ft to add to hs pre.rept,'i;.

In the yeatS since :its discovery, the: Elliott Wave Thl;;:OI1' ha.~ proven :its reJiillhMltytimc after countless dille, It ~s, however, noe 'without ddect. It IS because of these defects thar [bis book has been wri.h:(n. We do ]lotatt'Cmpt merely to explain the meon' as most other books on the subject do. Nor do we claim. to' halo'e made "new djsr.;()yer~es" about the theerj; 'Our purpose: Isto a]low the reader to aPlPly the Emot~ Wave Theory to trading markets in ill practical. profitable manner wlth.olllt hiiN'~:nJg to :l:IeLy on the trdd:i~io,nal flawed methodt)~o,g'y inhelientt within the tenets OJ the original working theory,

-, NClthirng but careful study and r<;'aj-time market experience cam, ~:om~Jish rth~s. In short, we almwHhhli these pages to

[;LLIO'f'l' W",VE 'I!totPLIJHED :I

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help' the trader avoid th€ p:itifillll:s. '~l1n~ so many' pra.ctiJtione.r5 of

the E.l.1IjO'tt Wil.ve 'Ihoo[,}- ~DC01,mfreJi'- •

tn tll.!2 .f(lolIlo~g chaptces we wuU iL'litroduccn:<IdlLlg. :ffiiC'.tl1oc:los {;ombi.niJlgm~tlU!il)'bt W.:I!lfof: Tht:ory wirh {l:d:u::r rr.u;:,th!Ddt> of 1;)1;:1;:11- nic~J i;1.~~yl1j<5 in s m:an:mu;:1" tha~ produces optirm~ re8ul¢s-.a (:ombiiiail)oriall d~e::mi:stry, if ~'Ou will It ,lS this. ,~remef1lrt: of dytID:Jin~ ~L syrnmetry thathas been fi./Ldly l<Lc:kl.ng !Ln tlh.e devfil.op~nent of 'rrhe :EUlott Wave ThOO1"l1' 'Which, wne.nprope.rty app!1icli, .P1'Q,mis->t:',s,'~ ad,~ot:· l!~ ~heQ:!)'fa'l;" b!:;:yt)!id i~!j .p:re~:n~ $~K': md make :~t even more V€ille.rabl~ than it: :iJlre.'1d¥ Is.

Mop: dl@n i.mythitng ,~, thi:& book, ~, at. r-.i;]nm"in,g mJW;;b ,of 'tllll;:!i!iI;:lI;:dlll;:titci "dut1):er" a11ld.r;Q.mb~!!"5()rn~ r;1,d.:;::'j .tbj!:¢ :n:sm(;...i: ~tt;, !li.Sd:lIi1ness and te reduce ii.rt to i~s rn.o!ji~ rlid~ntMY CQ1npOneuts, In mort" we aim. iilitiPtc501l1Ii.ng i1 streamlined, sltnplificd Elliott Wavi::: Themy.

It :\;li, our hope that iii! t.he t:chap~ep.j that, £{'.iUoW" the I[(:!::!.deli' ~iU g~.11 a fll'em ~,er~~1g ~ S!'p~,~iiQ!!l ol, ~~;~ ~tll~kil!'ble . Lli1.eory a~d Ileam. to apply i~ to bi:1i Or :h~r Imres~e.fl~ ~~\~

wiili jl1!'oflt;ili.fe Fe$.uJ!~~,. . ~.'

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The Basics 0" the .Elli'ot~, Wave Theory

'V~'[lini:actly is the :EUiO'~t 'Wiave Theory? In C5.1!Crn.:.:::, H;. L~, ::I. w~ theory of :Pri(t mrYI.'em.c:nt: wl1.icb states that tlie' prioe of ;my·:giVco. stock or c{l,;tnmodity (wihJich '!jIIi'(: will :n:;l:et I;..(J as:'~8e£1lrlti~".in! the :R::!Ji!;iiltider' oJ Ith!ls book fur pu.r:pu",es. i),f' hit,e'i,ri.'ty) in ,:1, frct:: lIIlU':ke~ W"ill.ll':illie'l in p;~'Nkt~Lm[[]:~ w::i!1i1f:·like adv:i!Jnces aoo i!'~~:5[[)f1:l;: ltil a :s€mi'"Cyciic(l] fi'1!sh i.On,. S1m.ply put; :~[ holds ~t, pr~ce:s oJ :ilcth~ly tr:il'dcd ~t:I;:u.-i[i~8 move in wlIJ'f'{:-like mmioi'J~ in i1iri! alter,rutting patt.:::rt! trna'l nonnaJJy Involves three steps ,forwaroi fur 'CV(:1rY ~"l{) :\ibt:pS hack,

'T"he mDtt W~aJ!.,(: .Th~~'Y :Ii!'1- more thm jrnt a theory uf price :A1oV.emcnt, howeve~, H i~ above aliI ;il! pl:ill.o:!iopn.y ,of ih~,:maJl el11Otlon :l!JI!d l17(~wd beh,rv1.ol'-:a psycho logic.;::I1 thenry, Like it~ plcdeoe.-5l\lOi'; :tl:Jie Dow Theory. ill:ti b~~~::> 'ill in the behavlor of tlU[iI'Iarl:'1 in the ~tA:" Robert. Rbt:u: the great cxponmtot' tihe DO''I',' ~(i!.ry; dr;.!j,(ri'bed tbis ~11. his book, nre Dow TblO'Ory, as. follews:

.... tbe PfflgmrU;lc :basis for the theory', '"~ ~Fktttg bypDthesis if nothing mot'!:'!;.. lies ~rl bu jlj!1j:~n 'n'-!Jui'll :i't$,&if. Pr08$l'OrHy wlti drive ~ to f!t:JtCe;Ss) and rrejNnl~nt,.~ fbj~ ~}je txms(~.lrmce oJ t'bQ:\:ii!' exc'e~es wfU pro(I'l-~c;~ {~ .:::0 H"jj8PMUU~,';: tiftP:fY,/·~~~iml.

I""r r 1',"-"'1"''''1''' W~II'I""!· __ ~uull,r,.IIIr:r.. 1Ij,

Potlowing tbe darlt b'Our of ,r.:i{;!wA1lte paui«, labor' wiU b~ tban1:Jidj'{)" wha.t' t.t C.j:j!tj. get al-':d ~vill ~al,,'e -~1:tJW9l' ~~t ~r sm~ii.~,. 'wages, whUc capital U)i11 be 'Vll~tlt wW;} smfl1.li pH)jI4 a'14 quick. n:!tt.im~, i

The: !iilIDC aaumd easily he s~d of the 1.I11!!:::Ic1'lyWs baslS nfth<:

Ellh.Jt~ 'Wave thOOi'}";

''\;5;rc have stated that th,c; Wa:"I.~C Theo.ry ~'1 :l dl~(:(::nJ.aJlll· of Dnw Theorv, the lli.'S,I comprehensrve thcery of stock rnalikct at'lim~ ... d.i>. iti the WCliit'CJ'Dl world, Be:lhn: 1,)r.!1I;: tan 1'tlllr cmnp:t€he:l1J! the iillio'[Jt 'Wa'~'e 'ThI';(I[}'O'ne must nave a wotkiil'lg knowledge of tbe basics of Dow TIle(:.rv., Whi.l.e we do oot 'W1:sh to bOK the

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reilder '>1(.itli a prolix explanatio~ and hlsmry of 't1j)i8tth~Qry, W(' de f:i.(lii'li:;:~hek:!Ss feci ~t .neces.~y ro o-rk11y' tilllch en. it before i.ntMChJ.(inS. more ii1.l!lL'y UJiC Bliott. WO:liVt:··fheQ.E1~

The man Eor whomfJO'w tbeory was named, CIh,iI!,de:;. N.

D()l'ol', 0111:: of the owners of The: \WIn .5"trcct Jou~, ,did ,ilot actually d~ismitt": rn51 theory oJ st:oc;k !i'luuket prici! ~Oveill!etfllt as the "'Dow T!h,e[J~;"''['hat W'M done by ni~ f£1.cnd! S,'!, Ne1soll, who wrote TlJ~ A!~C 0/ Srock ~peCUlat1rHt in 1 Si02:. ]t ~1lIS he who first attempted 1:[1 explain Dow's meli1!OOs ill a prap1::lcaJi manner, ~

Willi..1JID Petei' fIamJltuJil, who scm:(I] IIDm:I', ~w _~1ed. on tl~ s~wJ;r ~.IJld mte,pl'etarWlJ, (Jf 'ili.t: mcons~Ou8h. ~HIDllal edJ~ot~ fornc11i5tS,~ Jt W1].S, Hlillil'liIwn l\:110 fI:rs[.OOJiln,M the. thee:ry and ~):r:s~i7.l;':d it intoo an e.ffl.cient wor~. sYS[ofm, H1~ b90k, ThfJ Sl~ Ma:rket Barometer, fliuW [isn t;:d in '922; ~la:im1.ed lb.t:· Dow Thcoryfn d.el::el,

'~Il'i.h::n;:Ntin.gly;· nOTICs, S~even Ache'filS in hls book, l~nt:~~~i AtlaQ'sts From Ai to Z. lithe r:J:l.Gory' i'f!elf o.ngmai4-- fOCused 011 u:ill1g .~c.nera] s'tock market IJIClllds M it l~motcr for g,e.ner;aJ1 buslaess condllltions. .. h \V:;J!!:;; not or.iglfially in~el1d!ed to fu!1lec;il1lt stock price.s" However, .~l!i[h.$t::tiuelO.t v;"'01'k ibJa8, .f.ocl,J!~l;;:d iWnost e}J;.cImii'l;ldy on t.Ws usc of the tb~.lry,~ ~

to :EiLiLIOTT 'W _"VI! S [M 1'1.1 FH'O

40.,i\r1J liI1d1yWual stock's pn.ce reflects t:'\'Cil1'1h~ng !1:hat is known ahm:u ti'i~ secunry As. new inforrnatfnn arrives, market parucip111ilS qliJ.~ck[}' di!'ise~minm(' rhe :infotfilaLitm and tne price a,d~f\1.~H; ou::ca!1ljjl.ng,n,.~u writrt.'l. Achelis. "Likewise, tilt: III"!~~[ a\'~mgcs dJ.s· Qt~l,lm. and reflccr e'ie,r~·~1Iin.~ known by atl stock Ill<lrkt:'C particil~lt:$:~

AJ diiy (jjfiIJe1'l fhlUJ in ttse s,todf: murk€l, i.tm~t!' to'f'i:CS moe ilt effort' tlJe .Primary h·en(i...'.'; N,l~ S{!condary trel'ui.~, cmd Mi,nor ~~~~,

1'be PrinlaT)' tnmds. c(ln eft{!}('!1' btl a b.uflish (r.i:l:i.t2KJ IJ,larnr.t 'Or a b{1~rlsIJ' (falmig) mc~rkf!t. T:b(! rj~/maf')' trend u:".,*dJy lasts mf.J'N/ tb':H'l O,I'H!' ,:rear and iY.I'1aJ' tass Joj' '9riH.ICra!. .W·e-UF}i. ,if Uw ~kel '18 tm~klng successiue b41bf!r-i:Jigbs and hl:gb~N:ou,'s /J.Jf! prltJUl:yY trf::nd f.Ji up. If the ma;r/..>el ts TfWi1!1.·ng; .Hl{"t,:&!isitxy lO1.I)(, 1 , btghs a,~a lQUMI' loWS, the jJ1'i11'M1:1.'Y t!'e1ld Is dA·W,I:J:..

'$~'()'I'tlktry Ironds me iltU!1"m.lU:ik·fl(!, Gorrecth'(~ re{~cH(jns: u, U:!t;! Prim,ury treml, These roacUol.!s /;.Yln'~:a.ti:y lfl!st/rom. onl? to tM:e1t il'nQntb~ .ami reir:f~C(I from oJUJ-th~fd to lu;n-t.J~.i:r.as of rfJt? ptl:lJi· GUs s!>'COjidary tFe:1:j(I, Tbe IaJlo'u'h:g e;b'H"l sbmos a Prl nw"y tI'e1U'I (lineA) atul tu,'!!) ;}·~\pr.m"~jl"Y r''€,fuls (B .t.md q.

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.!.J1.(tJ.Ot' troluls (.diil'<! :!ih~~rt.'·Wrnl U1lDJ:.;t1"I;1·lIS'l.!t;i l4.~t{7ig from OU<8 d~y to rhnw iilJ.eeks. Slff..v.ndmy lren"k; Ci!l"e' t;}!ptmlly .crm~pNS~~ ·of q. nJ~mb'1!!'1" oj' Afirn)f' tTend.'i. Ther Dow Tb~O'r;)' holds tba t stc.tek· prlrJriJS over ~h~ short .tertn arc :rmb:jrfJ'cJ tiD $(m'll!!!' degree of ,"'UmN!'Utatt(!'~ (Prim~TJI cmd Se'c:m~:daf"y t.'1'~!}Hi~ ;(lr~ nat), M!'iwt' ~i1(i$ a'o/¥ u.nimpott,ft;tH dna can he mLd!!.'adj:i~g.~'

Primall'Y Trends· Have Three Prnllse'5

ThllrE are' fi:Ji'OO m.(-li!:!li't,lw:ru'S of liJtJ' ave~o'j, .all· ('if w.bich may be {n P'1'DgI!f}&S at Otl!.? t:md the sa:m.e ttmo. TIJE.'! .first) a;"td most m:jJOrTmU •. is .the prj'mar}' tnmd: the broad upu./t.3rd 01' ,dml!),!'lIU<"(.mi InrJz.o:~~nts k;ruiitt..'11. (u buY nr ']ear n:u~mt."\" u;\bi:ch may be' oj se:.;eml: y.e·ar'S' dur.'(l;No~'.l. Tb« seeowd, and mQ,st ,'lierep.tiJJg 1!11lO!!.\e1,i1'lCnt, is tiN' .;l'1!':',(:OI~~ re.a(:tl:O'.n," (m· impori',an t ,.aim #~ ~ J?i'~~ry biitt. :rn.ai"keJ or.a rat{y Jy:~ a primary bElar tn.t:lrf,wt.. Those rtu'lCrio:tl;S us~.tal1J! lastfrom tfjrtre tt-"&Jk.~ to .as -matlY I'tloni"bs. 'r1:1e tb.lr"i, arid usr}:Il1~)' itmimpoJ'".ti:Inl, '1'1-(1),(.'. ;!1iUim is Um d'o.l.fyflucru:aticm.?

Our 'fi:mnll mle of the Dow Theory is p ern;ilJpS the wos~ ilm.PO.rtllot· one, For wlt!hcrut C 011t1f':I:'I'];!!Itio.n ol the ~ lW'C'.fO"! ges,~ (.m.ciUW:Jg the Dow .Joruc;::s 1I1id~~~tri+JJi ijn.,oi;l.:;;:.x ~nd ~Im~ lkl!W J~ ~1ilIt:::;; ~PQrt;~!.tti,oO jnd"e;;;;:)" .~ m:ilrrk~t tren d t~ar:ilTKft be. ·c(rn.!iiden:d 1.00% 'IIilHd.

II

IJoul always igt.lored a mO:I,\(~mt!nt of -ONe' r.:lt,'et'(lge u;lJich was not a.mjln~~d by tQrt Qth~?;: ~~d f1Xj.W'1'If!J};.(,"tj! sin.('-e h1'S d'f:idh iJ.a.g .~'rj: $~~ u,i~tkm~· of .€p(./.~ melhod of r:heckl,itB,' the r~~dtrtg oj ~. {i.'l,.~I:!!'i. f·lt~ tl~~m'Y li.\rl.."j J'hat a dQu.mwaw

., movem.em· of $e,condary, emil pf£lt'l')aps. uWn'uil!o{r pr;(mary tm~poruJfU;e UJaS eJ~i§1blW:)8d toben. the ;!:'leu, loo~s for bo:tb aver-ages ~ro r,m.dcr .rho .la:r.v· po{~m 00/ U}C jffW(JdiQg f'U!!m'on.~

In ~)rn-e:L' words, 'both a .... -.:r:.-gll:i> must br; 'Ltav;e.H!lS 3ipp1'oxi,m,,u!cly (U1.ou.g]n. nUl Il.ec~s...,aril~~ e.xa,c..-tly) In the same djLn:cti'ofli wiil:hi!ll dose prt}xiDIlit}' (}If one anorher j:D1I order to p:rOv1:(!h:; -:t, Dnw TiH::OI)' conftrmation nf the prevalllng In;l,!!'ket trend; whether up o. down_

Our fifth te,net lS not to be O"i'e!1'-lnDked In ifflpMLm(""¢: as it all ton fr.oquentl'~· Is by now Th!\:O'r~' practulouera, ~4.l'Ui.DUgh DO:YW"TIlCOTY ilS based prunarily OIIP.r.k..:: ;!luian, l'ull..lfi'}e shOl,dd ~ used to cOlWmllhe Jlli'~llti ue.El.d,

Ma:n:iJf:IJ P'ring, ln ha!!iboQk~ lee-btl,teal A na.,rys.t,g Jbj,p'iainrul, wrues concemlag thiS rule:

~rh~ nonnPl reiati:tJrtU:dp is,fi},' 'I.iT:rJum-e: to expa'1'~.on rollie$ ,~~j:td r:;ontrdCt ON elecllnes, .II t.W-lUl'I'lf! becomes dull on, ~iIi price ati:t,'(I:"/C:l.i ami ~;c:pa/'.I(is on a (.j.'edin~, tl. u};af'J'ting ~!i'ffi~n: that. the pr.et;.'a iUIl;8' trona /n&1.f soOn b~ 1'~~ r~'6:rsed< 1'bi~ fJ'J'i~'l(:~PW shotJ.W be U$'lEd as back,g:1'OHnd itl/twmatiof.! ont:;w, s"nc.-e: ,the c.onciu,shl(!. 'fJ,uldrmce (jf tT!im.r/ 'f'e1.Je1'saiJ,: t:;ljit! b,~ given ani;)' .by'

the prtc« {if tht~ f(!sj:Jf:Idit.Je (I"llf!1'ages. "-' •

A.tl :trptrt;na is ,6kfiJUJ,a lry a sertes of bigber' hlgb,~ ~nd h#J,t)... er lou.i,s, In ordf!r Jur' an uj:JlrauJ ro' fif)v.erse, prives ~nu$t·.b..:uIe at t'i!t:<.;f01; O'n~ IWlt!}l' /"(J?,h ~d .one tmo~r lOw (tl:Je tt:!iIiwu. ~,;rru~ ola dUumt~,.,.n.d),

W1..Je'1J a r"tJr}'er;5-t.,~ .~ignaJ' in l/),e {Jrl"wry,' tnmi is rll]j'Mz{ed bJ.f botfJ the indus.triais and ·rn:~i1.spart.~ .. rl!,ti!' O(J(is o.f th~ ",!',!O!W mm'd ,conUiti!li!ing 1ilfi1' fd ¥betr. gro(l,~s..t. HQ:f;//t:V4!:!1j tbe $o"'!;B€!,r .a t;Tend ,f.(mtinues, ti.U:!I od(/'s of Mit? trend re1;1'lat-ni:n.g il'ztj:j ct bl[!'OOme pm.gres'Sit.~{j! s.mt#ler,'-l,

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A,I, r'1'OSi and Robert P!I.~cbter, in, lheii' se.mlnaJ WlHk • .Elliot(.

W;,::nJe Frf.m.;JPlt~. called now 'TheQry "the gundf.1th(':'r of thl!:: 'I,1.'a!l;"e Prm,(;ip.~I!_ri'" [r1dccd, the Dt!w 11 ieory l;'lid ~ile loolldMion for the EUiQi:.t, Wa",\c Theory and there ;In;: lin a.ny l.imila ri ~it::S between Ithe- ['I!;'O U1CIl),riill;:i'i. Concerning these s1t'11~]a.ritit:~', IF:n)S[ and Ilredlier wrote.

:!be' ..Dow' 1~~' :ts ~cn#(illy a UJaVE:! tmory b{j_o;ed 01'1 tire ooncept Qj' .d,m~ry of a.cU.r.-n benoeen Jbe »"U)!iemcnt:5 of Jbe sea ,md tbe trct.ul'-s of lh.e '~'l(u"k(tr.4,:;; Cha;-le:s Dow once observed, stake~ ca1~ he dr[l,lcn ini;u tb,e sands 0/ t'bf: :f>I!(iS}j(J!fl]' as the uxaters iB~bb m;~d flOUt to mal'k tlR!' dtre<:tio Ii of th.e tide fn n'luch .ebf! same u~r ~lS' wdrts are use~t ,ft<) hbQ~.v hote pri,"'fI'S at'1l;l' rnflV'ing. Out iQ!'.$(perlenr;r! (:ti!m~ tbe /Undam(]'I1.t([.{ Dow Theory ftnu;d lh',~l sf~~cc bQt£j(U.\~nl,glts am part 0./ tbe same ocean, .the ,tidal a,rnon (J/,r:ml? ,avc1"'Qg'(:!' nU~$t moue tn unison wllb the au/om" lo ,be a:t,l,thmlic. 'thu.o;, a mOi',.'t'J11€nt to a new e.;tl.Tl."mE:!' t'n an estaf;Usht~d ~.r~na oJ' 0 n~ Q,;[J!!.'l"ag.a alo~~e !'&a ~W high or ~ {(ill) wlJfcb ts 5~i'rJ to L'u-;k "'r:xmfi~'malj'(m;'" ,b')' the arlJer a~ra,ge. J.

DOw Th.eory laid the :ft,ll,mdalrQ'j] tor (he Hlliott, WaIT Theory \WIthou.t a .tirm lWd.c~tiillliiInS of its, ,tt:::rlt:ti'i and, iInlpllcfl:tk)'l;iI~ a ~l~t 'Wl..!ill.iIl>ot fully he ahkl 1:0 (..'UmPT,t:'h,end or "'lP'p[(;c;:iatt: rn.c: :Elliotll:. Wave 'Principle.

L Rhea. Robert, Thill' lJ'oq:,. t:ttec.iil"'y, Fr.J.S>Cf. 'Ptuhllsliii!hg Co.,

UllIdifigtmn.,Vt .. ,.1993, orig.1932, pg_ S ~ ]b:ild, pg. ::I.

~ 11b..1.d I p.g. 2

~ A,du:fu;~ .tl~'elreu, Thcrulk:i'll Ali a.lr&i.s Fwm A to 'I.: Irwin.

NiCwYork,,1995~])S. :1.16 I, Ibid, pg. :[16

6 ,{bid I IIlg. iLl!. '(

? RIilCOl:, pg. 52:

~ Ib1d, pg.l1

~[,.['I()TT ''i'iU .. \'1:: ~I./IIJ''L!'FcrF.1) 11

~ Pring, M,;ulin. Tec1YjdcaIAnafyst..~ l!xJil:aituuJ, MI.:(J,:r.a~-Hjl~; ]")4)1, PFj., 3·6

~~ .Acheh~i PS,5. i ZO-Il:2:iI.

1! FrOst and. ,P:reohtc:.r, B1li.ottW~ Prlnqple;,New (;bIJs£.ic3.

Ubl"',jJ)~ Gain.e!iVil~e, 0::".,,19"8; !;IS. [ 7"5· I~ ~btd" pg. l73

,I

C,hapter :2

What is 'the Eliliott Wave Theory'?

,~e 'tum Wlllliott W~'f,' I htOFY' i1s?cinr-S!. used more ~, 'nd :n1oi'C l :ill. thr; l'oca1Jrul:air}· ,of [radetS and mve~lo.rs 1U"QU]l(j! [,he W'OfLd

maar. 'lbe ~' rneti ftili!io heel] 1a'r,'flUfO.di for' mamy." decades ::.nd. 'W'"J:lii pcpulanzed in the 197015 by R'(,b€"rt ~hl;.er ilDd AJ. Prost, through tbeir book" EIUott R"i:fZi't" Pr:itlG'J;ple'- l't has been lC;:UI1.ed by c01lLOtiefi$ thoWa.D,d.:!i, of traders OVl~T the yCM1!i and i!'io inC1"Ca:5- in.gI.y ,Ui....ro·rpORtaliin G"'fliluplli~a tr.:l!d:ing, PWgr:l!l[[H;'.

Despite aU of tltis, however, there seems to be >I, very low ~omprchcmw.!!l! ill its teI!t:;:"t.'I. among t~leTS and 'lIInmoo.:n no eonse.ni'L]!ii amom:li,g prnctitiO".t'!ers, 0"[ !Bill.iot!t W~"\"e ThoolrY as (0 how the ith~ry shrndd b'i::: appl!ifc.Q .ill ardr::, [0 best .rnaxiil1!uze pro.fit~'fht aim of this; book is to, in~trI,!lC[ the reader in dlC proper u:-.t! Q!!! the diLICO'ry far .I:OOXlmUr.rl j,:rrofirnbUut)' i~ almost ;;my 'market. 'I,,,'ilc will show yO!.l now eo avoid the .mos'I: 'COmIil10(lJ pit{,11l5 that atlou adherents ,;:::nU)lUntr:r and how you can 'f!I""o,i<J the mi:li~ !'b:U most. of 'the lea,ding, apum!t11ts of ~.ht: tllt.eory.1'llmW:.

Betore we do, however, W;f;: tl!)'iut Lay the foundanon [Of.' w~.d~'md.int Elliott: \Vl'I'i'-e. l~ :is esse LUi;!1 that. UlC an __ Iylit, nave a fU'iI:ll gn:s.p HI' the basics nf the thro:r)' and, Us. ;],ppiLi,.canolfl to ful!an~1 m:anrets.

To' , I "'I' 'T' 1't" ~ v E ~ I' 'ill "i I " I 'E I) 1 ~

Ttl a~tcrn.ptiliilg itO lhrmt.:J..!i~ defm;e;: th~ F.lijo~ Wa~ 'J11(lOn; '1,',:"(; quote trom Fi\)i.~t & Pred1ter .in thelr seminal work, Eil.rott ii¥av.e Prln[;~/e':

1'f~ ~flfluJU~ WW)~ Pri'fu;:ij)u/ is .1!lalj"~' .i1ilIJ'hr.m; lllti(J"'f'idJ~m~ ~i'j;! that· social, or cr0w4 hehat-iot' t.:f'e.~uis and reuersee ttl ~ o8nfzabl~ .P~ftl;.rno:s. Us.~·~ $tock maf"kQt d~i~ /0'1' tbf! Dow p::meg lr,uiUSl'rial Average (QJL4) .as bis wulin 'msf3arch J()Ql~ lllhutt dI5c(n .. ~~u thui .the ~~".r;b.(mgw;g 1m/v of :sto.~' market P.rk:tts iI'tlw~lS a s'trUctuml design timt .in t'Urn: fiJ:j'lfX.1.S· a :p~1c haroj:ony.found m tUiWrc.. . .f'rtJ-nil tb'l.s ats~ he deoo:.loped a raticnJal Sj'st"'iIil<l vf 'ma~t ,ana/Yril1;' Elito#. :fsoll1Wd tb.irtee.~J ~tte.rn1i., fW "':t!:-~w . ..," ~J. :P'c£.'ur :in 1.mfrk~d!i ~'nd ,;::In':! ro:J.rett#1Je in form, brito am ".tDt ~ss.a1';;'ty nJPttm~~'e :f.1"~ ti~ Or .umj;4irudiJ, H~' tofalnM;, d;@fl"/'J(id: al~tJ flJU3,ty.,UINi t'm! pmmH~. Iff] liMn. d~s~rtl);(!,d how tlm.tw st:r'U'"tu:n:'.~ l:if~k tVgrztl1riff' to .farm t~~~r!r ,~T$ioru. of the. .'iam.e patt61'"ng, how tb()''if! i:ft ,~~ffl ,(f.re ~~, building hlocks for pa,rterns oJ tl:}f~ tlexi ~ sUe, and so o:r .... .H~s deKrlpi:ions t'Vf.lS,r:tuw ,a set .oj mnpfri'cxiily derived mres llIiI'Jd gfl;#/r;:L'/n:f;!';'!ol' ~rlt&.'FJ.mi!tf.'ng tl.UrrRet ,ad<t(Wl!, .EUfQff ,d~i't1;ed.

P: .,~: ~~ ,- - -, lUifl fi - it. ' ij'r~,. -.-.. u..,. - ~ . -. f ••• b.",'l.. -. i.,-~

reffie::_ ~1Jt! ~-': _.,01' _,;\;o'~ n'H:F~' ~ ~'P1UPf!, w!V~ 'oow' ~~~ t~t!

iUM'ite" "Tbe Ellit.yl;'t' W:l:iv.e .Prl:ndj1Ie':"'

Bru::l!d1y' 5IPeakiDl.!!:, ~.he Elliott 'W~L''I'\~ Tbem}, (wblcb we wHl l.eru::t:furtih aJbbit";::O-Ja'tt: with EWT) (,;<L]"! be eummarized in th~"fol~ l<T~g, Sl,ll!n;em.ew~" alse by l!"ros~ &; ,Preciuer;

bl mm'k~t1>J progrei!t u!timatelj,' takes tbe fo:rm o!'five ~B of ~ s,Pe.oific. ;st'l"'Uchl1~, Throe oj ,these' UJ{il;!""e3;. which ,a.re It:.IhelUl 1, ,-::I a/til. 5, (~r:;tua.l~ ~jJrKJ' i'bf!. ,di~t;Umlq..t m(J!'JI)!'mI)!'JN':. Th~art'· :wpa.'MUd by ,U/lO ooifl.n;ter:tretu'f: ~'I1i~'tJrI'up.riO<J1;$J :wbJch aFt!! l(i,b(d~ :2 acnd 4.,.

', .

. R.N. Elliott' did tlot ~p.ed.fl(;aJ~ sta~e ,th.(.I,t t1rerg. ,it,. Gr.l-I)o· (n~ ,oPlt:ffidi'npfjbr!n, J:bq "fltte wm.J.e,.u Jmttern~bW tbl.'<i~:{!s und:enia.bry tbe ~$.e... A~ ~,7;fr .w:mr:, thf: mm'k'1t :Ptl6f:Y be' (dct:ltiJied as' oein.g ro.lneuJhern in the basic /ipe ~N~rftf jJfltter-n !lit the lnrgest. d~~ rren.d. Bc.r.nus~ .am fiw ~ ptiJUd.n is Jhe. (!~n"'idtng jW71'1. of ma~t Pt'O/P¥!$i$j au. otberjJatte.rrlS a~ suhsNcT:ii!>E.i'd by i,'t]

L_~

IL

I

Ba's h: l~ III ii ott "iN ~ VE' Pai"!:t:e r 11

Bdarc we can bogiin to discuss th;e: JIU;i:llGCS of th'l; lbiWf)Ij It 'W'iJm 'be heJpJu.i [0 de.fine ::i. f.;n!.l.pi!!! of (em~i:;i that rcl:lirem EM, There;rure rwo b;lfsic 't}1PCS Qf'!w~,v~'· in iUIfgi.l,\C="(\! mj.<rket.lmplill:!lcLv;e <llild corrective. [mpni:sivc; waves !in;: these pr,ioe movements '[l~t are' asc!!!o.dllng if!. 't;iUld!cm 'WJtlh. a r'i.s.ing trend or f~ i!lli 11 mrnn~, ~retL'd. while ~ti'r~ v,"aVCS are too~ waves that !lin: ful!ling coaneerro ~, rbil:lg, !::rerul, 01" rukig lI,n a fiillmS: trend.Te pruvide: tor a beuer 'lj,qildcnt,aodling (lif thhi, the foUo.wiilg i!ill~~Jtl.o.n sh'lH.lIld hdp:

FalHng Trend

, A completed EJliiou W.il'li't! Cycle' con.'Itii!i-t5 of fi~'e umplllsiv,e wave.s and three cottt:c¢iJv(: waves:

'.

.As }'Ou can see, tile ti'.iree wave "cOJi'recti01l!~ is l"Q~led~A-B.iC, ~ which is stmOOOOI Elliott Wi:fIit: taxonomy. So then, the ]lrlmar;'" asS1J.t1ipti{ii~~ t)f the Ellwnil Wave' 'I1:ut:f)rr '~s that 1I;:!4.Oh I'rl[l¥r;~n!t, Q1' 'W:iIIl!1Z:, of ,tlprk:e trend censlses of fr'~ rn~nporn.efirn;-'Vi.!'ilves OQt:.: ~gh five, these ffve "I'YlIVCS are f.oUowoo by three corftCt'~,"e ...va ves,

The tel'f.il "'w<},ge"" ilr.sellf ~la;s, its ,o-t!:gifi :i!t{)iI'"u[IJOw '[!leo,:>)'., :ill;) Churles D'Ow first made the analogy of stock rmuke:t :11i.twemt:IlIi:."i Wi corn,pll!~~ ¢o the ~''!i",~ (I,r theocean, IiIl! llis book! ElUQU Wave Iixpiatn.€d; Robe tit, ne~bf:iaJiJ obs.e!"Yt:di that "the waves ;;U<C: SllOma1n;)i[c to the tide, the ripp1es in the Vitiil.!.'er ;sul;}. Q:rdiii'l,!a.it,t:: 'bl.~ the waves, each ri.l:il:n.g and fulllil!!l wlrh rlrILytl1i.mk regula:,n!r-y; .self-ger:u:-:r:a:c-ed and 'f(-lnT!!i!:1.g 'CliO(5$ currents, but the whole :!~O,\;\~:i'i1cJ by see,iuingly moofHir.iven ~klal fO:r,c:t::;L"~ ]k~kmi:lin fUrilia notesthas this com:pariooill, illus~.t~,·the v.Jrtom trends n!i:' !In''=lill! price, ~::O{J!I'Q~i'me~ acting (JoIIliGUrrt:rlitiy, somctJimcs ,rw:t:n.lI:lig mll1wdictoffl.ll.~,; but a.l!wnys S,URlj'e.c,;: to il!Jl O;"'ef:Itiding fu~~·~

Oe;c.kmafi Sl!mUII:!i.ri:ze!i; 1:1:1(::: ~:ri!(}st impOi'1.af:!t rules ~ovc:riiing:

Elliott ~";t'!,Ie Tihr;:Qty as ,~ll\t:rws~ .

1, F'Or' ,E.l't!ei'J!t:lCUOlt tl:J.ert! 'IS a 1"g(ICtt'OIt. Stock 'f}Uff'kef mo,"-remen,ts ;iJ'l stse d~f'Ccr,lotl; oJ the n:I:(~£n ~r~ml dr~' fmp,r.dsi''Vf1' 1'P·rQfN'5, Srock ;fi',~H~f mcn.mm:Xfflt.5' rQ;/,l~ltc1' to- tJJrt '1'1Udn tr.end an ~r.,iir.:·e ~no~!C:!S-An r.mp,~me' moue Is ,:iru;.'a,s,fo~wWM ,~)' a t."'(),rmctlu~ ;iT.Ul\I!.o~.,

Z. Cr<!!1iierully, all inipli.h!;i1}~ mQr~;.; hfff."e ii~~lJ.f)rdlnfilt(3 um:--es while .all C(H"I'!3ctive »,1o,v.e..~ batle M'I'tll'!:? :u.~~"

J. '~rn WfJ mai:n mmd ts upwtl,'dJ wava"l 1; 3j' aHa'.5 ~te inipzii:'ii.'lJf! mo~f.'.s ~nli' U'atlCS 2 ,:inti 4 are CD<rrecUve m-?!:J&"'. 'W7n~1 the 11fUlil'l ,~ld f$ dounljlu: .. ~rn, ,i~eJ~''fIj"t ~1:ldthtrd U\'a~s ol:;Icam';w ;fmpulsfv.e ~:!i1()v,e~~r what? ~Uj ~Brontl :rJ;'aVe" becomes' a. (":;o~CiNvc I'nD~:Ie:,

4. ~ ~d'iO,11 o/lbf! 'nah~ trend can be ttikingpu'J.I:.li. ;(.Iusr a ~tm~ jf~me of at1~pUN·1~g f'f~ffl ,'~ feu;' hourS' too man)' J'ears.

113 BI.!I.IOT'rW 11. VI! SIl>U"I.HIIl,[)

'l11b.en, the' .main ~Y;!na ~14S c'Ompwte/i a 'S~rie;s OfJi1li$ u,wws, ir 1r!VCirS(3S a.nd a counter .move ~l th~ «'YU~ is expected.

j'.1Vbetl comple,fed, a mOM~' {"·m12prtsh'lg fiv.e. tf..."at.'fJS jn!.lmiiE!d. by·a oouneer 1I'lrJi[.."e t"'OrJs/oG..t1t18 of t'bn,!,(! wam.!:,'i ts the flr'St c"j.!cle mr)L1?JH(:!,f}t, '!hi's cClmplr,re cycte tlW~numl '(.trill f'!!Presrmi· the first and S";:'CQjj~' U4WCS oj a cycle ill (jJ.tf tl"1n.e! ir~m.!e of 'till:' fWjJf.t bi3her deg~_ ~

I

I

']'h~ Eli.[Qtt Wi:1:~,"e TIu:ory is mul t'iJx<U.:tal ~Ifl nature, which lS defiJiet:! as a gt:om.;:m..c: S~l:tpC that CUI! be' :!'Ier,ar","~d Into ,pru1s. eaeh of which l:s ill reduced-scale vcrslou of the wll()ie,(' 'rh(t. mult.fit:rilctal .nature of lIlt: Elliott Wav'l:" Priindp,lc ~s il!hIS,Lr:1i[ed

"!..

below:

1Il :::Ii iIlUtlShei1, the :HLliutJ!: \'(':a\<e' q;d~ C-illl be nwnbacd as 5-:)- 5-3-5-5·;3-5. :EllJiott ~ '[11'C(llrf p'I,ltitulali~!ii that, ]'.e~a:td!less of size, a complete ~'n.aC!k markee CyclE coraprlses eight mCPP'"t:-· me.nI1:S,~ Those c.lght movemenrs o:;;ompri~ tnJe' £rTS~ five ttopul,· sive W<IIl"C5 and. rile fif,S[ three correctivewaves .of a market cydc;: (~ee mUJl,'l:.r-.LI::ioo).

5
J
·1
I
i~ '1 4 .:.-"" ----..-.-- .. ---' .... - - ..... - .. - .. ,.- .. -~

I,

L_ I

At this pokLl, the 1illCOry .gt:,tl5 a little:: mt>.Tt:" Co.Ulp1.ex {>lind tascinali.Llg)- :Sli!l~1:: B:l1iti:lU Wa~r,es. <lI'C' mtdtlfractal, each indivbd1l3i W,Ilv.e s:ubdlvkt~ into ~ t1blrtlil(:;:r :\i~Ti~!'ii uJ 'l;\o'avli;;oS ~d.€il'u.kaL ifl form a~lld number Hi tbe overs Ll Larger partern 0 i 50-'3-"5-3·-5 _ f (}f ±~twt:€, 'wave 1 of iii, gl .... ren imp'l~jsjjv(: !;;Uimt \i4. .. a v e piltll€nl ,subdi· .... ides !Into 5 addiiiJonili waves, Of lbe;:~!: fj,,"e S"uMM.ded ~m'Cs. a ill,nllef' :5libdt.vi5ion !'" {[lund 'which corresponds to the 1.1ii['~f. pauem m, F:IIndura's Box .rn~hl.on. wtI'i!C 2 :5liibd·i v iidb lnll[I' three ":,A.-n.,cY 'W':il.V€s,;;]J.nd1 so on,

iI; '1'

B,reak of Wave IPan:euH

"1"1" "I 'I .-. T" ITI '111;" '" UI I"" .~. I' .... L" "! 1'1 l'" I 'l'" 1"1 ,.,

_~ .-- -. r -- _ _ _ __ _ ,r-_

. _.-. -

These 5!Wbdivided, wnves are 1I;i:;l.!'>.>;i,fiedi ,;l;CCO:roJlng to (;.y.cle degree, ~"nI {x IL:li:u:u:at:i:ng ttus theory, Elliott labeled each (if lIlese t.'""{;!O:::~: [:r{)fU I!.n£ very !jJl!J;:Iil!!;:~~[ lti Lhe lru'gC;5~, The :Sl!:::lnd;:a.td EWlo~t W.:lvt: da.:'.!siHcrltio:ll-.JrolQ1J g~ClIn:eS[ to l.z~s~-b as l3t:dj~""S: .;, ' '

Gr,and S!!Ipertycl!e' 5Uip@rryde Cyd.e Primi!iI'Y Int:ermediia,t,e:

Minor

Mifll.ne Mi IlUI@.tt~

The largest of t h~t£~ wu ve cycles, Gemd swperq'de, caatypicaUy be said to !:L!¢O;(LlIPMlS ]00 YClm o:r m(~. Each Sll.IIbscqllJ~t (:,,\, cle dM5 jfj{;~t i on t: ncom (t;;tS:5.CS a prQgre ssiively smaller [i'Dl]"etaclil<:' ILl,P' until t.he r'iy:lim.tcttc cydt:" whi,ch C'MJ. ~~5t ,tIDJ..m a ,[cw 110U rs to :it f~' days, '[lIiutt (:V1';:iI. went. one step :i\,rlher and en I"L~t:~ IleO a class of w:rvt::~, ill the' ,j subeiinueree" c:aJtf~g01'"Y~ wIH-C"ll, typil':i!.l.1y l;l$~ €m only 01. ,f:ew m:iJlID~t~'s or Iess, For :lIill inrents ;:Illi.d rurp~J~t:~ J [loot traders [IJ-.Jl.Y diis..reg:am t!J:l'.5 c]~s!j 0'£ W;li'i~.[i H." ill. lS uonnnlly Woo iJn (:0 n ae q ue.[]).tial. to)] merIt ,¢Jrlltkiil,g.

]11 bCi:~ ns we' will. IC-XrUwII! IdOC1' i!Il the book, t.l;'llider.i, "''"'ill: do 'Well to igtlCi.ir"C .CV(!ry wa'rif! cyc!.rn c-lasJi.ilica'tiO'n ;e;)lt.;:ept\tolf tbc: rnfuor, ill.t-.l"mQ,iia1t!, and ro a much more Il:i'fI~,'I.ed degree. fllle, prlniarry .;;':)'t:lt!fL

A !1'um.(;ru(~:li !j"~ttml:br labeling Vi~·Vt:.: pmgress was created by EI~ ii)itt :li.tii(l hU1lher' refined and mu;jtJiied yeflfS l."1Itoer by ]I~Jl1b;:;:tt Prec:n'lcit., editor :and! publisher nf Th'" ElUott Wave T..be();r"L'5,t;~ r<i.1r. academic PlItr,PQ5{:S wt'! !iIL(,:hid.e the' 'i1i,~"(,; labdiil1rg. ~Sn.elll, here, but 1N"oI'! wi.M h:l.~c::ly igno<e ii: [or~ the: 1'eJjJ'J;linder of thc book:, ~h 1,.iI:O;, it i·S 1l0( 1l0C€SS,iln' for the reader [0 IllC"lMO.ri.:zlJ: !;hi!l' .!ioy!'itt:!rti!.

Slilperqtle, CytSl~

IPlfnma,ry Imenned·iate Mil1l!](f Mil1lut@,iiiiiiiv'il' Mliill!lene

(Iii (1.11), (m~ (IV) (V) III II ~IIIIVV

(1) (2) ,(3) '4,) (5)1 (1) i2) (3) [4,}. (5) 12:145

abJ::

1:.2:3 45,

(~(B) ~C) ABC:

(Ai) (8) ~C) (a) (b) (.~) ,A B c:

abc

Hef(irecl¢;sifJ~ it.hi:ii ~.pttr it 15. n.coL':~ary to OClli1.€~t:e the bC!lsrc rules allEle oV€!t.".:!.Il mlh'ltt \VaJ,;;E ~trl!Jl:;:tl,.!lrc,1'b!;':}' are as :!tdiow;\t;

1, A croCk may not. be said to be ,eomp]et.e' unlil a, 5=3 pattern 'is meed !":nll~"

(' 2.,\Va":'Ile8 are: mt~!llFt:d by distance (:mu,oo on the rnm (lin teems' o:f sllall:e prtce)., f'I,ot by time. ('[im{'; ]$ ,r:eI\;1m"cly uni.!:npO".E'romt ill OUir :sru]~}.,. oJ Eilli\oH Wave Themy).

3. 'Co~cemjljg ~bt r..equi5ite50 forwave lcngtlts it :lis 5wfihci.et1t EO :ru:JiEe' th.u'W;il!!/!I:! 3 in alIT! im,[l'Ilbil,;;t!: S-';W>!'I'·(! move ls 'tI:5l1:ruLliy the l'(Hl.g£S[ wave of tl1:i:!' "5, wmvesj and nf!r)et" the shortest:

4. Of me tJhrn:~ lm.pllllrsiVEl waves In a 5-'WaV'e ~ql!!ience (me otber two Dei.rn.'g correcnve) two of' the three waves tend! ILQW:l.rd eq iila!i'ry" '1,L!I!::iJ,i!a11y; bm not ~Lj'B~ waves one and .!flV€.

II

II

I

I

5- ]n I1ke manner; waves two aru:l rom tend ~. eqt!lality (ill fCfms (lit· di:st:o:cl1cc cuvJ:::R:d).

6_ In .a. dear risin,l'!; Or filllug trend; the bottom of Wl'!I'!'e W.\U' m1!JiS[ never pe:neU'3i.e [he bottom of wave two; otherwisc ro-m wave coutn. l:S lncerrect.

I nc.o nett

,Co rlrect

"'-.

i - 11'\ m.lIly mlfoldins W;I,l'es!, :tJ\e 4th wave reacnoc (also known as "corrective") i5 equal to th(; 1st wave Li'i'Li?I.llse. Sitmil.;myl· tlI.e Sth wave .Empul.!:llC:· is oftro e<.I.utl.'alcnli t.o the 2nd 'W'iitl'e reactlon."

'8.: Ir.f (J).ft'(!ct:ive' mo\'C~, ware~ A iliAd C ofthe .A-EI-C CQITCCl::ion tcnd'k:J~ c:qu~ll}r l;:n m'(lJ' irnt:lIli.oe-.s:..

Eqll.lalU.y ,of Waves, A and C

9 .. Wave n of [he ;\.-I'I·C correcuon must never p.enelr.l!k:

be-Jaw !!he bonolll 0.'1 Vi.'o1rll€ A. o· .

J.Q. A-&C correcrtons, ocgMcHess, of where they oeeue :In a WIlIVC ~'\::~cnoe,. ty.pk>111y retrace O.l1.c·~hlrdi (If Wie: p:r.ev.li01!lS ,., v,";iIyr::: ~e[auernc;;e. -1"\.-11-'( (~"u~cti[Jn5 t~lld w :Stop at "the bottom of wave 41· ln Ll.pv..·a~. trends and a~ 'the top. (If w~~e 4 in ,downwilrd treads.

NatulI'@ of A·R·C Corr@,;::trnons.

lA

~. 4'

. 2.

2

~

.

:3

~ 5 lb

~ 1. Fonrth waves .fn::quCIltly take the form. O'.f a. m.nsolida.tlrnt and uftt:n lake;: the form of ·tri:J,'l1gJ~s: or pC:mL~nts on the cfuut.

.. , . T ria n 9 I' ePa"lt@ n11 i n F ,0 u r t h W 8i v e

~'1hi]r;; by ao m.eaii1ls providing ;;]J coaiprehenslre cxplaj:ta.tit:lil1 (Jff aI] the DtlafiCe,S of E\'(.'T" ~his chapter ~ayi\i' out the bask tertets 111st will enable the begin r.tiniil! studcua to 8.m~p tID::' theory and 'ilPpt}' it ·wjtb at least some lIi!Jt':Oe!i5. [t will also l'id'p rue int.crm.e· dmllNo-ady:ati!~t::d .Elliott· .!itud.en!$ ibrllHiil up on the baslcs and perru.:ps CVCll. grutil new rnsfght. In the Cn:llpter5 rhar follow we w.lU de11l!~ ill"llW .greater detail

Notes:

"I Frog[· ill\d. ,rrc~.htcr, .. EIUMt "'a~ Prll.<ldple, Ne!iit < :13=5!!itC5 LihfLUT~ Gill.!n'e8¥iII~, G<l" 19"78, P.~. i 9-

:I: lb:td; PH. ~ 1

,. Beclf!IUlrn, H6oelit, Elliott Wur}~ h);pt~lne:d.:.A Rlfat- WVr:4"1 Gfjide to Prt."'-dlc#ng &- P1'QfUtng from M«rlwrThn:M, Pmbtll5· P!;gblLsihring" Wndon, iL'995. pg. 24

4 Ibid, :ps.. 24 . . ~

, [bid, !pi!j!:l. 25·.26

~ Mruldelbrot. Bcn.o.iit B.:~:A M·IJ.~Ltmci(al "\':l!tk [)Q"W'Il W[l[l Stii"eett

SGhm I tftt; .Americi31:l" Itel'mlil.ty 19-99; pg. '71 t Bccl:m.anJ p~s. 6

.!J '!'he lHltart "Wafie' Th.~f~t, RoO. Box 161..8, Gainesville, GA 3C1y(~3 -. ErlL~ .Ht.ld,tk'S! llVSlfDE 'fh1:ck ,J,muarr 1999, Vol. Vll, No. 6; pg. 5,

PO .. lKrix 22'52, K.~pcn".Ue, r[ ,60-56!'

'I

.'

fl,Crhi1ps the siEn!lle mO$i di:fiIiI;:u1t aspect 11]1 1M ''\Waw prindple rtf) learn is the i\dffittlfl~iBo·n 01' 'i'm'iOl,.!l$co!['~ti!f'C: meves in. :marlke~" WRUe' the bnsic fi'il&W.i!I.v·e :~mp!l;d1~i'i!"~ pattern eharaeteriistk of illI!il!J1pu~~h~ moves ~ .fu.idy siimpk:- to J!l!La."'I1I:.er, the tt;l!lxi· linl1l: ot eoeeeettons :is: mor~ diffi<':!.llU aru:ll requlees gu:a,t.er stILIdy on tliLe part of [he student (Qtbr;:.f'l?id~·c known as an "ED.l.ottidm")_

I'

U[](Qmlmtc.!:y! tl1l:!l ~s also the m!~t .ilm.PQ.rt~iI: aspect ·of me '\l'$v·e lll~.ry 5.iinc'C· tile market (:any maIi:>..Ctt).g.eru:rnny .. perud.il. fn)1ml 60, perocnt to 75 percent of lit:!>; time in some s.o.rt off cortech '!i\e Piit1tt::i'fl. Thus, It Is in.clilmi:'ie!:llt upon us to Jearn the !ltilltl.lk of these cerrectlons.

'The rtr-,~t j;)Oi.ttt:rfl we will take tip is :act.l..hlily a 'lrolrLWtiOilli uj the basic t~:liree-vta'ir~ A-B-C dtdilnmg .lixut,oCnt; call.e-d! a ·zig:HLg~ due eo till: ;;tpp~ar;runce h takes Qrli±!e clia.rt. ZiSl.a:gli· can oecue as fib1JI1:y i3!!!l dlll;i:';: successive ttmes on >J: if.:::l'l:a;r.i rau l.J:ll-l,IaiJy occur only OIJC"C .• 'TI\€ iPanf:'];ih i:-; :fu+rE}' ~1'"·~·o idmtlty.

Zi'9Iz.ags

c

\

.

c

I I

A

.~

\

c

i I

.Anotllier type. oJ co~ot:ioll-a ·f1a~" co1'":t"eOi.on-as its name impillies, ~~S 00 a t]a;uer <APiPcaF.1LD(1C thanns "zigzag H CD"I1l1l~tpare i!lli1:d hence n;!:ttaUcs, less Qf rhe precedin,g .DttLtpul:"ie W.;J:ve.$ then do z1.gu.gs. J FJats CO¥Cl' much Less di:;ti~11lCC: [hall do zii~·.rng.l> am]~nernlll.y terminate just :!'iJiBl1Uy beyund rhe end of wa ve A rntb.et·thru1 signfficmtly beyond! as Jn ;;jg;za!}s.·

Tria n'9 le:$,

Our :fiflal d:aS5mCa,tJion ·of corrective patterns ar-e: tbe: triaaglc.s" Tria.ngle.o; r~pfei5ent the rdati'li'.c: bataace berw een buyers and! ~l1eti8 i.n a. given ~~t. and c.m. be Identlfled on the chart by tn .. e,1r trllmgiLJl.3r appearance (wh!ct!, almost :a]MIcYS, fu~JD5 on dllriinisbing \roAume). Ra.t1m:r than eneertmo a lengtbyeJ[pllimation of the ~ha:racted:;tic.s .(If. thc::~c: p.atterns, we have ptmted the JoUow!.og chan,;; whlch Should aid the reader greatly in. ]e~niDg t(l recognize' them.

BULl., IlARKET

8'EAR MARKEr

AIJCENDN!KJ (rCiP ~, tcrIam ri'M:W

b .='"

......... ,......-T--l~/

1-

I

I

.

\~

\jV ," ." ,"r\

, 1:1 !ill \.

- -

[~'OOS~(T~'~DI.'IrltIm~

/ /

r

,

! /

! ,.

\~'"

\ '/ ',' ",~', ',81

\ j\'" "',""'" ',""

\ "'/ "'" ' " \.

\ , . "."',~ \

\; ",' b \

, ,

'1!!

ELL ~ 10 r r W" ~:Ii 1i 1 lit I" t I ,I.' J Il [), ~:3

AS you can ~elJ, each ~lt: correcdoncorresponds to the "RW,e of" five" :Identified by rechrcical walry5t R.W $ch:aha,d·;.~;. "Wherein pt:lces are expected T!O ail:rer,oate1y touch the upper and lowe.r boun.darles oi a trnilin.gml1gea roml of 6:ve times befure break:ing out fro'm the triangle diec.lsivdy. Purthermore.a measlJremen~ 01[ bow far priees will can-l' once l:i1.ey ~'rn,,,.e broken, out Qjf llle !riaogJe is proovided by measllri.ng the 'Wickst eDds:W' the mafl,g]c and adillng the distance; bt:twcX:1l them ,anter~5 0,[ pri(¢) ,otlt,'O thcpri.;:::e ]l;'VIl,'lI, at dl,'t:: time o't the breakoue, It isallso he.lpfui to rern'ellloer tbaJt. pdces g.eneraJl]y Cftf.lY onward in the d:k,ectlou lheyttaveled prior 11:.(1 lile ~g1e OOJlSOlid;~tkm.

Chissic Elliott Wa1i1cThcQ1ry' has developed ;,Jim m,o\re wphil5 .. ucaled system ~ :i.de!i1illy,~l1!g the nlanY types, of corrections that we have IJOV~ here. '\Xle; have (ltn!itted il;iYese a(h.1.monall t-eclrniqucs JH!lll1<osely, fur we helleve H is ,fur too eumbersome ;andILUl:ll'f:C'~S~J!I1' to learn them, A .simple Q'"etvi~w of rue basic: co~ct:i~ patterru> such as we: have fU''OVi\dJed he~ v.1lI. ,S'u.ttke"

'M ELLlo,tT Wi;;. YB S I,Ml'LIE'lED

SULLMARKE'f

,

/

/

~I i

/

---+-~~./ {

\~,ece!

.~ . . .

\ . ". rs-:

'IN .. · ./ <I. \

, , ... ' b .

". ~.

f\\ .. ~·· b /

j v- -:« "~'" /

I "' .. " ,.,,", /

f a c -,

,·1

/\'.~."'b /

.. - _'. f

............... : ' .....•. '., ..•....... , ~ .. ,/

..' ,8

J . . - c' .

, ,I!I

}

I

..

Nl:lte~

"Earn of th~{!! patter'll! mOl)' OlC~r [Ill e;lth.er tllie rising Or fi'lmnilj posiilll®n,

Diagonal.s

An. addi!i,omLI d~mc.a1ii()iJll o.f "tfi:m.,g].eS, the: dJiag<tI!!.lIis, may ;1h;i:) ;:!JPPC;g in ttiuc· charts d~ngJa:o imp.uI.s];ve mov!l."l. 'Ill.e diago= naW ttlilln,gka'ppears in ·one of two pestriens, a5(;lcnding or descending.

DLagonaili triaiJ.gJes m.O.s!: freq1!lendy QCC1JU' in thewave 4 ]110::;1· uon of either a .fi.re·Wll'fe Lnnpul:siv;e: :fno"!'t:, 0:1' in. the wm'C 4 PQ~l· tlon uf·w.J.~ 'C leo an A-:S-C cerrecden, The}' arc.Iess frequent in the wmve 4 positJon ,of wave A of ao..A·lI-C eorreenen, ~

When dia,gonaJ trjangi]cs,. also kl~OW!1 as "'wed~eiSJ~ occur m the ascending, 01'" !I".is.ing., fQfm the)' frequently presage a retracemenrte !lppro;xim::uely IIhe 'base of the wedge af~et bl'ca.kJng mit from the "apex," or tip, oJ the wedge. ]n ~fu.e descending, or F.liUing, WlfIll wedge's also n.or.maJ]y pomt to. a retmo~tu~njt of the entire '!Wedge beforeprices ef)~Unu.e en in th:ellc prevainng dlrectlnn,

56 lH.t:IOTTWAV:S UMPlU'lIW

.~

OccaslOQ.iilly. wbialElliQtt cllllied an "extenskm" may develop ll.'iU::Un-a wave ~lQD!" Extenslons-",1tieh are al!wdy:s contposed of five w.avcs-may deve'lop in either a 1 S~ \'\o"'3ve, a .3rrl W8'ife, or a '5th WI!!'I"C of an. adV<llndng or deenning sequence. Note the enmplcs below:

Tiotlfli). WAVE IEXTENS1Qt1l1 01

T.HIRD WAVE EXTENSUJt4

IlLLIOTT ·W1I.YIl S,IMI'ILII'HO ;7

A truncated, or .abbr,evia~~d"wa-;'c pr'Qgn::!is.~OD occurs \v]ru,en wave :5 :m. elther an sscendtng or descendtng pr±ce sequence Is eut short and fafl:s; to pmgl'es.'l abov'C the preceding wave 4, Such instances are: rare, bur. when they do occur it !ligfiltlS tha't 'either- a :m.aiket has pfetlUlr;Ure~.y lost :s!t~ngdll. and. momentum (as ill the case of::i. risiog mariket ·tttat hats, developed ~. truncated v;.ra'Li'l!': 5) O[ mala nmarl..-et th~t was prev:iowly' ~ has suddenIy gained buying; interes.t (M in a .fal!Jifig market ili1lJt: bms,d!eveJ· oped a rruncated flJtJi]! wave).

:3

~-------------=-~.-

1

/.

\

~2

\

Bull M~t faJlijre

'3-8 !lLlIOTT WAVE SIMi'LI fJ cD

Not!!:

.~ Pnecli'ltet, Robert, The iJmtes ofth~ Elliott Waz.."t' Prindp;:e,

New 'Cla'ioSics Lib.rory, G:,:li!neiSville, Ga. 199,., PEl.' 25-

i Il>id.,.pg, 25 •

. l' Ibid, pg. 27

1, IleckIrum,RoliJen,Elifott Wt;U1f! E..xp'airt~¥LA Real·wnrid' GUI'ae to Predic.rfng ,S ·l+ofiUngjrom .iJlJrJ.r-ktt TUffh'i",. Probus 1?Ubl:i:!l~g. ~dQn. 1995',P8. 11':;3

."

..

' ..

Chap1er 4

Pi,tfans of the Eniott Wave Theory

Ddore," w, e P, ro,-cc,oo,:", ~~er,in," 01U~, und,:e,l',standill,g of ElIic,tt, Dwrave 1'heory we. think It cl[1I[y &:iir and necessary to poJi!]~

out certain pi.tfaIl!s Mid failures tn the t1n~o1'"f' OUI' encomtum of Eliott must be tempered with crfticlsm, and this w,nID prcivid,t; 't}le: basls fur tbls .chapter..

TIle furst objection normally voiced against me rellablliny of the U!:ave TheOry ts 'dJat it is mec:rua:nlstic-l::lIia-n Is", ~tatlanpt!l to i1!.flaty~,e and fOtOCit5t crowd bel'lavioll" (through the tru~diWfi of tlle Mock matiCli) ·whiIDe treat"iog the' psyc'b.e' otthe tl1~~ting pub'lI,~ that II: 3lltl:(lmpts to :lUial}'"!e as a machiDe or robot, Ilh;:h::ard II Wyckoff., wii:llting, ~d'r:r the ,110m de phw.e of 1l0Eo '!ape in his 191 0 classlc, S·.tud!es in rape Readlng, SlJIlIii:ml'liriz,ed the markeebest wIlen he observed; "The m.1rk,e:t :i5 ma'l.1e:by the m:inds 0,( many' men. Th,e state of tbe~e minds is ~flectod in the prlces of !ittnrjti'~5 in """hIDd'D. 'their owners operate.:!

It iha..o;, !nnglln'lef.J. a criticism wt Elliott Wave The 0 t)' tl:'c3tS the market, and by ex:t:elJ!SiUfl the rnillions 0,( operators who com. pose i'l!,1!!5· a g~ga:n'lIdC' machine. Purthermoee, U :liS chal'gcdby Elllou:'s d'1Ucsthia.t, ocsidi£:s being meehanlsuc, tliiet1:!er:lI;l' ~ll (JIeterm:i'nlstic in mat it designs to, o:ffet. an expr:a:natlQl1 fo.r tihe

l!LLlOTT WAY" SDMI"U.fIED .on

overal.l! movement .... of tM: m<!Idet. before tbey even occur.as we Sillall see, thb,chat'ge is not e'f.l.tlreiy wi"hom merit.

One of the most for1lulgih;t Cht!lT~eS apifiSit the tJ:IIW!['}' by EIUou's c~,ijtics is theat tbie entire ;five-'\\"a\'e imPUh!.iViC strucrere of marKet :!!I"'I·l"lng~· is DQn.existe.nt, "The proi:drum. 'W:ith thls gG;neral. market «;:onoe.pt is. thilt, most of the time., thc.ft are no reg'UJar 5- wave S'Winss; writes. Ro!be:rtlfbcbe1' :ifi his. book, Jo"ibrNu~cd Appl~Ctlttons and SlnU:egi'cs .tor Tr-ader;-s, "MoOrt: o.ften, the 5- wave swing. il!ime O1't[pUClU:"

CQ.Dtlllues Fischer:

Tbr! Elltotf. War,'e IJfinclpltl~ are. brilliantly conoo.t~Tb.~ llJOtk perfectly in "wguiacr'" ma .• ts and give ;s'Uttm~ng ,remits when loolzJng blflCk tit ,the r;:htlIt'S, The most s.ign.f/Ir;;aTlt pro/; l~m 1$ that ,Jia:rket swlngs a'~ ~'t"tfegular,; This make.s tt ilfJlk:ut't to give (Je.fi:niU'IJt! answers M que:s#Ol'1$ suc" as:

-. ii.rrewe in an irnpul<;{w :1.Var."e or ~.ctJ.~,~·

.. Will 'tlJ2H! beafifth wa[.;"e? 'j ., .'''!

.. Is I.be correaton flat 01' *agl' . " I'

• mil theN be' an ,ext4mslO1.l in U)~:ve 1.3, or 5,?

EUwn s.aid,. "Tbe Prlnc!pl~ bas O-f?cn C(l.~ejUl1y testlrtt a'1Ui ut:ed su~es~1:#{l' by s.ubscribers in foro-casttng mnrli,:et matJemenr.s:·\!' In ,t:JJwiber place be mentiotled;, '"1x~ajtr!r lette.rs u't# be f;$Sfl,ed on oomp'f~tion ,oj a tl..!(J:W and n()l'·aWQit.~'be·eti.Ufe cycle.In thls~ti.e1; :.rturi:en!S mu')' i(?am how tr.uw their QW:!] .IorecasfJl1.g and at noexpe.11.se, The PtJent:m.ie.tlt':ln ~na t~ pr..ac-

tical ,(;lPPlicati()1I become .tfJCriNUtngly inten. .. :>ur~g becau:se .the tnm'ket cvnu,rualljl' ,unfolt.ls now ecx.a.mpl'es to whtdJ' may ~fi ,appli'ed ~n.cbangt1i:g Nll(!s.,~

A£ Fisch,ex POi.nt5, out, the Wavcfrlncip!e does .~ itlj, sl1oncomings, p:micularly m: the area of wave counti!ng. lit cO'IiIID..Qtbe denied tha I, wav(: c.01!!IJDlsue often confusing. aiDd do not :aJ:ways develop MoO:ilg the 5-3-'5 pattern oOull:ll1~oo by flI1o,tt,.BsFb.ei:' pro.P05e'S to solrve this problem by heavy relianceon f:iboD.a,Oc:i

rati.os, an :ad,idnct 'to the: "'av~ Theory [hat ''il;"'C: "''''ilt rm~ address hCK due to its complex .nanue. Our experiot".nce shows that neither 1~ sUi'Ctintc:rpremtjon Qi the Wave Prmciple's hasic .rules nor arellance on t1bOI1.:lCcl ratios is necessary for pwf]I.;·!bly expMl~ the Elliott W~,,~ TI~'eory. Du~ simpl!fled version oJ the Wave Prlmtcl:ple js the sub~jjct of thus book, and we wiJll uncover the' detail.!; ot it tn the p:ilgC1!j, that foUow.

Probihly the .g1'Cat:est pittall of thc\l~.'i.'e Prtaciple is ene ~.hal is buJ[t in, Sinc~ EW'T by :i,ts very nature rends ro focus the' analyst:!ii' atteanen on the individua] fhactnatioJ'ls of .1 price movement, r;egatdless of how smail, i.t becomes '""Cf)" easy W "'get Iost" in the Watt COWlt williG;: simlllta.neous1y missing the biflger .pic .. mre, For this reasor, we recorumend d!ls.rega.rding ! he !5m:aUcr l1.uctuatl!om. a.ilugetlier, as we will explain l;l~C"

rheEW.ott Wave Tl:H::O;!1; i:!'!, a. rnarvelo us wol .for forecasrlng price movemeras .m vadolU.. .. m:J:J.:kt:ts, However, its drawbacks lie in its i!.lh5:~IIy rigid V!O!tvC'COUJ1ting SU'I,.I.ctU!I'C and, when followed mechani~,:itt teods to produce f~'Uo;.trohoF.l oil tbi:: 'part: ,of Ifl'lte, :il'BaI}':'St,.Wim Ithe tight adjustments, no,,",,"Cv,er, these pJtfaUs can be :ilVofded. Out goal if! W:IJ:!ling: this tx)Oi;: :!s to' show you h-ow iIbls .may be :!!!.o(:ompillihed.

l11fpe., ]lO,UQ, Studies f,n rapE" .Nell4':ii'liM" PiJihHshillg, Concepts, 1910, t'ep:r.:in.tCdi m 1995i,.f;U6 .iE::I;scly s.~" ",,4 ~.1, si:ivc::r Spring, MD 20910, pg, 38

.~ Hii1.J~R" The Cilmpkte Wrlun~' of R~V. HUon u,,>ltb PraeliclJ:l AJJPl.iCati()m.tromJR~Hill, CQfiUl1;od!iilies Rese~it'ch Insnrute, 197'9, no Hl7

'-- ,1'""!D'"

~ P.isooer, ·Ro1:H~.n; Pi.'OofUilfd A,ppltmJions' ana St~~teg tes lor TradL'TS; Wil~ 1993, pg.'). 21-22

'r

EI'I'iottWa,ve

and Techn'ical Ana,lysis

A, full, (:Qmpreknoo:n 01 tile Eilliotl: Wave ThC1):ry is imJp9S:5ibh:: wltliOIl'l,!i:' ,a,:"'groWl.d:il'l1g, in the D:iI!sics ofdass:i<:a1 tiechoical atllalY5'J:s,. In ]its ',ni:osttms.ic ferm, 'l:och:nic:a] all11:iysis Is nO!thin,R more than the furecrustin,g o!lf price tt"oods b~800 on chaTt pattern re<:ii)~tion, Sm,oe EUiOtt Wave 111eory is a]:I.l(i b~ed! Oil pat(em it!ecogniliom, basic technieal ;matys18 serves as an excenenr comp].em.ent.

-Cha~ pmt1ie:cns form t~e baJcklbo,l]c of technleal :il.1l:alysts bttalll~ they sl).!Jl';,dncH'y kt the awdy,st know what is iI.!I!ppe:!1iin;S in the :rn.arli:el ill: :lin)' given time, 'fi::ch~cal arulIYSl: Ralipil Bloch Sl.ID1JJ5 it up mcel!y;"'[Chal1, patterns] are ,either aCCli.mi'l~]atiOfi pilitterns., {:OROO!tl:;tli.Oii patt-crJ'Ni; Or' disU',ilbu:tlon pttte,r,IlS,~ L

Of:h~ of the most ftlsc.iJrulllii'ig aspn1:~; off the WBtve Theory Is I:Lbilt it reclJ\i!'d&w~th p~CtJ.JIriaJ !ilmpl±drry-·the ,~(ll:lfcU¥e e.m.otion:lli i:inptllst:;S ,of the masses of :!l;'!,'iIlCSWrse The lr"fry -d!e:s,i.g:ru'ltio.nilwa:'!!'C trnn.,eory'" OOI-w.i :J! pa:rad]!!;'l bet'!lV,eenthe rhythmic movemenrs of tal1t,e >-'tts'l: ocean and the rll}'1llJJJrrlc, w~'Ve-n.e mass tt.m.otwm of the crowd as they reglererin ~]],e: npp:.lCl!; ,undi thrusts of the' !Stock ,Ch:U1_

Ii!..LlOTT W Ii ViE SUIl 1"[ I FII!:!) 4'

~.~:-~-----

It has long Of!CTI oJ1M:f!o"fd tl:lli~ t'h~ ocean WlliV'E.¥S tjut rut :t.he be a ch have ,;Ii. t:l"ipJe d,'hythm. ~ The grea!'1i ocesa waves, !1i: ~s cl.llimcd, reaeb the cooSE in. threes:. "Ihree great waves, then an Inde u~rmlnatie run of lesser rhythms, then three great v,'a\lies ;lig· ... in ... ' The implicMion., tIliCft:":f'Ol'e. uS tha.t the ElHotll; Wa,,"e Theory is based upon a principle .fOUI1d. in nanwe oonsis~g of :J..I.rernatillgrh.)rl:lllns or cucrenes tlliU OCC1J!U" ""11Ih predktilible r~u/.arit}', We ~"iII have more re fiay of tl"illI, "[,lIl.li.e of aJtemr:.rti.on"m. a later clD.apt,e:r,

The po'Int ... -ve are t:rying. to make Is tIlra'~ tlt,~ Wave Prl'nclpie, like nature itst::li', is s.umplicil~~pe'rSOOliifiG:d, Any auemp't th_:n: is made to truly undersrand tile W;a.;'c. Principle can onJiy be done 'liiid1.ln the context of t111s :si.mplidIt)', We will begin eur :sUlliplf. fled apprD:"~.ch wlth a llHf]"lher of b;L'iiiC ch!ilirt technlques.

lren.dliines

The first {If these recnniques inv))ivf.S; the use of tb.t: mOS!:. baslc and siniple ()f aJl technical ·t.ocJ;l:;~thc t:te.ndlin.e. O:U~ of the tenets btl;!.C to t.echni.c:al arudY81JS .is dia1i: prices move .m trends, and that rnese trend:il tend to cantinne l!Jlf:ItU .)U..'1eU upnn by strung,. opposite forces Undcrsl;i,ndm!<i!!lhi..s basi'c. prindple alone will give 'the technical .analy:\l.~ a. m~jor :advant.OJlS.i:. 0'1'1:1 ~1'!J.yQ1H: using funda:roemaJ amdy:s~s"

'rh~ are only three tyPi;S of trends :l maJ;'k.et m~y t~ke; up, down, or sJ.d,eways (hoi"17;';:J;fil'~ill) 1t remams· ~p '1:0 th.e.am.ly8t to devcrmlne which of these three trends Is []a plraceat ~ ;giyen ti.rue. Ad!nUncdl~ .. , tIDs is someumes a dHfioili:, tt.-S:k since me .pr.ilrrutry, or major; tre:nd .rn;J.y be up w.h:ul.e prlc:cs nay take :3i. temporary r:;I.ov;;uward p<!ifb Qrury 'to IT:lt1iD),le the 'Previous up,'IJ1'ef;!d once' rhe ··OOJ"Il'a;tiO.ll" hi over, A major goal, thea, 0:£ n:chnical analysis (a.!.1d Emou Wave analys:is) is to detc;;rliJJ!ne pdce trends and ~de~ntiJfy 'ru.rnillilJ paiots In [b~ market,

How. d:)..cn, are we to approach tbls l:il!!ilo:? The most simple told ,e:fft:c[;'J' v C' W::;t,y ics through the use of tt'c'fiillinc5;thllit is, :ii, p~ fecuy ~tnight il£le drawn o,n the chart coonectm.g el1thet the

- --. -- -- ..... - ..... l,"rr:;I""

bott(lms (!troughs} of prit:t:-s (in order to determine M uPtrend) 'Oil: th~ tIlPS, (peaks) of pric:e,s (in order to de:tcrmifie a- downtrnnd).As f!d~ .&: Mn,gee put it:

If ~t.'£' acttl:alJy apply' a ru.Jcr to a mmtber of (Jnmed pnc.e t,re,tUU, U't'!',f1:Uickly dircoWf' tbm t'b~ tine UJb.(:r::h most .often: is realty ·,~aw.1.it"lit em uprmuJ ts a. Nne oonn~cli'l,g the lower extremes of the -mi1.U:W reeesston« witEn'n tbose Ironds. On a deroetld/~g Price. fr'(}ln1. the Un.~ #/:O$;'l' lfMly tQbe sln~tght is tbe' 'Q~ !bat ~tlfft.'l" tbe tops vf tiJe mf.not' :rnlltf',s 'u:l"/t'hh:~ it, wbUe .tbe_ mtno» botlom~ ni.ay Dr maJ" not faR! alott)! a

stm(gbt ,edge. t .

,

.'

ire rI d II in es

1U I.HJ TT "Ii h V [l S 1M Pl. f' DEI' i7

ire nell i ii'I e.s

~ ss

~LL~~~~-L~~~~~==~~ ~~~~

~ ~1m-r~I~~,

~,

~, .IItI!'iI'

~"''''il_~ __

Tn~'ru;lil ines whether in tile upward 0(1' dQwn'W01!rd-sI'lt.l!t]~ pus:ilion, cannot be: drawn arbhr"ui1y but must eoreespond to a b<lsic set of rules, One of theserules-« glrw::nby ,E'dwatds &:

M .. gce-Is d1JlIIt a srralgln line is lnathenmtic.illy tIlete.rm.iDaJr by any two points all,ong ,it, "]n orderro draw atn:l'lcllliu::, th~re, we H::quil'C: t'WO d)etttmi.nirJ;g PQil~Y'two !Lst01!b[:h!ru,~ top reversal poiots to fix a dO,\\l1 trendJlJ.ne acid '[wQ·t:S!1i!oliish.ed bouom reversal points to ftx il!rI. up'~~Midili.ne ,"~

One (!If the most md~tl! tp[l[rposC's of :alrei"iJd.l.tf1~ i3 iU'l, establishing reversals or ~1IJ11.')il;lg potnts in the tFdld, Re'ii'e~s. are indicated by a breaik b elow (oJ! above asthe ,ca~c fifLdy be) tJl~ t:t'·elldlJoe' by at i1ta!tl: 3 percent (tale" three pel~:c;:eo:l11)l!le")" EM :iILIl asi de, it may be w01,"Ih not:il'lg that h:::gt::nd,:lJity trader J,esse Livermore, In bis book, NO~I/ to 'rrade in $ror;ks(TrndeFS P.resS, 1993), aflIx~dI an almose ,mystical nJlJc !Upon dlJl:: n~er three in his il:nark,ct. ;m~~. Instead Qf m:ing ~ f~lter' af3 pt:ocrt:JlJ.t as, Edl">l,.'ilrds & MagL'lt' :uJv,uuute, .he~~d Tj]e use of a, 3' .tpo:irl.!r filIicM:, regill:~k~s of what price the :i>t:C"lUril,), in qllestlonis tradiing ili.t:. E:n tod,.:y's markit:tp]acc thai ruk [l,)JIY (lit' Dlaf :l'IIfll be valJd, 'but :at least one .lclu:lmg te.cbnic:!!i .. anatysr, Ke:rmeth Sihatt::eifI, O'ilutiliuot of VOiUni€ and Open Interest ([r"Ntn, 1996) asserted t'l'lat this: "de nuo/ still be used in fl:imre markets $natysl~l.,

The three percent rule must be strictly adb::l'td eo, for sometiwio~s prices do break above or below :a It::re:ndlin.eMly 'ro reCf)'I'ot:~ :~md ,continue al.{J:ng the previously established trendllne, A break Q! 3 peoccn~ or more, hO'I;\,i'C"j,!'Cf, ]6 very ~U~dy to reprcscnr a true rumaromlld of me trend,

,

':Edwar~ ,& ~l::\gec ~Ve' U;$ t\VO mere useflu~ rules tOt ±d!e:ntifyiRS: t\tr~ POintfi wbenu.sing ttertdJi:i1eS}

W"bmi; tb.~ m>ndUnfJ ts bmkrl'n; O-K, whtm prirns drop rJ(}u.<'.n th.rou.gb ff (11 d~(Jistve jasb£Qn), tt $tgnf'ili that tbe advan;~ .Em$ :r'U11 ouf.1t: ~& ffm.,fJ jor the In.tfJ.~4t~~ tradtf.1' /0 sell ,out that iSS.UR, and ,loQk. far :r:lidnvestmiJnt oppt:irtuniti.es e.Tsewblin'&

!. .

1Wi1;:.1?n a mUjU to.p t'etc"ef";&W pattern fS~Ci.1 ~s a lJe~ and Sbo/-IJd~r-s. f01' Inst'ancell(wms Oi(/ the ,chr:J;r1. 0;( ~ issue 'tt,,?N upanc!. ml;~' from, that tssuo» tntt'iN1Ul:diatf.1 :uft m-ndiine,l>v that then;:' aPP('lreJuty ts room for the downl;;tde implications o/.'the Rt/ersa~I(Wmatloftsto ve CtJlrrled ou: b~~ t"e ~ndUne ,(.s. r;i'Olr,Uea. then tiM Imermedtatl!"ffleM m:uler ~rmy Wt!J.t r:fec:!i!e to wr~ tbEl' small re'l)er~ll)(.merr~ He (¥I.n bola on $0 lOn;g as tfJe ~rettdUne h(lid$,";

nf crnrrse, volume au trn.dJllIg activity (as~-:iith JLuy t~dh:rl!ical measure Of dtan pllil.:teI'Li) can aJ:lJa, s:florud be used eo OO!ll:illr:tll UI.e' ~1tRidiily of iii. frendilIDe b.reakJthi'OlilP.,Asal~iDys. a noneeebte 'ill,c~in '!JQ1l!lme adds more '!;';,"eighit ~o the: l!:!gitimacy of any sucb '~rendt[;]:i,e peaetrauon. A treodJt~:e pe:iletl:'atii)~~ Ot';:CIlI,'!:'Jng o1l!Lcompkl1;ously mgh !i'l]li!:ne, e'l'efJJ when the 3 percenr rule futis 11,m been satisfied, is onen eneugh eo (r~1llIify as ;il cJu1~ of tte:n'l!d, and the trader should respond :'I!coo.riling~?

Edwa!l''d~, &; Magee provide furthc r tests which. ID:ay be app,l:Il!;d 'l:oiucigc;' the technical vaUdity; or authority, ulan up ll'Enillmc:

L 't.b,r g-reatt!r the number ()f bOffOtr/:$ ib~/: Wn"oe developed tl,t (or ,erer; r.1<r;',CiI"') a it'endUne In the course oj ,a SH,{.e5. of minor wp wav!?'s, the gref,./('f,'r t'he t'mpGrirmce of ,t}jat .If;n.C fn tb« t.{'(;bntcal sense. lFilh ,each successioe "lest," ,t/Ji1 S.igl1-iflcanae

of the une ts increased. '

2, The: krlgtb oj' t~ [itte-, t,i:i." the l(J~gef' ft bas' 'helil WitbO'ut Ill/trig /)cm..etmt:f!ti f>y prices, loa J,,'1'ea.t?t' ft-s te,clmical signifi· Cil1'Wr~, ~r },Ot4r t!'endUne is e:1Wl<i-\n, from tu:m orlgfna'l bottoms uI/:#ch U'rn' vet:l' dose together in fI'1"ne-say. less 1J:m;n 'u :week apart-it .is ,s'Ubject to en-or; it m~ he too steep or (more ()J"ie~) ,tno flat. "~be Jattt.'1j· price» n.ay mQV1~' awq from !& and .'Itay i:ligh ub.ot¥.~ it for a long rime;' ,titer mqJ.I' then turn dm.i.Jtl ,ana bulle declffled weU along i7i em {ntl?n~4tme 00"" rection be.fttre the trendUne fbus draum is nu.iCbed" BUJ if th«tI"NUWn(f I.}'{u been drawn frorn botl'am..~ u;J:j{ch are far er/ou8)J apar; to J:u:we ,(i(r~lr:t!o.p(!d as ltul.epentf,erU: :W~ WI1Jponents .of the tren« JV$I a;re trying to d~fin(!, with a go.od /'Y4,Uy 4t/id "opf!.n warer~ between them., tben it is more apt ta /)e tee true trendUne, G11m,ter weigbt ,dmuid be gi.tffln tlJ t'be. rmmvrz:r of l;JQttOl1tS that /Java foNnlUi on a 'ren(.fJine (To?$/ AJ tban to it.! l'mlgth ,a$o,w. (R~f!,"1 iJ),

J- TIN angie of tbe tr:eruiUm!- 0-0 tbe ho.r(zontal) is alsa; to ~m·.ti(.;o c/(~g1'('(!, (~ critf?-riOfl Of Us t/n!idity (il$ Q true delimiter of tntermedsate t~na:.,Steep lines ani' of Ut!le. ftW(!castt~ Mtrie J't.) r.h,(1f,edJ'rlf,cia ~l, The j'lt-'Utl!!t;t.ttlore ~.~{<lr:ly borizontm 'tbe hvmd/fne, the mon:~ tmpof'tarn M is tt';cbntcaUy ami;, .t'rJ conseql~e1~ce, tiN greater the $tgniji(:,;mGfJ of any daw.l1sidc break tbrougb i.l~

Purthcr e:xpounciiI(lg OC1 tile prludpk of the aog~e of the trendline, EdwJird~ &: M;'igt't: point out tb.M~ intermedtste uplrends on the a.aily charts, "in the great rna:jo,.r.iq.- of tssues selling .in. the 10 to 50. range, rise at an ;~ngk of :Eppwxim.ately 30 Jegrcc~ eo ~.he hcrizontal. some wi\] lOt: a trifle flalilel"", some ~i tr:iif.lc- steeper, but it .us surpr: sh'lg to see how often the tten«i= line .f:::LU~o;; ",err close to the :3 O-degr<et: slope in stocks of a'iO-e.m,ge yola~H.j.ty and acu ,"jt}' " As a corollary to rhls, i.l JHII.ISI be poiint-

.;!.11 I' ' -''" , ~-"-='~

ed 'out that thls applles onl.y rochares made {In sem .. Ho.g:a!"lth~ mLe'scale ..

F.ro.m an Elliott ''!','ave perspective. me trendlinc can be an importan! ttOQ.I. far.de1termml:ng at what juncture the current qde .ts 1».- M lort:Q. as a .[!,e.fi:nJ!i.tce trendllne can be d)rmvn O'Jrn. a chart •. !it~~s ii. ·stim.ng mdicatlnl1~h!l!t a .five-wa'l'e :impuhi'l7e move is u:nde:t"W"l\l~, As .~ong as the trendllne remains um·io!at:cd (me:a:n.i:n.g that no penetratton has cceurree) an ;maly.s;t (:an assume the current jmpl1ll1!si"lf-e wave sertes is .still ill force snd wHI continue ln the direction of the trendllne (WhC1:h!:!:l" up 01i" dO"W"II1~I' 'ImJJt:il -a l-l:IolatlO!l occurs, The ,e:x:ception to this rule is Wh,M a fourth. mve {:rega!l'dl]es.s of di:,g.l'ee) pa-f'llally 'l'iolab::s a trendHn.c only to return bi1d. a'bu'!r'e l'l:_'th:liS is actuaJly a common occureence with fourth waves am:ii should not be interpreted as the beginnifll.Si of a correetlon (<'Ind hence a new I:Jrel.ldI),

~----~----~------~---"""~~~~--------~~------------------------ ~MM~ __

Too ralses the question" "How does, one tell wht:,ilter:a. Wfndline penetradcn is ;!;ner:e1y a ,f:oll11.h, ' ...... ave or the start of:;1:, i'Le~ Qnc~'"Thi:ii can best beanS'W'e!l!d by the use 0,1' "'lUte!!.':!!," A. f!iller in

- ".

tedrnicm a1il:;dy.<;i:o:;, is a. Me used to iililtcr out ins]pHlcmt,(ancli

,mi~,ding) flucmatlomi", thereby making price ;a:D.'alf5~ easier. A good rule of tlmLnb for using tr,endilline mters js the venemble "three percent rule" m~nti.o.n~{1 previously hI this rnapmet·;, As longasthe price' does not penetrate three percent or more below the uendHnc, tile trendline shou'ld be considered 'to .be illtac:t" Of course, SO~ !iIl'ar1i:,e~s are more vollltLle, than ethers lind the ,an~y~ ils urged to use dlscreuoa :;l:,ccoriling to the' ehae~1,CU:::r of the market he is dealing "vltb.. fu 8Q.DI..£ .socurlrtfc::s. fur instance, where t.:rnd'lnl~, tends to, be extrn,ordina.:l'!ly VQlatik" h may be appropriate W use a .l1Itcl!' of 10 percent or even hJ!ghe!t'. At workm.g kfi0wi!ed.ge o,f a giV~D securiry's ~lisW:ry is obviously useful in dcci.ding what kind of:filte!r to nse.

A further ,a.d~l1:11tlige: of the: tn:nd1lne to the EllliOn Wa\Ve ::mac Iyst is that it tends 10 slmp]Jiy '~"a,vt.' counting;. Under most circumstanees each ~-aV'C trough (.lln :i1!fl uptr'emi~' ill' wave crest, (l[l a Jowntre.o(U) should touch the trendllne before bouncing higher OCI!' Iower (as 1111;" case m:a.y be).

5

':;2 1i1.11~Il'T W.'1Vfl SIME'LIf.IED

In, t!tti::!. chapter, W~ haveaddressed the use of the m:nd]iDi.e w:lirth an eye toward. an:tlyzing 5·]W["t ~md int,ermedJ;Ue-tel,'m rrends, 'The tre:Ildline concept worlbl eqmd!.y weU for ailaJyzing u'~fldllhrLei5 ·of. larger degrees. In tmlc g~d scheme of 3 given mn~:~"ii progtCss,tmt:!I:'e will likely be many ttendlme:s; ~denillillltile 'at various levei15 witbin the .larger trend Some willlbE o.f m.~rwr sigrufU:~m~t 'woi]t: others wOO be of greater impona:nc~ In the longer term. Wlith pracilce aft ,a.n:lly~twi]1 learn how much 'l'i't:ighl ~.Q assign '£0 each trendJi:Qe and wtuch ones to alt:ill.c'l'ru !ignlli:caoce to.itT1Jtilmn.reJy, it remains up 110 the m~t to decide since much dep ends 00 his, lrrvestment time frame, whether short; ioter,med.iate or long-term,

! ~scm; om.!!, 1kbnfcaUy SPf!aktng,lnu'lers, Press, Greemv.iUe. S.C." 1997, pg. 62

, Murpl1Y.]Qlm, recb.h~oalA1UJlysi.s of the P'fdures ,;~~ls,New Yom, ms'titl1l'l~e o'fFl:llance.,196'6"pg. 377

~ Ibld, PI!;. 377

• .Ed'wards &: M'l!Qee, TI~cbn{cal A'n4tv.~i~ ojStoc.k Tt-entis,

A.m~N~Yo:rk, il996"pg. 283-4' ~ Ibid, pgs.. 284,5

j, ,Ibid, !pg. 259'

" Ib~d, pg.. 296

~ Ib.id, pgs. 29~-92 9 ]ibid, pg. 293

\.

-.

'The F'an P,ri nc:ip~e

1- rn th.!: pf.c::viOl]scn·1pler we: examil1!ed the use of the h~"'ic ·lre..ndllnem recbnical ~w:dJ'"Si.:s and H s lilliottW:rli'e appllical'iOlfliS., The :li~j"bje.ct of ourpeesent chapter is clo~dy related to tb.etiei:l!dliine, and m21![!lY ~JruJ[y5tS trear it as a subset of ttcndlinc matyIliS, FOr' '~I'IJi:' P~f.!{}!jica.l:!i(}wC!vcll'; we will tr~at it as a &epa.F.J!tC ilI00 di5till0l!: d;:il.'iSifi.Cit~on and 'i;\oillaffix: to j ~ i~s OU'fl clrspl!.e'l!" headll'l(Q/fhe ·iF;'!!.u Pr.i.ncip]e, the sl~:bjeet O'f thischapter, is o'f suchgreea im.p'0ttt::.ii1CI: that we: con~~cl,l:!!'" it to be om;: ()\f the most !lig:[uifi~:l!i1.t fi\.:!;nC'!pl;es ~n techrncal analy.sl.s, If vou Iearn !l"m[hi~ else Jrom this b(!;ok, Jearn HII.e Fan Principle-it wi.l!l tate YUH far as ~ tf.'".lJ(rtt. 0.1' mv't'stur,

The .P"&D P.rindp:lc lsused prhll!!!r:il,y as aa ldentlfl.l;'l" and mdl· ca:t:or 01 correcdons :mdb'eod revends, P.rope,r implementa,tion of 'tJliis' rule wi1I.il ~l1ow the :ma[ys[ to c:'!JtCn most trend reversals cif mm:ori m.ttrnttdiarn, md primary ~i:gnllfiarn.,c;:e_

I~ its ~im,~e:l,t formthe F~1l Princ:ip['l;, aliso known as ".ran ~D1es;· :is a measure of :Plfr.ceILta.ge retracemeil:t. SlPeciUh::all:y, fun ~~Ile,~ measure the pej,"Cen"U.:ge: retracement of the first, second, and thl.KI ~\i;::1I!C.t:li)tl8· in. a colt't'e:ni.Q]"DJ Wil:hifli a trencTiitg market, In Hsrnore oompLe:l{ form, f.:;Jai lii.lJes are dtll;wlli ill. slTiet sccerdance

with the F.ihOIUll(,d "Golden Ratio'" jJilUlci"ple, whicb states t1Ut a correction sliiou.ld approxlm .. u:ely retrace 0$8 percent (onethtrd) and It6.J fl; percent (~wo-ttriir:<!I;s) in its sec!Jlldary and reru;].l'Y :retfJ.Icet'lle;r1ltS .. :S·e:ethc chart on the fu]lowmg page tor an example of me .f~]1 line ptlllli."'ilpl\e._

[hln LInes

~~--~~~~~~~--~----~~~~~

~

e .. :. 11.:1' I lr.·. I· -,:mJ,L VI( .... i u'D-1 jlP.i ,.,

".

'\'Ii'mit Rllio t Wtn'C anal)-s/2s insist on draw.my fan Hnes oru)" when .. ~ . precise ono·ttdrd:twQ·1tJ.iros .reJ~tkUl:'.ihlp can be ·seem in 'price eeacnons on the ·charLWe postulalIc. however., It.at a strict adJh.erence to Fibo~.a(:d. ranos is cot nece .. '!'sa:ry' in fao IIDe' con;SU·lI.ctiO.Dl since msrkers gencrni:ly retrace ~cotdi['Jg to these ratios, anYway. and Can. be seen on tbe charts in. the fm:m of .support and. r:esislance' levels withQ1J!t. ba'l'~: to COfl:stl'i1!.lCt theoretlad F:ITbonacci lines. Fl.iitthC:lfID(n'.~. it. nm8'~ tIe remembered th_at itHili::kct rerracements 'are not always precise that cannot be expeeted ro always conform to Fib ona eel me as 11 rements, Fortunatety; il: 111 not necessary to uaderstand Fibomi.~d ratiofl when peli'fu·:r:miilg market omalysis, (illthough :5{]:nlle :Iilli.o'tt ana :Iy:'iit:'ii 'WOuLd! .awe otherwise), The charts almost always main: iit easy on .the muyst when i~ comes eo fun Hoe eonstructlnn.

Edwru:ds lk Ma,gEe !had dlis to say :Ibout the ~rl! PriDcip·k:

, .

In, a (mil f.i':latnr, ~t starts wffb a sharp teacn'on u.J/'J(.c/) proceeds fO'" sevemJ .drJYs~perhi1fJ5 Jor as 1nt«:h a.,', tuo weelts~ produ"Cing a steep rnintJrt1'e¥JdJine, 'l'h'fs ffne is brolum ·u.pstd(J· by a qu{~ m"JQr'ml1J~ after ulh.tch pn:ce.s slf.de Qff again in a duller a.nd less pre,c(ptl'al'e irend:, A seoond minor trendlb,le m;:;ry :I1QU1 be' drawn 'from tlJe original bigh pofnJ across lbe lOp Of the upthrust thai broke' me fifgf ~11d; TbfsSecrJHQ trend .. · Utt.fJ i~ bmh"n by ,(mother partial WCOve1Ji .rhrusl, {m.d a thim ,m.el still ciu.Jler and flatter sell-Qff ensues. A tbtrd tre1'ldUn.e Ct:itJ now ~Il' d,:~itI.m fr()~n the original high acroS$ #.;?e tot» of tbe KflCOtJ;4 upihrust. ~be wJ.Joie moee, ~,. th~ (tme; bas' taken t'Otlgbly and ifTllgu1a,rly a "sau cering-out" fQrm, TlJe throe t.n.'nd Unes drtl/wn jro'fflthfJ' (Jr.rgi'nal~~!et"s.aJ. point' from wt.J'icb the oor'rr!t#ltJi;1 decUne started, eaci) asa. flatter angle .than its j)redecessor; (Jt'(! Jmmvn as jan. #neS, A~d the rute fs tbat wbrim .rbe ti#(;(j fan tine is bro}um up!>'1'de, tbe low oj rbe tntcrtnedj(,tt~· correcHonhas been seen.. I

Ac:x:oroing U)Edwa:rds & .Mag,ee, the: pU1.'['KJSe of tlle fan prtndple .is to determine the eJild of mt~rmedJi:;:lte rreaclioM in a bull marker and of hlter.m.edi:;ut: recoverres :1m. a b eat marker. t

Hnwicver, the Fm Principle can be used 3.-; a tool tor, deterrlfn:iln· i ilg changes ln I'he trend ::11r mlnor and! major points •. as 'Well"

Fan Unt::~ are most lbdpfuJ to the Eili.ott Wa.'i'e ,analyst when ' lli'iCd to dctermme if a new impulsive HC:[JJd has started., or if the correcuon of the !tX.isti!l~ trend is only rempO:i1U'''Y. The basic mae I:Q remember isthat ;1 mere correctlon will. stop shQlft of a)1;'e;l!l:ing below {or above, cieperu:Ung on the d~on of the trend) lhl:'ITt'"lllUinc, [but an actual change in. trend "~dlll 'O!I:'Cak above (or below) it.

~ . .: ...... -

. i

~ MOO

~C)1myno!I'It"

Jii'ffl IIlrM

Mtp:J uQ#tt"y:Do.~·

fQI.J:.O'WiDg rn:'e !ie\'el'3! examples of the: fan Prln.dpk lin action U'kel~ .from rca[o(Jlm.e charts.

ik:-t'lW J.m "'V~ .II!ool!lS ~ ~!I<"M Fiy-'I~ .... 1"

'IDlffi 'r~1 Inc. ~I ... 'tlnomot.~_cm"

UI!JolfI:225: UiWI !li II'I:i!I ...... ~~i sr.i Itvn· .1",;)

lU'il(c I·lm

.~ II"""" ..,... .............. ,..........,.....,..,.C!!"""......,,.... ............. ....,..,,.....,..,,.,..,.., ............... ,,,....... .......

Jd!. ~: ~, .ld2 ~. .iIii~ ~I

,~Im y~I' Inc, ,~"rl~I'W'D.~,_

INotes:

I Ed:wil!1!"ds & .M."a.g,ee, .n~cln't·(f,(ll Analysis oJ Stock 1hmds, Amacom, New York, 19%, P£- 3'13

~ ]btd!, p.g, 314·

00 ELLIOTT \V.Ii .... e: .1MPLlFii1:U

- Ct'ia ptell' 7'

Elliiott Wave

alnd: Channel Ana!lysis

111 tills. chapter we will ,[[isCQSS :II. tedmfcQ1 t'o:~tion bown as a cbannel, which jl'!i. most oomm0fl11y seen in :iic!l:Wcly t.mdcd securities o.fw:id1l! :;JL ~e numbcJ:' Qf om5itaJTItdillgsL~:lleS Gand. least often In the Jess papular, ·thl.lily·tmdEd oq!:.Qities which receive only spoili'adi.c att.mtioo from. tmd~rslne c1DW1ld plafJii an important role in. bo·th d~ca~tiechnb:;:al a.nalysis and Eillott Wave 'f'heor)"

Edwards &: M~ dcrlllle a ch:a:nnel fur 1,.15 in the fo.ltowlrltg terms:

In a fa·,'r $bQm oj normaJ ,treml.fL.We minor war,.'eS are' sUr jidenfly regular to l>e defined at .tlJ.elr ~e.s bj.!' another line, That is. th~ tops' {)/ tim ral.lt;;1$ compositW, an intermc.dlak adfJajlCC' som·e#mes (/euewp along a line which ~$ ap~ mately paraJle.t to to? ba#c: trendline p.rojeCItf!iJ aiong tbdr bottQ1.ns. Tbts par:alki might be caJJtu:l.' the :ro.rui"n line, since it marks rIM ZiJne w~e.r.e reactions (~turn m~tm$ apJtW ,the prlmQfy in'nd) orlginuwl. The a1"ea bettvrnm ,pasic ftrmdJ.lne an4 rotu:N~ Jme is. the' trend cha,1H1e-1.'

ELLIOTT W!.i. V E 51 YIHI i.>:i I'll 6t

I~f'iee~ bound by trend chanrrels llanov.-' the Rule of .A:l!~.rmtiC,il1 in which ,Ui"'i.10V;:: that meets with th~tOp of the ,~cllinc clici:es ;;]I bouuce 11:0. ·the 'bottom iim:: ;uld y.ice:"i,rei!'~a in arepeaung paue.m (we will ha.-e more to ~ abouc ,the Rule of' .ilierna1tiurl Inthe ]1'ex£ chapter).

Channel

'~.

~~-~.~--~~~=---~~-- .. ~~~=---~~~

'~ HiI~

(Cj I.m "IiIlml Ito!:.

I'i.i~ J,;,!9!I

IrtW1 ... .rrIIl\W\Ol','!i~.!i(iro.F

--- _. - - - ...... ,.,.... ...... _r •........ :. 'I .... r..,', .. ~ i' iJo,.,

The tre:!1;di chrutl'lJci plily<,:d an illmport:u~t role in the 'Origmal dC'V't:~o:pmenlt of the EUlou Wave Theorj; In .'t'brJ W.r.1tJl;l' Principle, ehe fir.':>I, of R.N. !Elliott's works. pll1bliishedl in 1938, .Elli.Q1tt stares, "To properly observe '-I. lII.atkeE's movements, and. hence co segregate the in.ilividuali waliT~, Ij/f such 'a movernenr, ix is necessary that tl'Le' mQ¥emenll:, as it progre:55e!l, be channeled between parallel .Lir'les,""

As a geners! rule; one sh'l'JUld al'WarYS !i!!ra1t fur the compktaoo of the fi.rst two waves ill it b£g:il1rung imfHJJsive m.OY~ b~fure dmw:if!g a t[lend ch:ilnnel, A trend d'laJfijll.et C3.1li!i'J.Ot be fQf.ffi<t:d nti! the flir,st tiVo. waves of:a iCY,e[e are t:O!m:pletc;)

R.obert Bcdkmall, author of lJT#cti mwe Expla;tm,.>t/" descrl'lx:s the CQn5trnction of til-£; EIl.tioftWa:"r"C trend C:ha~llel Ito nle foliow;. IDs. terms;

Wb'L~m propartn;g the ,ch!(ll'lne/~ a ,tangent., which wfli ~e riferred to a5 a fJasft line, sb(mla b'e dr.anm i'M.f,'t~g too OOn-fact po~n.t;."i ofG and. oJ: ,Qm..1:!' this (Jasf! line ha.s i!JL!'i!t'!'i dNtl.}t$, a line P.a1'aUel to- it shoufa bE!' amum, u..<;tng 1 as rh rent-act point, a.nd c:xtr'Jrlaea .M'"h~~ ,distance to UJe rtght (as shown in the example em the following 'page). Tbts Un~ Uli.ll es.ralJll£b the upper 1l1n#s of t'be trend ,cham'1.el.

it will al.ro lM JotmarueJuI tv draw a ~mt Un~ ta.ngentitd U'f;tb tbe boUorn;.~ O'f the ~m#re flrsvwaw mo:veme",u; subseq~le.nt(y using cuntact 2: ,a'S a pafnt.from #'I;)ie.h to drow ,Q.ftJr~ tbe« U,~e parallel '0' toc' t:t'end ttne, betW(l'~n () a'mt 1, Tbe upper ttlend..r:-bt:mne~ J;ine will betp rutabUsb probable .taf'gcts. reJ(jJ,'~ve to ,v;}-e' sin ,ojtbe succeeding W€itiJ1!5; the wtmnel:S with-in the c.!mnnel will' he:ip e;$Mlf)U~1J ttme:-Jmme "ftrences,. 'l'1:1e$-e cbarlnels haw b~ .labeled A ,~na lJ,

A fu:rlh.er·lJM has been drawn betw.eenco.m.act patrtrs .'i ana 2. Thls line bas been l!!;tal:J-ltsh~d Qv using the peaks Of rbe d:()wntrona ,lie;fWe..;?!;!. 1 ana ,2, 1ub.f!~as (iJe ~d #ne belUteer~ Cllntact points 0 and .1 bas ,~e!m formed by drawing a line' u:m;genUa' to the bottoms of tbe t-lP'/fYill'~d. G(".""iIet:aJiJ~ uj]Jen

dmr.vin,g trend U;'ncs U'('.' use f,l'.~a trougl"js as Mngentpotnt$ in an :uplwm:t, e:211(:/. the p('aks 4.~~ tl.m[?ii!nt potnt« in a downmmd.

E: II ion Wa ve C han n e I c: [) rut r u ct Ii (I n

o

We (;a,n 11Q:W ~tabUgh a probablr3 ,t:arget for the end of the third wa:lte in prl~e and time, based O~t nor',lna'~ fft,*rkef= bebambrpartern.s.

A.:§'S'f;Imllt.W toot ~O:rmar. ma-rkiet behavmr continues ,and lhe third W(l.t.'e. terminates at, the. top ojtbe wend cb'4~nel; at the prlce (md ti~ ,(;oonfitnate established, one (;(;11 N:xm ~ lbe cbannel fOr pi.Qtting ,the .P()S#bf,~ termirnuton 'in price and Ume frw tbe fourth .andftft;h ~["'es. ,us'ing l-he t!ttrJ rQfthe tblrd UliUl"g as eonsaaootn» 3, one drnUls a line' parallel eo .t/;;at dra:wn batween contaa' ,Points .1 ami 2, filii' jl(J1'tj.t at whiCh' thk> tin,c C()ntacts tbe- bo.ttom Of t1:w treJla channel will ~s.tab." Usb a probab'le prJ.t;;l~· farge!t [~nd ltr.m~· of 1ierm#~:tion for tbe fourth W'afl€.

In tbe same m:anner, once the' ji:m"rlhwm/f! .has been comlite~ and a CfJnJ't.t(J pointIonned, a Htl~ :l<; drawnpamllel to (be first and tbtrd UI1<iYf'S .. The point ar wbicb ti.Jt.r; lin-f1 toucbe.s the lOp Of the t.rend ch'ann~ wfil' prvtl"tde the t-a-rget /01" the fifth WQ'I.:'C in both price and time; •

Bed!::!rum notes that in employing the eJtl.l:Ine]ing. technique, normal behavior iod!.ca~'I;~ that wave 3, of a movemem should tCMlrncii:lte in. the v:ici.oitr o.f the' upper tIre.nd cllM!:tle] lJioe that was drawn lll!pCi:l'l co:mpl.eUQf.!of the fir-st tW~ waves or the movement. "Should wave 3ctl,d above the upper Umit~· of me trend ch!!rnod. the movement has taken on te;mporary- strengm, and ·~iI1.;el',e.f'Ore modillc~tl.uns iI:i!J the trend-cilaflne] structure should be made, ]n rhe event Wa'l'e :3 terminates, below the upper Ji..mlt8 of tbe trend channel, ·tt failure occurs, !lJ1d once again adjul!!itHi.e]lts must be rnade."

1 ~ I

Tbe ,fjUe$Non fbenat'fus:' Wben drawing ,a hyp'otb.eN~!

Wav!.\' l{ what references' areu..-;edl.. .• Tbe amlLrercan befound in the normaJ cbarnct~~i:r:::s of ~,L'al.ro tYJ.latton5J#ps, AccordIng to ElUOOi the dJ:jne.~~om l!fW.:2w·V should :rosemble l'oose ()f Wa1!1!! 1 i:n both price and tim«:

'l1.Jere/ore. ttl: C07~truC'itng our byp,Q'tbetic(/j,1 'Wave V, UN~ (.on:n:ect tbe lOp and b'O,ttm11 of ttse tr:e'id cb.a,mel by cirowtng a lInepar.allell'o Jl7at'e.1, wbtcb RirN!t Us the tm"tl{m·um prob.ablr1 extent of Wave l{ l'J(Jt.J.t on tbe Pri'L"C morr:tlm,ue (i,nd the ttme co 0 min"te.

Elliott W,ElVE! Ch.a n nell Cons1.ruc.tio n

EII{(}tt obsf!:mt!:d further Cha1"(,lcterisl-ics ,af mar.'kriJt bi?batliQ1" wbU:b extemJ t~J~ corl>ce,P'1 eWn further. r'~se dJaf'.Qcterlsrlcs were noted w.flb p,a:rtic.'Ula:r regard liO the most ,tmpc;:rtal'l:t mooement of tbe buJI marke't. the final fiftb UJaVf.'. Normally, lbe flftb ~ ft.'itl" tl'mnin(:Ne m tlxt top of the trend cba:nnei," t~flJru, mablisbi.ng tar,get:;'i' at that 1(;n'~.1 will, On most (xC4" siotlSJ prove hdpjuJ ....

'1 f:d:ward:s it M:lgee, TIe,cbr.ru::aJAnr4J1'w of l'tm.;k Tnmas,

.Am~lc'o.m,Ne\V·Y()fk, 1996, pg .. ~n$,- ..

~ Beckman, RohC'.r1), EllWtt lfi'ave Expta(:ned:A .Rec:'I·wtDrld ,Guide !Q .PtwJfcHng & ~fllJngJrom Market Tunu, fro b us Publishing, London, 199'5, p,g. 97

) lbiid, ])g. t03

.. Ibid, ]J,gs .. i 0;3.4 ~ ]bid, pg,W5·

6 FWd, pg. l06

Chi.,. pte r S

E.mOiit w .•. ·· ave Theory is based on the ." :l{ilde of Alt.ema tion," Slmp»y' stated, this means l:M~ In fin::lill~in! m.urk:ets-a:nd in all! of the <:!\.'t::UOO lInl,;rer~e., ~or that m:mec=every aetton hasan opposite a;.ctliQu,. Q.I' reaeuoa,

III its applica'IJ.on to l):.c;dtmiL'aI anil'ysis, !.his rule 'I;iI;,'a5 p.[o'ba'bL}' lirst obsereed and aJp'ptiled by George Cole, who wrote a semi-

II nat work on technics! :'lnall's:ls enritled, Or:aphs (uuJ Their Applicar{;o1t to :51Jeculativn.AlH10tlgh Cole had a different name :mf'Ft, he :Ravetbe ~onowing dt:1JCFiipI'IDn of it

AccW'dlng to too .law ,qf' A ction am;lRe"ction.lr:e~tty the market rot.'Cr.S~S (01.714 m(~krts 11.,lJ,c1.J' m/iglJr be c(I.'lied second.m:v ~u;ns of good proporUans, eitf.wt' !~P Qr down, in oPPQ$f.. timl to' the 'primary' ,trend, ulbi"b ends itt a ccmgestio1'l" Then,. after wrw!dng in the tevtl.l(jtt:.ainerJ withi:n Q. rtm'/.tf},(j move-ment up and down for mDre or less time, it wUJ mOl'''f:!' (Jut .of the oDngestlor~ in a tnm.1.f'fnent of Q.pprQX!mately t'be same exm.nt, in tbesame diMl'lcoon ~t,nst ehf! primary trena. ,ail" rer-'t!r.se, going ult'tb oragains£ the pt'imary trEnd fora disfaJ1,ce app~'m(i/eiy equal. to tb~fl'r$l "S'ooondary,! ru.n,'''

~1.r.lnTT WI\\!I! :SIMI"lIl'IED ®

It u ,obvious thai j'n ev.c"l)! second reuerse the mQ'lJement is. .tn. tt}'f! same dht'fCUort as t:m:d u .. nnparntively pac"aJr~J 'uWb' the origirlllJ moz;'('ment. Tttc theory is that the e~etnt 01 every paraJJe'i" m01 .. \f!m~nt; ~g(zydlel>"s.of tbe U'en.d oj We marJwr~ sh(mlll be equal to tb« East mQt.I{!mmt in tfJe s.ame(iit'(u::r['(m, ThiS ts "cco.ming 10 the law of R,~url'''ence.1

Theappllc-atiOIi of the Rul,€: of Alt.c:rn:3I.tiOil to the :£I[iotE Wa,'I"t Theory is ebvious, for tile theory l.tse.lf is based on this fiile. "Wave ]. will.!. be fu!l:owed by' W'.!I.vc 2, lntbe opposlre direction, followed by W'a'Ye :3 in the opposltedtrecrion to v"cave 2, anti so on. F'tnr:ther" the lodilvidttru waves tbemsdves cam' Diliinimull'l! :rlletl.~wing Dp.liCiUi.OJi9 whdCh ern be used ttl IIpp.tO'xim:.ne the extent of furore: waves, For instance. waves 1 and j. us,uai1y 3:pproxl.mate tn both. le@gU~atld uLmltioo, as do 'Wa'!f"1:S 2' 3.t)d 4, n:garoless of whether the waves lJIIT: in the impulsive; 01' correc!tI\.'l~ posinon, The same ItilO:fIil.'ijlly holds U11e fur aIll three ~'fflves of !II typiC;t] A·B.C correcuen .. Observes Robert Beckman in. 13/Jj'0"1: Wat.~ &plamed:

EUiott·& Thoory" of Alte.rnation. bas a number of mlSir. appttcatio'r1...<i; tlJe most obtdou.f tieing the manner in wb'tclJ j1'1'st wave ji:#7n~Uions a'~te wit',), t~~wa~.'fJifotrrUdfons tv!:1en a .b~ar market folJmvs a bull ma:rl..'Y?tand co'1"rec#ue acUon JOI. lowes impulstve u.:.aw (1ft/an.. A.CC:Qrding so R.N IJUJott, form, lmTam;e; S'Jimme!ty. amt alternation aro a '('law OJ nature" and a~ #wiollUe.. leaw'S ,on the branwe.'l r"?f trees app.f'{lt' first on o:ne. stde {Jj tbe main stem «I'itt tbfm on ·,the oppome sf.de, ,(4JterntUing theh' positiml. A.iterrnattot:1 Qccu;rs tn galaxies, fl()U~ sea $heil$, and b~ps in pineappws" ana 'was lunda., mmtal to Niefs .Bubr·s df,.~'COVery of tbe proce.<;s Qf C()g~rition. AJte.rnarWtJ, i.n the gc.o-poJt&tcai uience; wa..~ an ~nb~re.nt frature oj Os:wal"t SPengler's ft11di.~,g in i1ec#n e of the West. KiepleT med I'D ~Jesc:rlfN;! I.bedistam:cs. between, tux: plm'le,ts as a ,ry'slem in wMcb r;o(jfes .are m.tCm4te:'/;y lnsfflo.(!a ,and ctrcumsr;-ribed t,: spberes, There' tJ an eruiltJS,S list of ex~'nples (hat Can ae offrwe:d by natur:e and the SO·€nCS.'1 wb(:cb SUPP(w1 tbe prin~e'()f ,rJ'lternaffon. [Jut, tlJe object oJ this; exeni'!ie is tIM pattern .()f,~1!f(l1!7JaUtm ,as f,t is n;ftrJc.t£d 11'1 human t;lch:r:'4Jt. Wftbbumu1i actiVJ~Q'; we bal\.\i:J.' wnttnuou~ ai'ter=tJali'On with i#tle ,alteration

Autumn j'OltQws Sitmm~1j night joUows da)~ j'amt"tut fo!ImBs least:. bear markets follow lJuU ttuJrnets, ainD Y(l:1lg fol~ lows yin. Bull. markets and be,~r markets alternate .. A buti Inarket is c(nfJl)Qsed' of fit;(?! W6U/(!S and a bear marke.t ,a/

tilL! OTT W.Ii. v I! :S I M 1'1. D ~IED 71

tbr€r.: U'4t'l1S~ Five and rhone (1lr{;rrna fe-tbis .~mne r1.~le governs aJJ tbe' ~.ts, .from .th~ most 1nilm:.l~e to the 1'nOSr: gl'(;l:11,dio'f;E~

.,. otrer #me.

Within llu: jl!.--'!!l41XU.Jf. "p-uKltd mODentllmt, Wmlei' 1~ lJl, and V ,a-m i'l an up~t'(..l di~tizyn, f#Ja u;at}tC.;Ji II ,and !"V {1:riI? fn (1,. dOU'1HJJ'(f.rti rHre·r;N.'m'J._ WUbin tl:rtVU} Wm}~8 (1/ a do,wnumr-d mO~metU; the first waVf1 ~'s ,downw(;1,'n~ l1:te sec.-O'1'ut woaw. is ~'Td,(/ind' th{' thh'rJ W(lrJ(!, !'S UOWJ1.uoard, The first U-'afJe of a dQ,J;lnwlntd mowm~.:"1'1 ( nt!1:r fJl~~Ir3 War;\S's .1, 3, afld 5 trtltJe#ng in a daumu}ar:rJ d:1ntCliott, wb.ile Wa~)El's :1 ana 4 tr(.wel in ,1Xt! u'pw:~tyJ dinctiml-.. Up .aitfl'NJUlies w(tb d.o'1!1Hi, Odd m;,: ml>ers alre-nu:1:!;e w'Ub etJen num,~el~,~. ~

~ 001~, €iCorge, Graphs: and Tbe#' AppMcaNo1'" M Spec/dation, Pitma:r:t F;u.lbli5b.:in:g, to[ltio:n,.19'9H: QE]~illy published i1:I 1936 ~. BeclrnJan, RU.i>eI:'i:., BUion W:li-'(i b_p:lained:A ReaJ-\'liVrta Guide to fl'eaiaing 6- Profit1f"lg IhAn 1}lari:&g/, Turt.t.S, Probus PiUb'Jjsh]f1~, London, ]:995" pgs, 191-92

1'2 I!n .. l!..lO'T1" W f, v I! S I Ml"L I ,. [~j)

Chapter 9

EII'io,tt Wave

and Vol'ume, Anal,ysis

We _ ~o~e.> .~~ .'? .. :one ~f !Ile. :m. 'OS._ t '~.' . -dUD.. ~ .. ~(J m~ ... 51J!1U"S m. 1ic:clm~.<;a1. iirudy~tta_ V()]II;!i!n~, 1..0 recent }"eus, mar-

J:.::~lt.ec;:h:l1!icia!!flls-ificlu.dmS Elliou \'''~ve ana1y:sts-na'l,'"e latgc1Y ]gnored i!:hl.5 crucial 1tI:.1!l'k:ct g-a1!1gf ln ili.e.ir examination of thl:l ftillIiil:':k:ef, in.~reillid pl'L!:fNring to .fOcus 50lely on prtce, illndeed; Ii;ViI;:.!:1 Elliott h11l:!sclf mmd.e seant reft:'.Jre.I1jce to robu:ne itD. his w!!:i..l;tng!ii" This is a :mis~ake, and. Me: that has been ];.urgdy .res.po.nsib]e for the percereed "fuill1re'" of the EllIott WTh"""e -1!hcory. POI' wlrhout laking h:lli:o aeeeuruvelusne Into one's market iiInOdysis., the IDJ:. lyst comes awayw:ith o~ half th!e piceure .. V(lit'lme j:!l to price wh~;t~llne Is 00 ~ car, ~d you cannot have one w:iitll0lU.t Ute (j,ther; 'Wit ttl a proper Ullder&u;flJd!lr:lg; of voll!:!ru::, howev,t:t. the FJlintt W"::1rI.-c:·-nu:o.ry tt:r!1otes on new life, and one's OlJ.f!a1ysis, o:f the market becomes much mort accW'".iI!U:.

W'b:lJt consneutes wlume! Qwte simpJY:,'!;'"(J]umt: is the weld number of contracts (or shares) tr.iJJrl.ccd Ulill'.rn.g 3::;mg:letrudj~ session or over a give.n !Period ofti.m.(:. As a technlcal in.d,Lcatiori, vohime provtdes .important c:1lue,'l as. to in1."Cstor ;S;eorul:J .. enr, tile k~vt':l o.f o:.::Ommiotme.nt {or. llQn-.comHJitnuentj of rraders to a gtven marker trend,,:ls wclJ as wha~ is ~u.p:pe:!"llng within a ~Vel1 chart pil!ttero.,

As a rule, volume should expand in ihe dlrection of the price trend, H the pl:ev:ai!ling trend is lrp, volume shouldl be hef'Pller nn

,t!l1'J.e up d.a)..,,; and iligh~t']'" on the down days, ]f tile trend is down, volume should be lleav.lu' on the JUW:Il clil)'S" with. lighter volumc on the.' up (l:lys.This L., because in 011[1 uptrend there should be':' raore buyers than sd!l.ers and! ill a downtrend there sbol!lM 'be .m'Of,e ~~lJ!efs dun buyers .. n volume S'l10l1h:l SUl<lI" to diHlin.ish, it could be a 'w~f1l:iIilg that the trend could be IOSll!llg steam. and th.at a eonsci idail::i on or perhaps a reversal couhl be ahead. U the tlreli!1!l! was up, and we HOW , .. ~C" more volume on d!i.ps than on :rnIlies,:ii1 should be an. alert that bllyi 19 pressure is ",,1'Ining and sel!l.ers are becomtng more aggl"cssi'lfc, The reverse would be true in a c]o''t'ut.rend. If ,,"U.I!uIDe sWl1s to shrink on tlh.e scll--offs and pkkii: up on. the .rnill.es, QIlce again., it c'ouLo h'e :l!. sign lMt the trend is it! trouble, and buyersare sttartin.g 10 assert themselves, Whelll volume IrIOH'~S in the opposite dtrecnon of the pril.ce, this is called d i'il'ergenc e ..

One Q1' the reasons \'i'hy volume has ;u tendency to diminisli durlng periods of lndeciston is for. jlMlit th.:u:. reason, DUFiog periods of )aternJ movement on the cbarts, traders win often :,I"\'oid die marker, preferring to COI:iiioo[ ~h.e:ir funds unl.]'" when a deal" cut brettlout: is seen .. However, wlliJ.e lit is typiC1il! f(u ""ol'lll.lllelo dimini!5la. dl[lting such times. V01Unli;: can gillie the ~Jl~.Jyst clues as too pO~'iiib.k near-rer l di rectinn by measlttfi:ng thc Icves of CQnvkuO,Il or me buyers and sellers. Seeing if there is he~wier volume on the up days Of on the down days, die buyers are probably the mo:[le aggresstve, and the mam.,et should break: out 00 the upside, The reverse h cing true on ~he down day!!;; the market SilI01!iVd beeakte tbc: .d]oWfl.o')iide.

Ad.(l!re&.sli~lg the retatlon of volume to price movemeets, Robert Rltu., in Tbe Duw n;.eory, 'Wrote:

A market whfcb bas been {lverbougbt hec01'J1.("'S' dull on mllies. m~a fJevetops flCliIVi'lj' 0'" d..f!CUneSi C();l;ji;e,rS.;;1.ly, when a ma:rket is VPIf!Tsoltl, tbe unu;lency is. TO become dull on

74 1!.1UOTT W.-\,{E SIMPUH:OI)

dedi:ne."l' 4tj,.d aCl'h.·(: on rallJes. Bull ma-rkets termin~te' tn; a .pftrir;d o.j excessive activity and begtn w#b oompa,M"/jvely

ttgbt tro'flSeict:o.ns. I -

.~amtn(f'!fO;l of tbe da.ay mOvefftoent.ll; of the av.~r:ages f.1-na v'olume tn:l(U~g O["'el" akmg Pflriod of years' demon.srmtes tb,at the umaency Is for rnl:tm~.e W increasewhenfJOO1" neW' bigh$ or ~ett' lrn~:,;s haHv'e" been ~u'l'de 1"r.t primary bull' O~ bear markeU, wiib' suc.-h an Increase Inquently progressing uintl{ romethi.ng like a climax indicates a ,t!:;>mpol:ary' reoersat oj tw mo~e~t.!

h~ empb~ng the Imponan.ce: of OOtum~, ,the writer ,does not; Of course; intend toronvey the ,'(jea that flf)'U1'ne Of .Wildiirl8 is (U' tmpona.nt as tbe mOvemenki of the ftulUSln'al a.nd h'ansporta#on aw~s, The fatter a1~ (#U)4y.S 'to be oonsfd- . erod as of primary Importance. Volume is (!fIJ'(!(}ontia.'J-' slgn(p icafu:;e:, but' #shoukl never he ov,e~/oolre,l wb~:I1 (;I S:tudy Is being made of the priCe move-m.e.nt. 3>

Manm. Pring" ln 'kcbnic.al.Ana1j.!Sis b:plrlined, cxpOolJtDdeeJ upon thern~ditiona1 concept of volume as 3 .. p·ricc trend corroboration by de:mQiIlSuating ft can :!i.lso. kf'\!C as a 'price ind.i.c.u:ol'. Quudn.g WUUam 60fd0i1, author or The Sl'od~' Jfa1"Ju~t Ihdicator.s., he "I\IYi.ii!es:

In 84 per,,~ent' .oj/be' brdl marker'S the volume· bigh dfd not D.CCU"·,fij;f fbe. J!ri.ce pe:ak b:Ut $Ome mQ.nfbs beJ1::we,,~

iPrll:1lg notes 'mat voltnme "'has, ;I!..oalm08.!I: consistent te:nde~cy to pe~k 0'1tI.1J: ilihead of .I?['kedlufl~:lg. both. b!J1J und bear phases,"> He conClUdes, that voh:!l:nu~ "elves 8't.rotlQ. inJi<''.;t1tions of a !l!rend. reversal when it moves In tale O-P'lPOSi.Iit:: diDxd.om. ito the pr>ev.ail0 in,S trend!."~'

~U.IOTT Wh.'d' SDrHU!>II!1l- 7S

Addressing the subjecc of volume frtlm an Bllintt' Wave p.oint of view, Robert Bt:ckLnail tn HUrott Wave Explained wnres:

According to E'lJiuU, tf.J{.>Te {<: a re/atilff1,ly ,consisten,;t relatIonship b.m!'e,~n. the ptltlf!'f'fJ .of ,JQlume, the t:h,arnaertstiCS of t.he lm.pulsi!.<'e w,ave.s, amI' CO'1'1"eCUve suaues ~f an uptrend. Any d:etJi(jtirJt~ fr() In these ,r::harar.ur.isUf:;S shu'ut(/ be regarded with sm1dc:for~,

[Jurlng tbe CQw','i'e' of a major fiv~wat)(! uptrena, "'Wfl.m~ wt1i tout to graduaH:y increase dunng tbe r;;aurse Of the' first W(il;Qe, of the cycle, contract (1'uri7/E tbe second wave oj the cycle., f!Xpafid ,d,twb:l,g the tbtrd WUI,"e oj the :CJlcle,. conteacs a.g:a#~ aun'ng l,~'" fow'tb wave, ~md be recubin,g 7,WUI c:yt:le h.igbs "tu.ring ibrJ jlfl:h ana J~nai wctiJr3. Further highs UJi# b.e tltCOrdtd' :if the ftfJ:h u;~ ne becomes e:;;r;t(Jli,teiJ.

As tw flViJo<I.mJW (.;yd~ progresses; tbe l/oiume m~rifj;g Wave 2 should be .far 'tess than that 'Wbfcb was S(~'(m aU1'(r~8 WaLl€' 1. Tbe r:olum(:' ic.--vei..'t recorded daring Wtwe J sboulii: Of! greater than tho~ of WtW~ I, T.01wne trnNls di.lr'.l'ng lif'iW'(' 4 ~IxmJd be lrJ$S tIJ·a.n those recorded (hwi7/8 Wave ]., butgreaser than that a/War:!!! 2, Tbe volume oflrtllJ~ 5 shQuld be tbe highest of the 'cyc'e" although rare, wlum tbe lI'Oju·me drJri"g ~Vt"v~ 5 has been greatc'r (bar/ W~ve 3- (SfU'! example ·f)elmt~)

.the #h(.Stn;~tiQ7I ~/f/tn()nstm,t~5 .the m,(U:!:n81'" in which oolume IWeis siJo'ldd be e,'-"PfU'ted. to contim~~ tQ ~t~, durl:ng Wave-x J ana' 3" btl t become someu.,b,u /:'atJm'ed during ,the ro~ of Wav'{)' 5, Also nolle that although :be level of lIolume soouJd CQntH;~Cl .d:"in-R Wt;lVe 4 oj' .tbe .seqmmcc, Cf'oI;!'n a~ the terminal; point· of \f,:we 4, uotume is still.co'mp.araUf}eiy big-b:,

76 E1.LIOTT ~.'I'!.\,F SJ'1I-'L.J~LI!D

Typicall Ellllo,u Wa.ve VohJme Pattern

3

4

II 11111111111111111111111111

IE general, dlH'in~ me: COurse: of an on,gain,g bull maeket, velume ;[[1(1 pri.,~ should ;agree in theie general diiI)GOio;n. When !the market ;dises:, tbe le'\'el of volume s:ho<UM dso rise. Wben me ma.l'm iaJlI~" tbe level of vohmle shQuld oontract..As. ~ong as tll!:~: tevel of volume co.nUnlles to exp:md, andthere is 110 diver= Ge~ce between prJJoe. and volume, one can a158Ume a, further adVlmlCe in ilie price acUoo isUke~y,

Wben the fifth and final u.rar;e fs .t'er,u:b'ed, valr:J:me tUvergetices will' 'begin 10 appear. 11 the If:'Vr!l vi vvl,ume w.71tinues to rise· tk"'bile tb.e price .ac-tion ji~dd(fflJy turns If!tllargic, you am being wanzM t'mt a?i bnporlnnl re'D~rsa' is tn the' oJfln,g.. Wher.j: the price actiQ"1- start» to adssence, bsa fKJlu.m.e· does not, .the u,pt,remt moue Is .nearll1g 4'~ e.ttd.'

As an ·ruiide, we wotlll.d, note tha~ ElliOtt adds :lI noee of C::!Iuti.o,n about markets, when the: ]e~',e] of ¥o]UIJ!!lIt: Js extremely low

1>1. LIO r r WA'I"II: 51 MI"LI fLED TI

.. _ .. when t.tm:r./;[ens areabnormauy 'th.in/ theusual volume sJigna.ltl arc' sometimes dece pnve."

Rounding oue our srudy u.f volume in Em()u Wave patterns we .list the following summary of (:Ofl&id,~:rati.O!ll;S an a.nalyst £Ml!lld be cognlznns of when pcit'furmillfjl. volume analy-sis:

.' Ai aoy ~iv:eD point .in rlme, markets are elther under {Iilst1i:bu'don Of aec:umll!atLQ!l., which iuvo.]TI:s randomll:rendi persistency of a stochasnc nature. Sbifts in supply or demand characteristics. a..<i expressed by changes in \'uhl!m,e trends, can often gh"C w:.U'1:lings· of current or approaching trend reversals,"

.. A rtsc In volume h.:: ~'el:~ is 11 normal expectance folJlowJng a lJ.reakabovc the upper pali"9lmetcJr5 of a triaf1lg~'IE: or a flat; following a period of low actlvtty; when ;u market breaks al:m'i.-e an ~ tertc :bj.gh; Of when correcuve actton h1'15 bee . n completed or I.:s dl"".il.lWing ~,I)~rd c omplerian, I leavyvolume under any other c!l).nd~tiom, Is likely to indicate :lJ reversal of the prevailing trend.'';'

oW'Ju::n volume expands as thee prlce action declines, this is dIar.acterisil:i.c of 9. llqujdating marset.Tbe downtrend is ID::ely to continue until ·thete is a reversal in the volume relationmlp. M aWiI'o;il.cldng end to [he downtrend is 'mdh::3J~d when the levd of volume beglns 00- contract as ~he mat'tel falls and expands on ra:llying. actlon. "

• A sharp on,NIH)' tally 0 n low volume ifldiCiItU short cuvering. The price iEVds achieved are unlikely to be maintained,"

• Following 3. ffiry" when there is cxoeptiun;llly b1gh volume, be 'on the aler~ for the pussiif)iliL1' th:at eithc.r a buy.ing clilll}:iIOC or a seLling cllmax has oecurrcd, if volume refuses to expand within Wee days uf the suspected chmax, the climax will have been contlrmed, ,\

• The breaking of the ap't"X of ~_~ niang.lc (.111 h.elwy volume ~s :.'jignM1c-a!ll.t, indk:m.ilng 1:.11f': correctl ... -e: pattern has been ("L)l!)pleted,

76 IlI.LlOTT ''''·,,,·VU. SIMJ'UfLE.l1

A break of a triangle on lowvolume is not !'iJg.llill(~mt, iridi.cliI!tllllG the: panern i:5 llbiely to extenc."

'. The brealtitig of the resistance Ievel of a .tlal on high volume is :significant, If a break occurs on low vQ1ume. :it beComes likedy itb:ll:C the p.riCl~ ::;u;:tion wm ret.urn it'n the conlm-es of u:J.'e :fui.t, l~

• DnJing a rising impul.stl.-"e 'Ara"e, it Js :li. :!'li1'l~'l o;rr weakness jf,,"'01. urne COIlUnlle:s to exprulldwhilc the price act iOlru begins to 11111'row; liTnder th.esecl..rrumstalTlcces, Slil.pp.Jy CUI. be seen to be ~ uatfy exceed.ling demand.Jf thelevel (If volume continues to rise whne thrusts become~C;:l'easingly powerfut, this is a sign of s~re.ngth, slnce dcm:and under s'Uc'.h. conditions v;iU be exceed:tinS suplPly.'~

• App.roa.chring the end of a corrective phase, H will. be a. Sign of strength wl1 en volume begins tol ncrease while tbe:: price actlon 1~'S.lbi:s type of ac;:t~Q".n wtll creen be the precursor to a final low-vo lume \Va"i'e ') of Wa vc: C be fo re the nexr up swing.l?

• Heavy volume is, C>O.llstructlvC" providedthere is a COntinua. tion in the ti"e.nld of me .price movement and the price moveme:l1!t does not re-entee aeorrective ft~Jt or a tri.'1!Elgl-e follQ"i'Viog a bu1ge in roh.lnic: levels, ]f the)',!!! is :a :fe-;eiilitty.into a congf~tl'on rangefallowinga higlll-'l.'QluftJ1e IIJt.YIt',o'~ll thrust; Ithris W(!II,11d follow distribnti.ofl :.md be a. sIgn ,oi weamesSi,la

ELllOTT WJi.'i;'i:; S;iMifI.IFIIiD 79

1 Rhea, Ro'bert, Tbe Dow Tbeory, Fra!':~1' Puhlishing;,.Burt.ingron,

vr, 1993·, lPg. 86 ~ IIbId, pg. 89

~ mbid, reo 92

.~ ~,Mi:ll1in, Technic4~ArJ,alysfs Pxp.l"t'fjed, I\..~cGraw··HH1~

New York, 1993,pg.273 ~ Ibid, pg. 273

, Ibid, p,g, 28S

, Httl:rnMl, Robert, Jil#ott Wave E:r:pi'alne·d:..t Real~lf'i:wld. Gt:lide to. Pn--dtcl'l'ng & Proftt1fl,gfram Mark!:!',r' TUn1.S, Prohm

. Publ.Jisbiog, London, 199'5, pg..'l. ];()']-1 Iii 'W'bid, pg_ -203

.~ bid, pg. 2(14.

10 Ibid, :p-;g. 2114

I! [bidi, pg, 204

ft [bid, peg. 204

I~ [(bId,lPg, 204

!1 lbfd, ~g; 2.05

15 Jb]d, pg. 205

I~' Ibid, pg, 205

I' ]hid, pg, 2105

jo! llbid.,.pg. 20;.

Eilliiott Wav,e

and! Cont'rary O'pinion

0- ne are,a,' of markt:t, an3!l}'SJ,·s t~a~ ha-S, t;o~e to be lIeiiled U, pOll as a 'useful adjWlot 1'0 rochruC3!l ;anilllySls tsthe use: of senUment indicat~lrs. In U8iog i5u.ch mdJ:catQn; th~ a:ruliyst atte.mptsro obtain ~I gnlSp of Ule predonililaln psychology of the ma.rket and 'USe til:rls to mnnulate a, trolldirJ.g approach based nn contmry optmon, the premise- rOor this branch of technical ,;:J.llalysb (though it is more "pS)'(cho]ogicm" than "wechnica]") is tmn. at anygi've.li'jj time. the malo~ity of traders and investors are on the wruog side ,of l~e WI:lfike't. b:lJd.eed, t;lltott Wave Th.eoryis 1tsellf 'CQllt:rarialn m. nature. •

Another 3Sa-wnptlon uod.e.r1ymg t:1Jlis: fotm of analysas is m:al sportin,g diy,eFgences of OpiiniOiil a:m-on~ tradel,'s is helpful ror .gaInrng all 'undcrstaodin,g of' when: the m:u:ket may be Ileadirng .. '~Wbat ls tmportaar to w.ndCi!'5t3m.ll;" wrote Kernn~dl Sh:illeen in hiis book, Volume and Ope;n 1~,resJ, "'is that me dillel.le11Ce or' opinmn [rul1Q<lilg Ui'ad.!eit's] ereares a market thm. can mstain\ a sig"niificmit price move," b Without lh±!'I alJ.imP01'it:tm'L1 dffie'te.i1ce ·of· cplnian, Or sentiment" 'lI'lIIdmg !!-cUvity COI1fle..~ to' a standstill I1lOd it becomes ,aa::cd.ingjr difflic-Ill't [.Q' make money.1'bis ls why being. aWe to gauge .m:a.fk:.et sentiment i5l so Imtpo.rtant.

] l.U 0 T,.. W A \' lj: s 1 't ! . ., I_I .' , f. Ll 81.

Martin Pring, in Tecbnica; An#{.I.'si~ Expk~tf1£.d, gives us further .iru;j.gflt .unto. thi::; subject:

Duringprima:ry Vil.ll tll'ut bear markl2tFr tbe p~j'YcJj(/I~gy oj aU tnu{!.$tors maUt?s fi<fJ1n pF;1s~;#"},lism U1!U ,foar' to };NJ:pe, .cIV(,',... confidence, ,and ,gi'ieerl. For' tbe rJ'l{fjorily tbe fo.eli'uR, of confla-ent'e' 'is' bum tip o/,fer (I. pen'()(;l of rlstn,.g {J11r:;e!i:, .';;0 that QP~imlsm readses its peak ,a1'i)!gl~t tbe same po,hU rb.m tors map. J3et is a:J..."MJ 'reachi.ng its fJ1'.g.b, Com.'t"n"e,fu the majority tfi. most ,1JtssimlsNc ,a,/' mar4et f:iot'l'O'l},M, t:l~r P'I'f!Ci"tf!ly the point IviJf;!n tt should be buying . These Obsm}(#ivns an~ as. va/tel /V1" ink1'medi"at(. ... tern» peaks andtrme;gh$ af toe}, are for pn'n~ary ones: tbe diflN'e:hce U 1U)I'TTUiUy 'o.{ degree. At ml·(lt~f!nm:/;dt.a.teteem roW. furexa.'fltj)fe; $tg:nifica;nt problems are percetoea, .but at a primary map'kI?t lQ~ tbl!'y ofifm See"l ¢r/~'t .. ;rtnOun,t. ("Ole.l'n S-o-1'1'U! respea: tbe ;tl101'S,El' the problems the mo<l1l' stgnift"m~' the bottom ..

The berter-in/ormed mareet jn:r.t.idpants., such as &tsidf!rli and :stock ,exch-artge members, leild to act i'n a f.P'.lat:~1"/er con· waryl.to that of tf:jl() l'Tu-tjor/:ty ~v s.emr-tgm market top« and buying (;t,l m{'lrkftt bott:o'1'l.S. Both groups go throu.gh a; .complete cycte Of emotions, bu~ In ("o11'1!Jletely opposl,re phases. Th£~ 'f..<; 1'1.ot to :iir-~ggest tbas member» Of ,tbe puf)lf;e {I.'r'tt al:..v{E,Ys;

. wrong at major martset turns at/d' tbat profl?s.<iimwl.s an aJu'a,'rs correct; rather:. tbe implfcaUMl is I'h£Ji. in aggregate, tbe· op!nt01lS oj the.~ g roups are usuall)' trl, di1Y3ct C'(J.-'n/ttct. ~

'W'h:fik the ,mea:sruem,ent a.Il!~1 q nflntiflca~jal'l! of inves~o.f SE::rlJtIm~i!lt may kern a dubious prospect, successful :attempts have been made and t.b.e proce SS o.ifg.rttbicF".ing, -interpreting, and /!;}ll.rap oJ:'! tJng: h:nvutmeru trends fr-mn such data has become rerutedi liD recent years tel the point of almost being 1II science, While ID11![[Y a'i'ef!I~;I!i;;5i exist for obtainlltg such. dla~a, U:le source most heaviily used by U.S. lnvestoes is. The Bu.ll'bsb Consensus, pili.l!!Ji~I:Iii~'d by the Market Vane Adv.i;SD.ry :Se.rvice. Earth W'CII::ill:: a. po'll of Jrul1ic,et Jcrters is, taken W determine tile degree of bull·

8a fi L 1, I Q r T W' .'. vs -' [ .'1 J' 1 [ f I iiI)

Ishness Of bearishness. among: com.m.od~ty professional,!:;" The rattenale beh:iind this approach ts that mos. trader s and In.'1',estUJ!";S are i:nftuerxced to :l g![',ealt extent by market ~'miis~ry services . .By .mclfl.itoring: tbe ""l;f::W:l of the professtonalsnarket ktter~ the.refu,rt,:ilL :Ii'l'!a:'i(ltl~b]y a,OC·!J.!I]:'lLte gauge Qi'me attitudes Qf the tr:a4Wg plibliLc ca.n be obuined. ~

The H1ctmLodfut- 'interpreting these numbers is fairly simple. 1f the .lJJumb.er of b'ulli~.b. ad"sors is above H{}%', the )1l1IIf1:..e.'t is considered to be overOcn.!.ght and, :imp:l:ies that a 'top IW.y be: O.Gil!;['; A readlll.g. bdow 30% (mellilllilng that only 30% are ourush and, 70% are bearish) hi, inrerp,rered to warn o.f aJ1~ o!,"tt.sokl ,t:iD!nditio(l a.ndi tile Increased tikcb1mod that a ilUl:rkt:t bottom b near .

'C.:.ommetui[J.g Oil this pri.nci.p1c,. John Murph~',urtbo:r of 1'ech'l#caJ Analysis of the Ft,U!,ttf'eS Mamets, wrnes:

.."if 80% to 90% o!trUU"-kei' traders ~ bttlUsh on Q marke~ it ts a5!J.:.u,med that they hat.'e ain.¥u1y taken their m,ar"~f.!t jwri. t/om.. Wbo !"$ .left m buy ,a';uJ push the .mar.li:et higher? This tbe.'fl. :i..'j rme. Of ~'&e 1reys to underslandi1~g Conmuy Optni(}1'A .(l the 'r:J:fmrwh~fmin.g sen#me'nt of mar'ket trtJd'en> is on .one slde Of tbe market; there s.imply isn't ,t\'nougb bu)r#r.g or S'l!Illi11.g pressure'l(fji to ,oontinue the. ~£el1.l: h'(md~

Aaother co.m.mo.f.iJy used se:nt.iJ:m,ent Indlcaror 1,5· what. is .kfiow:n as tile '"llL"lgazint: cover hldicalor.O; Used prlmar:ily as a turniog poml kldicator; this too] full' measuring cl'tn.vdpsyohoJogy is h,e~pfu] 001" d~:!lc~min;Q: rhe polse uiUlJe trr;.~estins pub]ic and the HOOd}' near-rerm <H.l',ecrl00 of the maJfut. Martio. f'lriing exp:l'aii!1s:

.The crowd 'is typically urtun.g at maio» ma:rket t,uming points, (lui! the' 'ntnl1.[; miM#a m:nmally ntJkct :majority opinb;m. Thtm1Qn!., a $(ffltimrmttndicator "(m~d$()l~ly on report...", ewet' swrles~ netu:'ork new iterns., and other pubUc soun"rJS) would probably be !?xt",,"~e,{1-!' use/poil. Rowet~rw; a care-fur s.tud.y

of popular m~I:1U! pub#r:atio,t;S (sudj as Time, NewswrNtk, ,Us:. News & 'WOr-la ,Report" FOr'tu"tle'" ami Bus~11ess i'~ekJ." the nem"IJ1:k fft''ening n:El'w.:~ fi',u;mciai books on fbe best selkr {{sf, (l;Ttd otJ.n...,.. sucb source: can ()ffi~ a, [;try u:s&j'Ul supp!emen~ (:0 the indt.catot'flpproClcb.

'J',Ypi'calJy; 0,1 the t.op or bottom of an eSlt:W/l.shed move, tbe star)' ,of ,a ,mirket crasbtng,the gold price SQ(jri:ng; orr soma f)~ extrwn~t!'wnt ts in I'tsttJf n{!wsw(}r'f~, and the stOlfJi' wltl app,ear tU e Uber ~' Pt'D'ffl in entarti'c.re or ,Itll cover-story. {J'iQrtu:nate.iy, fry th~ ffme tbe .fact$ b.~VEl' be,El'1~ u't4fJ,ly di'$~ Inated, tbey bave u;su~!f:Y bee:n 'U}r!ll d£scl';)unt("fil by' thiff marlaers; ,{f: is th~ much mort' liltr8~Y 'waf tb.(! ~nediCl. are puOliciz.ing tbe end rather ~~141~ $h~) ~ginnin.g oJa rn.o!';e.'

PriingltdJds this, note or on111.iOrtL, h()~er; '. It is '¥tty' i!m:po£''Wlt, theterore, EQ make sure that wcl'l seorles are cOilsisten:t w:rlih, the othe:l" t~Dh[\jica] iJlidi,~atol':'Lx ~

An CI:ptj,on-cic:ri'l't:G sentiment i.trl(1~cawr developed hy two re3dI~g exponents of the Blllort W;.uve l'lteu:ry, Bob Preehter amid Dan: Mllnan, cemparesthe open interest on PUtS and ealls on tbe Staru::!ll:rd &. POOl'S (S&'f') 1 00 (0 iE X) , Open truer(;~I; :Ii!! ithe tOtal number of out~.,~al:i.d.:i:rig Opti.Olis at the cnd .of e~mdmgd~y

Pcecbtei' ;and llJlmaIi lI-SC: a 1 O~day moving avcr:a,g.'t: of the i!"Itin, which !lAS t!he ad'i.'ant!1lB.e of l>ei.:!lg :fait' ]ess erratic d'Jruli, t~cl.e 3.CtJ1..1.3J!. rndo .. ]iowc:'V-.;:r, because the opea Interest fl!gu.re j$ fur Iess erranc than diliily yo]umc:, there are fewer :s~gnal.5. &'1 'itli. ~t. 'the Sigfllali'i, are q!:uite useful for. 1d,el'ltiif-y:mg ir.l'termedh~1ie-tt!i!i:1fl! :1iil, apposed to mOl'it't:e.r.ITl reversals. T

The' actua.l Indtcator is constructed ff.i).m.a lO,day .moviug a~:I"a!ge of dlaUy :r:;M~QS. A readlng of 2.0 W. euher dli[',ecti-on. tis iUlJiWlW!!l and typlc:d..l.y signals an importam t~ po.int in ttJ.e maJd:ct. M~l)kr!t ibOl[[OmS appear to he associared wtth decJl~e.<; below O, .. 5.(1.~ MO:I.rk~ peaks, UIl the other bandappear to 'be 1ilg-

.S'!. EiLi..HlT1" WA ."E S I Ml"LI!' I BD

naledwh.e.n m'e ratio moves <1!hm."e the 1.9 percent ]evdrUld ilieilllds b:l:ck: hd.n,w ~~_

S\.1JcCei!l.sfu] Integratlen or contrary oplnlon and ,!!Cl4tim:e'nt i.ndlcators Q}lJ!I serveas a beDpfull ailjill'anr;:;t In ElI.i 0 tit War'l"e :~""5L-';. SW::'h i:nte.gr:a:t~on, h.oweve:r, .rnql!l!lre!$ ithe s.kill ili~n co!mes with ,expe.riel1oe~ With practlce, tnt: E1!Ho'tt trader should be ablE '~O :imp~ the ~OCltlntcy of :h.1s:trad.:inS by comoh"l:lng Elli:O'tt W.1Ve Theory with sen.ttim.oent .l:i!J.cllit:a.IDFS.

I 'I II

I. ShaH~efl, Ke.l:W.eth, ltOliumt?, and Open lrt.'ter:rRst, ]rv,!,ii]1 New Yom, 1997'. !lg. 21 •

~ P.!:i.:ng. Marlin, T.e,r::'i)t#CiJIJ Ana'lysu. Explrji'ncd, ~M:C(,;;!I';lJ.'W"Hi.IJ, New York, ]993. pg. M3

~ M:tarphy • .1ch1!1J, Thc1;n#r;;aI'A:naiy#s of tbe Futures Marh,ts,

New"ilorJ!.;: ln~t~:rute oJ Fma!ttue,. 119186, pg. 316

• Ibld.pg, 318

, Priog,pglj,371·73 (i Ibid, V,g, 3'73

, J."b.jd, pg, 369

" ],bx-d, pg, 37l)

£["lIOT I' W ~'I'B So] Itt Ii' I,I'~! Ii V ffi

Filltered Waves

-r- EQ]IO:t:t, ~a~lbeo:i}"~ ~te~t utmtyi5~~5_ un~~~ a.CCU· ~ r.u::y ~ hi,g]1tUghtlng ilill..mlng P0.lI1U In ti'i,e market, Mil rechM~ too], El1i.otn W;av;e' :ns, peerless wru;;11 Jt cernes to idt:ntl:t}ing changes in the trefi~:J.-minor, taterrnedtare, and prtm:a,r~'. However, the 1I1iD.cr f1uct1l1afiolls and l1l1Ddom. "noise'" generated by. the markcls ~Q'met1m.c!!i, rend to obscure these turnIng points, maki:rJJg ~l. more difflclltt for the Eilio!! anaJ}Tst to id!ffi¢!fy these key c\rellliS. JF01"tlJ!n~te]y, there exists an auxili;!!ry tool eo help tile: analyst f:dtcl" out the excess noisecaused by market YQ.latili:Ey~ u.rut~w waves"

'file filtert::dw;l.'iI'e conceptwaa dev;eropcd by Arthur Mei!ii!iiil, who 01U.tllii.ed ith!i.s principle in bi:S 1971 book, FillereJ lVaves & Baste Theory, TIlle mCa8UM,g device de:scdbed by Merril. i:..'i an amplitude m~r, w.a~tes art: me!l!8iill!red by tile fi~.1i:!.!:t" :requi.:l'ed to eliminate mem, In ~pk terms, lif alJ! analyst chooses too 19rwr-e all swmgs of less t1:mn.6%, he 110 l!~ing a 6% filter.1

"The use of a fdter permits sunpllilcaltiOil,"' says Me:rJ!'"iI. "Smek marker prices move in '~,,'-ave8 within waves wJthto w~I'!;res;this can be confusing. [f i'i: filter is used, tile Impertant swings are dcady eV1idc:nil:"

F.!..1101'1 W"''''l! 81MI"1lflED et

So the first srep incQns~mctii£tg :i"l (jl~cn:d. wave chttrl is to ":fu:rer out" ilIJU the excess nolse und refine- the chart 1..IDtil 'it becemee smoothed OU~, It is up to the mlldrRt to ded.doc. to wha( c1itgree a cli.rUt, should be filtered-e-wherher to use a 3% ,.5% or l'O%'v.;,rh.a!beV"el'-·.fiLte..r. TIlu5 decision, ,I1Dwever, shQu~d nor. be made arbitrarily but should be based '011 a \"lI.t"iet)" off 'ImpOdilJU me.:. tors, inchndillg the tfme element, the "cll,a.rack:r" of d1E: seock or commodity being. chareed, and the degree and m.tgnitud(! of the trend (:'i"·,h(:ther minor, Intermedlate, 0.1." p'rimafY).

Once that ha.$ beenestablished lbe next seep 10 censtructing the filtered wave cbart t~aLIi be taken. Merrtl .::::xplruns.:

'!'be ,jirs.t strfjJ' is to d€ci'~e rbe:.-mal!e.lit 'wtlwto Of! charted.

This is t,l)e filJ7.t-T 'Si4'8. 1~ oUt' s:ru.diE!4 oj !br! ,S':u,Mngs. o-f tFi'e ,Dou) /o'l:l'ej 1I1dustria:/,'l;", we nave used u fr.df~{mtim 0/5%.

$uPPO~?, focr examp!(~, rha'{. 'we US'e; a jiltrer 0/ 5%, ,mea that prices JmVt! be!'ln rising, ami have risen more t..han 5 %. we .0000tinue to note n.eUl bigl;'J.,i1'11adf! #l the sU;ing, ana for ec~h new high' point (lc.b{rweti, we ai-viele ,/)y' 105% to get a MW f(.'llffsal sig72,al (RS). /'i01l.' .<;uPp05,f] tbat prices sWN to' d~cUne. we do nothing untiJ the RS /JoinJ is matJJ.ed.'WbE'n tbis {JCCl'lrS, we know. tbat W(~ h,(d~,'B been in (,1, qUfJtt!yfn.g decJi~e since tbe {aSf high poiru. Thill," ~$l(,lMt..~h~.!> l:i:Je bn'gb· PO'i/tlt as a qm'llif:ted turning point which .r;.cm be plotted on a chart.

In gmphk: mrm, the sIrruaJ:lo:n is thts:

oil! ! Itillirli,', !'Ildl, !, 'U', n I,ng, ~Ln", I F'l'iC!l! I

tl... P\!!lIit oil!, !I !" .''111\1" I'~Q. FIl'~

's'" - Prlq" II'll". ,!!II ~1;Md!! ~ 1:/1 t

'A..".rllli 51~,MliI. U"~'S l

PIUilul!'lifill ""'1".' 11IN'",

Now that prl~$ 41'f!. decJ#rin;:, neus low p.n.tnts a,re noted.A$ each neul.lvwpoim if> made, if is rm:iilft#ed by l.oj%, to get a H!l'tiV reversal signa.l (R'S), If price$. turn aftJp.'J;nd ana starn upwa~ nothinR is done unt/;l tbe JlS lEf1.lel is reamf!a. Wben this ()CCU1'S, ,the' pr;e,certmg lou.' po·int Is estabJisb?d as a q'tI:(4#" lying tu,m:m.g pOint, a~d can be plotted. Ot'j: a cb(Jrt, The $tt:U(lr

Non Is as fo!.l()'l.{)$,.·,j

p,rl «!;I!I I '1IFilI"'" 'i"II!:I !:tIiI<I FI" .... tl(! i S 1'/;1111.1 ! f.I~,i

R'!' 'I ~,,,, al!l,olt!l It

1"I'tI" .,tollf'l,h"iI II ,u

o qIIIdl<i'r!.d nl!rn,lnO;I tloii'!l'. ~.FW'G'!I

W,1:~:'l, are meiillSu.rOO by '~]}.e 'ii'l1::w:cal, di.cstaoce beeweeu tlU!minI points, expressed as n percent of~hc ~{)wc::Sit poiiilt.,~'

Upsv,',i!njs af!.di, downswtngs should be P'l,lt on the S;i)Jm,~ basts. always using; 1 00% at, the: lowest point.' Meniil puts ~hls 'in p~rSP!;ctivt: with the fullO'Wing ~al,Qgy: suppose a worker's sar~l:ry iist;:i\,Iit lH% ~Olf the high poJfI!t} d'l.1f.~ng a recesslen. ,Lait~r:. when lbusW~~s improves, his pay is hJcl\~8!Sro by 10%.,1ihJs, does not,

,howe-veil'; f'CSWft: .bis~.y cut, 8'!uce t~e' lnerease percentage is .now based. on the l.ow PO[I1l:t. W.rites Merrl]: '

Jj'c,'fin':f; (1, .Jmer:a~l?ft UUWE? can be m()"lS:Uf'I:!ti'; tt mu.<;t betii'(Jntilted" 1ivo ,fUij(:l,'CerM tMmtl18, P.0I'1tts may ~()t, Oil' a cmnpkte ,ruring;' 'hey may b'l! part of (,1 larger swing tntoo s~me dtnu;lion" Note 't.bis chart:

18

TbrJ l?ft band .t:h'artsJirow$ all waves of mOnl! tba.:n :5 % (F\!VG5); the right band char: uses a 1 O%fllteT ~1;'JO),

Note tJj,at thEt f(;j)$wi~ Be.. altbough :ft if on{v 8%, is not eliminated bJr the JO%flltet: It 1$ pUrl 0/ the la:rger ~~~ BE, 'l1.Je same. f$ true of the tlPSW,~ DE, 1'be wtlIt'e Cn, hcm.!'tro" ,~ C"fJ'11:fPlWefy it!sappe:anJ it is a jilW-abte ~.

The .re.qulr:ements,tof ,a wmple1.e $;w1ng ,are (ben evlden,t:" the $Wing must be smaller ,tb~~ ~oth the prevlQrl$ $WIng ~nd the· sw,iing 1lJhitb foliQ:'IlI1 . .a

'fI'rec.dlP1:111 ._1 m; ~ 1B~'II'.:r 111a", A,·'I

:1"DII,~.i I!i'~ ,,,I ~o. (U'1irrtihllll'l, A"B,

Pr-IUdltogl '!li!ln~ piner-than A"'I

F~II~,"il'it , .. i1rl\l

. li';:;llr tIi>a I!I, A- a

A-I, t;\~~ltiiflii at; (I ;>Drnlll'~.';. " 'i!ullbl. "0". ~iI'I 'both "'MI'" t'."

Applyiillll?,; fl.ltere-dJ waves to U'be Elliott W"11ve Theor}' CillO ease moe til.,Sk of wave counting by ~ghitiing tumiag points, the~· J by mak:irtg them easier to idJt'n'~V, Men'H e.xplaiIJJ5·;

Blliott had some problern..<; in tne' ,application of bis. pri.-rleJpie. Many of bts Ir..tt7Ilng points w(,'1tl' debatab.le; his W(UIl!' pa!MN'tS tend to prcilij'C7'al'e i'mo f.!ari;atiom.

TI:ie seteato» oj hU7~.fng pofnts 'Is cm.(;iaJ, You ca'~ kJf1'tJ,U/y almost a~y p,attern if ,;I.fcm setec: the .proPL7 IUmi:rw /JO'i/nts. Whe.tj ftlferea tcatHJS are (lpp-lied~ some 0/ ElUon's- ,mrn{ng {Kn'nts ap!#"Nl:t' to be' quite ll'gh~, (ind be seems tt» b'a~ missed SOffl.fi imp'Qrw.f~t t:.H?"J,S, ~

It. folllo.ws,tb:el;t, that using filtered wave.'! C:;UIi w-c:.u:ly aid the a:naily5t ill apply'ifig Lhc muon W)~""'e Theory,

I M~l'd, Anhut, Filtend w.iU .. 'eS & Beuie Tb.e.ory, The .'\mt.tysis

Pit'Css"CI:ulJPP~\qll.i;;l:" N,Y, 1977, pg. 1 2lbid, pg" 1

~ JbJd, p,g.. s ,. 6-7 4Jil;rid; pg. B

, Ibid,. pg. 8

~ Ibi.d, pgs, 8-9 ? Ibi.d, Pi!:- 170

!J2 Ii-! LI. i. o t T W.'" 'J{!;; S J M Ii' t, I P 1 H I},

Cha pte'lr 12

Conclusi'o'n

Tht:.rit: arc .marx;' applications of' ithe EUi.ouWilI:ve Theory ito. _ _ the analysis of smc;ks and c-ommod:liUes" TIle EUi-otil: Wdve 1beory is perhaps on!!:!' of' the f11QSt lmportanr and! ovc"doQked tedulJ:ques .rn. the: entire discipline of technical ::w,dysJ5,. M 11 :si1Ul(l.S m. its O'ri,girul1 IDol'ID, however; .I)t Is ill. Deed of~mel'l;t ittK1 a1i.tgme'Jl!tado.ll befOre ~~ 'can be practiced wtth a s:lgnll'h::w::n degree of ac"cur<l!CY, Our eodeavor ln wrltfng (b~~, book has been to' asstst in tius refirung process, •. bow~r :;;malll our 0011- t.rl1:mtlon m:zy be, .H:o·peftilly •. other 1l!I1llilysts ~il1 follow suh and add tbe:l:l'lmptl.l: ilia rec-oll.!!!tE1![ctiog [ihJs m~t .faso:m:n.iing ,oil" tern-

ni-cal eheortes, ' -

In fo~ting his thQory, R.N. EJJliott had! little to work wlit1.l in the;;1;':i}' of pc:ri~c~i.flg. the guideJines of W'J.l'\~ funn~ldo!]. in real tlimoe:. Whlil.E: he w:a~ 9ib[e to b~,cGltest h:i!!i the0irY to at OIl;:m.J!n degree, he .[h"Od at a time when :S!~ocl: :m..t.mct daea W3iS harder to obt~lin than j)li~ il:od!IlY, a;nd compurers were .00t yet aya..n~b~e to. 3.5S,jl!J"t him in hhj, work. Charts had. to be constructed bv hand-s-a tedloas task to be sure. Th..iis, added to. the fact tb:lt he was ~~noe.d in age ;and in pME' health when be dleve1opoo h'is tbeor-::v:, served ,gre~ltly to hinder the perfecUb:Ulty ofhls magnum opus, Had he Ilved a Jew ;mOil;'e years and had ~he

~'Qa,ls at tiJi.:S (Usposal that we now t'3k:e for granred, perhaps Elno1it would have worked out the kinks and presented us

~ with it more .ronndedLoIllt. theory. Sucl'1, however, was not to be his, fare, and whil~ he Jefc: us a considerable base 00 whseh ~O' bli!i]d, there is .sUI ~ much to be :accomplished in the way of rkvr:'.top:iD@.: the Ellion W'a\'C Tbc()1'}~

01.14" primary purpose in wl'i~ing this book has been. to presem 'the rudiments of the Elliou W;t\',~ Theory Jn a manner that can be 'Wlders.l'ood 'by both l:aynliliDl;'l:nd professionals a!!ke., We have also ~dea"<)rcd to add a few.' needed adjilll:;!tm!:!nt$ to tllile theory, For those who desire a more comprehensive explana- 1100 of Elliotl Wil~'e we: would recommend to you the works of .t:hi:; ]cading t:'Xp0IIe'JUS. of [he them'}'. Bob Prechter; GieM Neely; md Bob Beckman an: IUUOOg the IllOS1t dl5t~ui5br::';d. I)f these.'

III our ~"eU:!i of stud,l'iI'I.;Q 't:be d:leory and re:~ding the Bl1iou 'wave Wt~Jblg.S of other an"a]ys,tS we: haw. come tn note some ,cCtnspicu(i\!S shoetccmlngs in how :most analysts use the theory" :and we have addressed some of ihese problems within ithis book, Foremost among them ~s the absence O'i Vl)h;lm~ :<mMys]S, rhe flIa.llle to integrate basic trcndline and dl:llit't parrem anal}," ~ witb Elliott V?3ye analysis. and the M:inost cbsesslonai roClti on wave C<CI'untin.g to the excluston of d1C m"'emll posltlon of the market, which is always of paramount importance inC! j:s of more valuot: than the i:m:1ivk!u::\l f]~II,-:'tua~ions .. Tihough. much work remalns before Emott . reacbes a degree Qf l;l ertechbHity, we bdie\"'"C l:JIh.e WDrma~ion contained m thls book 'w.ru, fuc:lUtnit:: a grea.t'c:r midecsnmdi!ilg and sklill in the usc: of ,this highly k110~"'n ibut wid.tl:iy ~l'b1i.l!l;t'd tedlJti.'c~1 [.001.

[f you, the reader, come :l\\'i}y from read1ng trus book widl nothD..ng else, remember this'; the mose Important thing in the ~inalysis of secunrteses to concentrate Qif.l! the everatl U'cndL When co.n.!>olidill tlons or drawn-nut lateral patterns develop 'wlitbin a .gi1<-cn market, do not wcwryabout I.mi.ng count of the waves; ~nS1i:ca-d, foe us on. t.he tmde:rl}~ng trend as well as any dassic chart. patterns that may be idemHlaOic. while wave c"O~n!:ing:ls :lmpommt, it isn't as important as the trend! it~clf,fuc

il!;jj. !I! L L lOT T VI 1<. v C; s D M 1" .L i. ~ j EI)

whlJ!e price'ii generrdry ;;u:fhe;re· ee the guideUnes.· ii),f EllJd.ouWilve fonnatl.on it is douhtM tthat ilie:y al~"ays spedft("Q'liy adhere to them, Bcmg armed with this bit of infurmati.onalone ~-'i[I t:tkc you far in YOiiJT Stud}' of Uk .markets :and VriUgreatly Increase

the varl'l!~ of your pOil:'tfo1i'O_ .

Thank you for ibuying !this book, and we wish you every sue. ("'CSiS In your j'Oliffic-y tbroup the mnrketpIaoe;,

No~e:

i :Bob Prechter, pre.l~ide.ru: of mliut1t Wave Intern:J.tiomlil, 'Can be reached at P.O_ !Box 16]8" Gaim::s.·me., GA 30503. CilieWl Neely, presldenc Qf']be Eil]io1:t"W'ave. m5t1tttle', can be reached at l2i8 GkrmC}'Te St" Laguna B~h, CA 9'2561. Itobert Beckman can ibe reached through Irwin P:rofes:s:.ioru!l Pu.hl~&.hl:ng, l333 .BUrT Ridfl¢ Pkw)', ,Burr Rldge, ]"[.60:321,

Apperndb:. 1,

E'llliiott Wave

a,nd Cha,rt Pat,tern, An,allysi:s

StQCk market dlilrt patterns take one of three IJM.ic {onns: acclImuJatl'on [patterns" W$trilJrilrtiuil patterns, Oil COtJiMUa:t10Wl (ll"k. a, COJlHSQ1!lda:UQn) p~tJterOl!'J, Ea~h of these 18 !'tfibtl:roln fti.e charts m;, gt:um.etrie S~1..1.Pes. ']1us· ]:5 where b;l!s:lic chart fl:l!.ttoC;'m :llJ1:Wi'ysi8, derives, ft.~ fuel ·W'"he:n one ]eafm to recogeize these basic pauerns, of which thereare only throe 'ba~k categories of parterns, he Is wd] ,0.1:1 his w1'I:y to exce.l.Im,g ~t. technieal ~w and at making stib~t3:ntim preflts in the :.mck marn.et.

One majo!it p.robJe:m. tJi);at we have encoumered tbroug;nthe years of si.mly.mg. Emott Wacve is the promlnent disp,osUion among .E.lLiott ana1ysu of gieving prioriity to a P:.'IrtlCtli.a1 'W:!I'!'e count when. it conf][cts with II cleae-cnt chart p~utet,n,For lllst~e,. Ol;fi .m:lliyst may la[bel the waves of a downward .m.pllil. sive [Wen-d In a .~en stock m~Pmmodiltty, :!my silver fur insutnlGc, as a fu."e.~V;"lJ'I'e declinewil!:ih :a.n U'lJt1;rIDl.ttcnt A-B-C rnJ[}Ij. and then. proceed wuh rhe ,~p;ectat~{J[I !that tbe: dechne wi1[ contmUe. However, all a1ml,Q a olear "head 9!I1m ShDlti~d~IrS·' bottom (otbe¥o whc .kml'Wn as <1, "ruu1tJ.d:irig ~o'~wm "'), ~ patte:rn ·t~ihic·h pooje:cts a bulllshtrend rev:ersaJ!. Is f'Or~, rnstea:d Qf talding this :in,to IU:"lcOilltl: when att,emp'futg ItO label the 'l;l;.";lV'es., 001,11: :m:aiyst per-

!E.L.LIOTT W AV IE s ~ M l'iL]Fl!;:1) 'H

:!lists '\liith his bcartsh count [,I~ldign,orll!::li "l:h~ bullish im.pl..i:cations of the developing head :.tnd shoulders bQI:tA1m, a 1110"""<: he later comes 00, regret,

'I'ihi.s, incldent ac:trifdly happened, as one promment :analyst :inslistcd that silver was in the midst ofa bearish dleclirW:llg pattern when the evtdence a,ctuiOIlHy :lndfcartcd quIih:: tbe opposite. See il:hf: sik"f::r chart on the fQIlOV-"ifllg page, extrnctcdi iro:aTti. the July 1999 ElUotl iV-ave F-i1umcfa'l r"Orecastl. fa highly recnm. mende.d pubticatton ~) r students desirous Qfkar:ning the nuances ,of EliotnVnve' in real-time rnarket an:ilrsis),

THE BEAR MARKET mNI SIIL,V ER:

WE:lElkly Bat (iro(i·"f'I!'!~~}.

(2J

(5)

@ .

~ M"" I'HlIfMd'~ ~'"'l" ..... ~

HI +-~----+----+-~.......,-~--+-~ ........ ~ .......

98 !ELl.EOTT W' \if :su.[P~! FJEl'

As. }'Ol! can see, this ruJlall'S~ chose to label SWcT'i!i chart as an .. '\ -J3-C correcnoe, .~mpl}'iD.g wi!J'!'eC would carry pziceswell bdow $4.50/oz;. Qlllite de:!l,r.Ly., however, a ;r'QoU:!ld.ing, bQttQiil/b.ead and silou1ciers pattern had developed (one C01l.lI1d also ~ec a "diamond" reversal pattern-s-a Yaru'l'tiOi!1 of the head and. shoulders) p ro] e c"tiog prtc G::9, to a mdnfmum target of :96.50/02: -a if not .bighe.r, based on the mCJsoUlifig impLilcatfoos of t.M.t paU:e!.":ll .. Ol'niOUS:tr, sueh 31n :iaJ.pI.i!CatiOD. would e:ntafi a revtston of one's Vi.raw count (rul!d to ills. credit" t.1:W; analyst did later n:."jse his wmre OOllnt toO n:.f.loct tills). .

In Vi.rritl.og this our :intent is not to berate rhe skill of tI.1ls p~!i" tiClIl"af analyst, for he is a fine ail1aJj~'''s'~ who normaJUy Is .qufte accurate in til!!· market jiutigm.etlt,. Even the best "Ellimtidans." make mi.:states. The: !point we 1t!l't: Hl r h~Q; to' fllaJrt! ~i'! that one should never aLlow hlms~ll to 'be "wedded" to a parttculer wave countwhen the O'i"e:rridin:g impucation of a ;p.'"en chart pattern cent •• UllCtS tholil wave COlLlnt. In other words, cban: patterm should alW(l.'Vstak~ precedence (l'ver wave counts whenever the two ,cmillict.. If Elligtt w~w!: pTIiiCliJli.o.ilf:f8WO'!.dd beg.~n to embrace this rule it would transiwm EUion\"la.¥e analiyslsand bring it one step closer to perfection,

This cbapt.er Ms not meanr to. p!£loviJe an overview of bQSic charr pattern anaJ.ysiHhat 'lWQuld be beyond the scope of ou..:r present work. For that, we would point interested readers to our ,eadier work on the subject, Ter;;bntcaI A:na1ySJ's 'simpl,rped.2

Anyone who 1& not r.i.UIJilia:n WiUl basic chart pattern conslruction should definiIlcly take time to team :It betore peeceeding: ftllff.h.er in hls :'Itu.dy of Elli.otrl: \'?3i,.;e Theory;

Not,!!!:

I Tb~'.Elli()!i Wai:-'e' Fhumc~'al T'()n;!'C,:;!Sl, .. F:o. Box ]6]8, Gainesvi1!e"GA 3050~, 523·3112 jSS'lIt::5

~ Dro'~e., el.llf, Tul:nucaJ A,rm{l.'.'!is Sirnplfft.ed, Publish1i.ng Co:n.ccepts, 8,16 Ea:.-.e~J' sr., #411, SHver Spriil,g,:\1iJ 209W, $]6

101} 1!.1i.!L I 0 "i""j' W A .... I'; s 1 M P II F I [: n

Wave Chartiing

WhIle the dlartJiogap'Pl:i.cat1ollS of the .E1I..i.ott Wm':C' Th.eory ;lire :m.any and. Wllined, thereex:i:5.t!!i,cert;tin obl!ltades 00 performmgan. olJ('..cma1c Elliott ana~~s in the cham QJ certasn stocks and ffiiIlmodities, partiOJl!l<l!rly; wheJl these sec-miies are illiquicI (~~".,.D.ot V!.1dl,elyheld. Q,r a:.c;:t;lJvely tmdfd),A safe rule .oit!h:wnb fur d,t"Cml3ng which 6~ClllCklJes can be art.aly.zed! 'With Em.Ott ~ is to diem: QllIly In tnJose Issuea '\vi:r!h. at lease [001000 shares O'l.n· 8tolJndlltg and preft.fib.ly a .miUiDEL shares 01" more OUL"itilllumg.

Jill. even ibctltCI' vvay to exaet :;u thQrough t',o'arre ~}'£i.s. is 10 1'Il!t:~~il.m:· the warves on 'a stock or OO'IW'D(!Idi'W sector, rnthe.r t:11an CI~ Lndiviooai i5suf'S" Siri!ce' any given sector C01i1'C:.U!i1lS a. nuenber ~f ls.5Ues. ldeJuiillll'bl.e waves v.i.I.1 ;iloo.o1:i.t eC:ffillm..fiyreg;ister on !i1e charts of tile variuus s~,(:to:rind~x:e~_ O~e' way o~ obtainll1l these !rC!j,ruts is iIll!ml!lgh. <!! ptsctice known as "wavecmrt.Ing;,'"

1b.ils grooodbre~ teohni,que ilt'1lS r • lnvented lOy a iPim]u~e:1" of

~ecl.utic-fjJ arui~ys.i.S, Ril:!h.iiEd W. \VyL.kiOJ[ The t~C'hniqiue: ~l1Vo.lve.~ the lI'Ii'eF'Jgiog of tful!: l~~];[l.i.llg stocks :Un a given sector, Jack HUll:iun, in Cbar'll'ng the Stock M,(o','rket: The W)tckaffMetbod, C:X.pJ;J:i:ntil :

.Ai w.ato'e cbarl s.iJO'W$th(' p/;'ydJo.logl.calmonren t to buy at sell. It is fbi? PU}S:f< of the mu:r-ke,~, a: condensed pJerure of every

. tlit'r2'l dct,'f!io,Pme,m: in e'I.!'e't)' stoct: mr,t'l'ket :f,ellstm1 and ,(,I:n 'int:Jaluab!c ~Id ~n determi'f!!'ftg tl:Je h4rni:ng po1'IUS of minor

ami Interm.r:..vit'a·te :~uringsl1-equerJ.,dJ' d6IJ/s beftJt:e the popular , II

ave;:ages gt~.'e' an indl{;t;!ti'O-f!.

K~t.Ie cbarts are graphs of the ,aggTp.gate priCe 01 f!Je fl1,,'e leading sl'o(}.fS o.f at,! imhmry g'l"D M/J (liter tb-c past ;srNJe-rol m{lrntbs. T'his gn...lUp of iivf1! is adjN$,ted from time to time. so the :Wc1t.'e cbar! snfYWSi the proglt!sfJ of 3tock's with .r;:Qnt'tniWUS ,;M14 rf'ai Jllad(''r!libfp_ E!t8T)' dJ.r:1I1.:R.e! in the (lggregate jJr.ir:e tbrougho'l!,l: the tr(ut~'l:g tll.lJ' is Motted, and a comp.k,f;e U}Ull(!' chart al:m, sixm)$. :r...'Olm''n1l' and (.j.':r~ tnde» of ac,tiviry. 0'1' tn.te-ns(,t.J~ of lnuiitlg_ i

Man, exa.mplc; a w:l.,\re chart ofth.e m;~errnct sector oould thenn:ti,call~'be constructed by 3VeF'dQin;g 'the daily (or hourly) pl'icu of the fl.ve most a.ci:i'!,!e~y tJlad,eCl l.tHernet stocks. Accurnm.1ati.'i: daily volume for t!1f;'Se fiv,t: stocks would be avera:ged glS well.This provides a unlque and highBy reliable m.ediium, ,f.o:r spotting, Elliott, \Ili;av,e: trends in a gi~n sector sinCe ithcy are, more (]kel), to be spotted man aggregate stock cnart and are ]~ .likelyw be influe'b1c0d by 'VobtiHty and other eph~m.erf.t1 factors· that may produce mi,51t:;,du~ sIgnalo; in the. cha.fii of an irn:.Iiyjdua!l stock .• o\.S Hutston observed:

Just k£,ep in mtnd that' wee» you 'Nt cb(lr.t#~g, you'ro ,rie'ai·, tng uxitb t.'}'e'w~s- Ji-~'f!ry ~wi:ng tit. the 1nClri?el, no matter .boo,' many. pOints ft is,cmm'sts (J11/.1"#'h~t'O;'us bUJ'I'tlg t:md se.U'Ing wtwe.s. 'Ibfl wm/e$ tastjust so long as th!fJ.:V cal'~ a:tttact' a f,dl~ i~ and wbfJ'u fhat /0 llotdng i;.~ v:hau:Strri, the W/:iu(l' ends and a c()nttf~1J1 wCWrJ sets in, ,[r~<i 1.nuc-h like tbe titk mQvtn.g 10' a bi:gh"-,,.' Of" low,(!T ievel tbr(mgh a sertes of Stl~S~ ~

N1otes:

, Hutson.Jack, CbtlFti~g the Stock 1f..JarkRt:The wyr;koff.~l.e't"od Tec.bnia!l A11ral,ysiiS of S'I:Ol!::ks & Gomm.owuJii';'s. 1998, Pit'S, 22.23-

• Ibid, p,g. 23

JiI..HQTT WA,"1i SJM,PitHIEr> l(llj

I,

Chapter 13 ,Dlictiio,nary ,of TechniiicaII Terms

','

The fit!!:. paase of a buil1 fiI~ket. The' period in v..:hic'h utlL-sigb-md in",-eS[:Qf,<;; begsi to buy shares from. di!8COilU''a.ged or d'ii:;tIessed 15e.1.1.e.r.s.Fll:JlatLcia] ,r:c:pons are 1U5willy at tllleiir WQI",st and the Pl!lbtic is !cQmplletcly dfsgusted with the stock market. Volume- is onl.y mooemre DuE bc;giinnilng to increase on rhe rallies.

A(.tumulni:O:IiI/Dislribu~ilon

MOOl.ef1ltum Indica,rot th~~ a.;;socia1tC:'!i changes in price and volIU1Ie. 'I'lTIt~ in.dicator- is based i),i], me- ,premist: that me higb~'.!" the \!'o~umc; frhat. accompaeles ;} price move, the: more it.lxnificaot 'me price move.

TIle mv:aJllc:e/decooc line iJ.'> undoubtedly the most mdelY-lIillSro measuremem of market breadth, It i~ aJ cumulanve oo't.'d of the advanci:n,gldeeWtin.g, t:;;rn;es,,'Wh,cn cQmp.;ut:d fro 'the mo v ement of me: TItl>'11('ket ,indiI!X, the.W !!:me h;;q. :proven to be aa etIDective gauge or the stnek I:I'Ur.ket's. StJrc'n:gdl.1l1e A/IDlIDe has to consrm th~ ftlarket movt·ments.

The AID lim:: is ,--alcl,l~aled by :!!ub1:il.'aClt:l!ng tho: DllLDlbt:r of' .s~()cks w1tidl dediJ1ed in price lor tht:' d,lY from (.he n'j,Lmbe:1" of stocks wbidl. advanced, and then adding this .. 1ilI1lIe to ~ cumulative toW-

Pri'i':a·¢.e.~,y ctrculated publicaricns whlcb comment upon the ftlrnu'ie course of ftnancial nmrk.c,-t::; and fotwhieh a slibsctiptlnn .is usu:ill,' required. ,

E1.idt.~lJJe'e su~est;S, 'Iha~ the am."1IDry sen,rjC'C5 m ~,ggregate aa [n a manner o:.;lunpktcly opposite to that of die major:i1tf and d1c::refore repl't':slt nt a indile~, or of a. con trary opinion .. Advj~o.ry Sentiment Index "" percentage olT bullish market newslerter w:r:it-

• c

ers in relation to tbe Wta1 of all mose ,expressing an opinion,

,Amplitude, of cyclle

Nurmally the ~tmp1ilrLI(h;~ of a cycle lis a. function of its d'W'1tt;o1l; t.e. the lu~ger the ~)'de the big£t';t the SWitl.g.,

Aritli'nm·~tic sc..al e

AI unil:S of measure 011 aill ar:iitnmtlic scale are pjQu~d ~ the same vertical distance 80 that. the di.Hr:::rcnce In space 'between :2 and 4 is ~lle same as that between zu and 22. TIn scale is not panic.rly sil'tLs:fucrocy for IQng·ltCrm priot:;:t:' 100""1:mems, since a rise from 2 to 4 represents a doubin~ 'of th.£ price whereasa rise from :;,W to 2'2 represents o-nly a 10% mcrease.

[;l,criou in which there is cssc['i.tWly a long decline in prices i~nt~lFrupt,t:'t.I !by important TIlUiC'.~j usually for a lonB 'lime. Bear market!;, gt:neF.dllly consist of three phases, The fJifSt pb~se is dtsI!.tn)fY~~ on, the ~ It CU [I J is p~l nic and rhe t]li.fd. is akin loa ''tli'Uh'O'I,:n:, Those mvesrors who have held on ith.roU!g...h the fl~1t two phases .fnruilly giv,e up during, m.e tlW:d pnase an~ liquldat,e.

Loo !Il:L Ll 0 TT WAVE s i M!:'" t g s r ED

IEh~;n' :spreadrng

l1...1eshort s:lliE; of a future or' opdoa of 1!! nearby month and 'the p:~'m:"...hasc of ;l! dl~ conesct. (Olle 'fIi}mble exeepnon to- dlis principJe; in the 'traditional commod:ity markers is the precious .Iilct~~ group. Bill!! and! beaemarkets in gOld; siJ],."'"cr allld! platinum are led bl}' the dJ:M~Dt months.) .

geartrap

Co.rret::ti.ona in ill bear ~rket which call 'ei!!s[]:" be confused with :'I. ~TS:,il or a mew bull market. rnf you are not careful, you can bewashed out IYf ;lJ D~~lr trap.

A signal! whic.n s1J;g,~ests mail: ·the rising trend of 'an index Of stuck h .. 1:;; reversed, but which proves to befuJsrt.

Ii pcr.iod iowbic:hprk-e.s ~.re p;dmarily rjsing, :n1'O!:.m..ally fur an extended period, Usually, bur not. aIw;ays, di'Vj:Siibl~ ~nti) t:Il!ree phases.Tue :first phase I.s. accumulaucn. The seennd phase is one 01 a f.tirl:y Steady advance wiltlt inc~-.1l8ilng volume, The iI:hkd phase is marlied by conslderableacttvtty as the public: begfu,s to r,eoognlzc: and aUetllpt too ptofit from il:he rising market,

A si.,gn.:\! 'WIrudt suggests. t]l:U the dcdinmg trend of an !odex: or stock has reversed, but wrucih. pI'oves to be false,

The ,PiJl!I:l'dtase of a n~arby futures/options corr~ct !!1nd III short :saiIe of ,a, distottlt Cm1Itract, III certain types of bUll :m...:vk.fltS 'W:bi.Ch are: caused. by <l! tfg1'Ito~ :in the supply/dcmand stmatlon, the ~~,earby oCOrttTIIClt: months q;mstmUy rise faster tla:1l!1l the d!istant ones ,

:E1 LBYI'T w ,,," \"1'; 5 ~ MPlll'I.I!:D 1m

IReta

:M!C:;31lun:::mcnt of sensitivity to m:!i£kor n!l.(Ji~,eruen:l;:S ..

Th<e:trndil]g cycle (four weeks) breaks down in. two shorter :;lJpha and beta cycles, with an ayel1lge of two weeks ,eaoo ('\r\'"alt. Bressert).

Blow-oifl's

'::C:i~rnat~c tap} A sharp advance ;t~(;o.mpMLied byextr.l'otdin~ 'I."Olunl,e;i.!f.. a much larger volume than the fio.rmal. ll'lcrease whidJi &j]gttil]S [he final "b[.ow·o.ff" of the trend. Uri~ .65 fuUowed elther by g 1X."YC:fS<ll (or at least •. 1. pt'~.i,od of st;]~tiO:tl, fl)flI]lltiQf.l or ,cQrnsollidatlion) UE !try a ccrrection.

The bond marker (i.e. the ~Ofl!g ~:Ii1d) has three main seeress, whicib are classified :iLcc:uffiillJi,g '~G ]SlStLl.er.

- D1l g(l'Il~r:!mH~Ilt

,. T~-exemrt issuers (i.e. state and local gO'iFcrnr.nu,:nts) • Corperate lssuers

Br,e:iLclth relates ·to.th.e number of issues :partic;:l,pa~i:L1g in a move. A r.dly is considered suspect if the number of adl~lclllg i:s.mc:~ ilimmi~ht's as the .cd]}y develops, Converselv, if':3. d!edi1iH~: is 3&.0;,0.dated w.~th m.'cl'casffi:gly fewer f.~ll~ stocks, jt is constdered eo be a bmllish ~iglJ!.

Ute hele OJ' gap~1l the chart wllich Is ct'E:altect when a 51DC~ Or conu11od!lty tU"e1l!k!';, om 01' anarea pattern (a:rcas, Dill the 'bar chart wh;e're no trading nas ta.k-e:[1 vhlce} This g,'ll.p usually occurs :a~ the oCom]?ktion of an frnpo:rl1l!flt price pattern and \~1.Milly signa!;'!' (he heglnni.ng of a sigl'll:tl:li;::I!flt mumc:t move.

BEe9J~aw:l.'Y gaps 'l1!lU;:l,Uy OCCur 0'.0 ne;a, v y TIJI~umc. More' oft-cn ilia!!] not, Drcaka(W":l.Y gaps, are not .fl1]~d,

BillyJJUg Or ~eilmg preSSl!Ue js mt;:L~1Ll!redi by volume .iru::l!icatQts. U measures line &tren,gt:h OF the buyio,g 0]" 5t:iIlin:g,

Call1'optiiic!IiIS

Optl~ whlcb giiv"e tltt' buyer th,e :rj8b~ ttl, buy rhe lifidl:r~: ~o~~ct Q~ Mock at a :sp~l!t(: price within .tt ucrtaJl!1 pel'.DQd. md w~,ch {ib~ ~~ .!leUa 00, sell me oonU'aet o.t :It:od{ for th~ preJ:i1JlI:llll rec:ell.'ed! before the exp.imrionof tbe- desip::l:I:ctd time pedod,

Cash ~aH:lex

Index 'exPKSS'ed.:an monq1bis is in contrast to fumres pnces .. Olaill1elll'ines

~c:: chaunel hne, or '(Ire rerum line as U is oo:metUnesc:illbJl, is. a liPl.'c panlJ!lcl1Q the b3i!i1.c trend WitL II js· the nne lin a bull . .mru1ret which :is ~Wll pata!Ue] to ;the basic uptrend lme w:hkh· COn.neces (IX: L01;V8"

MOthr=.r word for a symmetrical triangle, A Sj'mrOcrtr:lca] trla:n~ ~e is ciO'fllpooed at a series oflfl,vl) o.rm,Q,re- rnl!lks and. te;:ucl. lions in 'Wllim each succceWtng[peak is ~o1p1,"er dial) It." pred)e. cessor, andlme bo,n'om of each 8lK0eooirl8 eeacuon is ~et than. its, predecel§5O!'.

E!L I..l 0 Oft Wi:.. YI!; ;,Ii i Mr'LIHEI) IG1I9

, ...... commodity gi\"t:s the holder l~hie rigih:~, bm not ilie obtlgati!Go, to pucdra-se (a c~~I1) Q'F sell {a put) on ,an 'l.Il'ldt.edyin.grntl!;Lt:es CQ'1l~ rract at ;,1. spociific price within ;I, :specific period Qf time ..

Compos:iite :a,v,er:a~e - A stock avoengc comprised! of the ~L'Qcks which ~Ike ~~IP ehe Dow Jones Industrial Aver:a.g,(: (DJIA) and the: [low j.OJiCS Ulill'r-f l!t!.:¥er:i)~e.

~n.."1I1I.y :a 1lli!.tk,e ~ i!1dex composed Q.fiil. selection of specific stocks,

In a tpatt-em. theconflrmation 15 the prJl[Jit at wruen ;!J, stock er coJ:nfllod]r.y ~jr8 an area p.aU12:I'.nidl the: ,n:pi!ctt:di dlreetlon by an amouru of price aile] volume 5 ufflclenr 10 meet oTil;)imulTl! pattern f'cqillremer.Us fora bona. fide breakout. This is ruS!] true :for o!!c)]Ia.tti!t' s. ThcClrl:firm iii new h~gh D1" ,:A new .. Iow In ;!I .s~cdi::. Of OOIDmodiij',~!) O:SCiiIJ9:~or needs to ,'~ach a new l1:igh or low as well .. Failure o.flbe osclllat or to couflrm il new high or a mew 1c'w is (;-aI!lod! ilIi vt:Fgen(.-;e tmcl would be considered Mi. early im~ncatio,D of a pme:l1.tial reversal in direction,

UtI!; sid~waJ's trading ~'3. fromwhuch ~1'l~a patterns evolve. No'!: all c'OOg~~tfQ[I p~l;'i.()(l.s .produce a reil;:ognl2able pruitJte!:'n bo-wt;c~1'":

Also c:ilUedi 3. contln uati on panern, it is an area partem thu breaks out in the {jij(",ectiJon of the previous- trend.

A. measure I)f $~ntiiJncl'lt ~ u!Pefu[ in. as:!iC:::!il~~n!;i the majority vliew, hom. w'Wdl a CUfltrary opJnioocan be cfletived,

The prices of Jruliuy (umIT.l!Qdtti~$ reflect !lca"M.""JiIU.] cycles, Due to tnt:: 1.!gr.h:;:uJruraI .naruoc 'of most ,commoditles" II1n::s.e {,;Ck:s are easily ex.plamed and understood, Howoev~r, for seciLlx]ties die c}"dlcru. natl'lrt: Is more dJiffl.·Cii;dt to c::x:p.l~l!:l" Human fl<liltt!!te: is probably respofi5iMc::,

Deoenlilial p~ttem

A :POlItretfl !I1rst dte>d by Edgu Law:r,el1ce: Smith. lit: is a ten-vear putem, (Hi'Cyd~ QI :s-cock lfU'k~ movemems, w:ii:tich 1~ e's~e~tial. ty !repc:ated itself over a. ,s-}'Ea1' period,

The decenmai pattem can be::- ufgr'Cater va]ue .If' iltis used eo iaem:ify whert.': the :stron,g and weak poinrs U!SU<l!ity occur and then to check whether oth.er' tecn.rurnl phit"J]jorne!l.~. are t\!Jimi» tent.

A difluslon :index shows [be percentage of indicators, wWch an:: a bove tnc:::iLr corresponding Ik:ve18 il] a p.n:rn.<;I'~ period (m th;is case six rn.OflW cai]i.cr). in-rue llfidicatof5 art· the co!llncjd~'FI!t ~& nomic lrndica~'(l[s that tendto nse aJl:I.d &Il coincidentally wltll the overall ecX'm.oMlY" These indka:tro:!"s tih.usptovid,~ a good :Ilppl'o~thm of th-e CC©nomy.For eXi.1tIJJpIe': industrial jprodu.c. ti:Q.I]!, CQlls'ttmc:r :i~::;u.Jlm.em debt" the fedietlll budget dcfk~t a,nd: lntladon,

DiSiWUlilt ~:ate

The' discount r;ue is the rate at ~'i ... htch banJis· can Wrn)W d~tify' frum th.e P.~d. The F't:d can reduce banf.:. m><!.i:'\"C\!i 'by rn!ms the dbc,ount rate <lind expand reserves b)' lowcring !the ri:US~ count nte .. It1J practice the dtscoumrare has little ac[UID L1illuence on Interest .!!lites.

The. !l:"b:st phase of a bear t1fWIket .. During tht'i flrst 'phas~. fa:rsigbted in'Vestor.s sense the fact that business ea.rllJng;s hav,c rea.cnw an abnormal bdght 'md \.U'.I!i.na.d! tnei!j" b(}ldlln~s <Ilt an mc~i,:i1g: pace (acc'Ui'liJ.:i1aidO'n).

DiVergence refees to a .slm:Hiofl in whlch dliftbr'~fI!t delm.ry mooths, related m.a.:rkets 01" t~bnf,caJl ~'I'li!tic3JtOf:'.s hi!] to cenfirm one \IDoth.er" Divergence' is a val'!.ttihte concept in market ,mal)'" !S,is and Qne of ·the be~t early 'warnln,g !ll.gnrus for hnpendiJli trend rcvemu.

Div·euifkatloA

. Umltmg ris:k e~Qisureby spreading me mvestmeou, o.vu (!if. rerent J1l:lll!.1'k:~rs Q" iill:<ittwncr!Jt!l. The more nega.tilvc thecorrelai!::iQn: between the .markets., the more diversified the ri5k.,

Dominant cy[)h!

DOfninan¢ cydc5 contumeusiy ::uffeCl fumtes pritts and c~:tl. be: deM.'y :identified. These ,'-]C1t5 are the orny ones o:f·rea] ·wtu.e fur f~~casting purposes, Mo5t. futurea .markets Jl~I""e' at Le:h~t fi,,"e dQmin.MJ: cycles.

prima ry or intermediate cy"CIe- ....... > 9 to .26 weeks

lfad~ngl qde-.-..> f,our w,eeics

Shorti>terlm C)'Cile- .... > severall hours: to, $!'velli'al daY,5.

m 1897' Charles Dow oovdopoo two broad. market ave:rng,es, The .lndu8tW1l.verage i:lld!llded 12 blue-chip stocks ~llDd [he rn.iB. ;we:rnge was CQropris<:d. of .W mitm~G..I en:utrvri.!i~s. The Dow tffi'j;~ .. o.rr rcsllll~ fro.ma !Senes, of mkle5 pub'lished by CbaIJes Dow in mil! Wall Stifit Juu-rnal between 1901) and 1902. The Dow theory is the ibrelt'Um\e.r!tO tlll();St prindpk:s of modern teclmicad, atl;~rysltL

- the a~s: discount 'I;~;

. die madmt has.three trends: prlm.aryj, se'COIlQaryand mi:nlOt' .. major trends have 'three p1h1:ascs;

.. the avenges .must 'Qonfmn each other;

." volume' must, ,oonfirm, the ttend (Vtt-;:rume rruti'lit ,expand in the directio.n of tine miiljor trend);

• a t~nd j:[j, assw'iiled to be .In ,effect untU it giv'il;'S defiJ'lJitt; si~ iliat it has reversed.

Downtrend

The ·tJr;:eoo Js simply the ,dln':Ciion oftbe 11Iladre"t.A dO'\'\"Dtt:end ls· a. itI'Cnd that 18 .LfiCl!iI."ke-d by descerbdiifig pC3!ks fwd t,ro1l!lgh13lj' im. other words ~()w,er subsequent :hiig'bs :'i.o-cJ IowerIows. An liJ.ptte.nd! WOl!!!!.!d:· be. defined as a ,seti~s of su,c-ce~stvcly hi.gilf:.l' peaks and troughs (lllgher hi~5 and higher lows:).

EUlottWalVe'

Basic tE!!ru~,u Qif the Elliott Wave prTllilcilfJ'le:

• pattern, ratio and time i,i!1, that order of hn!pO[I~nce;

• pattern rcf.c:rs [0 th. wave patterns Or Iormations that romp.rise one (lit Ute uios •. important elements of the th~l."J1Y;

• mfiol3:flaJysi$ is ~se!lUl. for detc'.r..rn.mi.ng retraocmcnt points .Mel! prlce objectives by measuring the: reb.UOd1l$l:tip between.

Ihe difi'!:::N:trlt ~"';1.".!C:"s;

'. m.d tlme ls used to cm~fl,rm wave p~Ue[flS and rades

Bars:k [-'0 nee p1S of 11'1 e E! I iott WiJV~ li'ri!ndple:

• arno.ni5, followed by reaction;

• the~ are five waves in the direc¢ion of t:l'1e main trend, Rillo'IiVCd by 1tflKlC"c01tri:::ctivre waees;

~ a 5 .. 3 :m.o,vc; completes a cl'cle.l'ihe 5-3, move then beeomes

I;'WU, rubdivl~'iion:§. of the next higiher '5-3 WilJ'Ir'e; aml

'. ~b ·ll!l:iJdcily.ling 5·3 pattern :remll!]flS· constant ~lthough the time .' span of each rlla,r;;" varr-

• obj:c;;oti:'\."-es by measuriag the n:latJonship between the dlffere:!t'E wtlv,es:;

• :w.o. time i5 used to confirm wave patterns and raties.

Emvelopes

- Anenvetepe D~ comprised of two moving a verages, Due moving :llVeifl~t: :Us, s.bifitt:d 1llPV;':ll,-d and the second ,moving 2l"'~Cr.ag.c hi s:l::dft~d dnwllv.'1U'd.. En'l,',e lopes define the u:pper and lowet boundaries oJ a stock's normal trading :Fili1lge.

The ,gilIP that appears ncar lh,e end of 3 marker move, Thv...rard.~. the endl of an uptrend prlces killp forward with a final gasp. HQVi'e'!'er, tbis fO,rM:lru le::a.p qu.jc.kIy loses grounds and p1"Jiee:s decrease witbin a couple of dlay~ O'i" a week, When prices close under. '~ih.is ]ast g;ap; it is usually 9i clear :indiill':lt:,iun that the ~m:;;tiofi g<lP has made j ~s apJ')ear;:LuC"e. Thls Is a classic

lHi IlLLIOTT W_"\!E S,'-"'.PllJlIHl

cxa.m.ple' of ,.,.hen, the filling ofa g:llp in an uptrend has Vety

:bearish. 1impliica:liolL'i. -

The exp~.Il.el'lIt~.1illy smoothed avenge assigns a. ~}tcr wdy..t to !l:Jil.e more recent aCl:i.vity. It is it,l1te~"e:fuI:';c.>.fl, wei.QhtttlJ moving. a~rage. Matbc:maotically, a slng[,e exiPo".I1e;f:Ltia~ ~mooth:iiog lo;;; cilJcu]at·

ec :it!; fu[l~.: .

. X := (C-Xp )K+Xp

, X i.-s exponrntial sm.'Oodting for the current period,

• K is smoothbl.,g constant, equal to lIn of. '1 for CoJl1pu'll:JC and

2.:{n fur B:ack Trac, -

- n ts total number of periods in a simpIc moving average, whieh is roughly approxi1m.ate.d by X.

failures

i\" urm~My" a l~Lurt: is whe.n a completed pattern !J6· no t: confkmed by t-he direCtiOb, o,f the- folii)wing !Ill 0 ve. The fia.i1un: (in the EilliOtti; Wa'!t'C)< shows a situatlon in which" in ;t bull market for example, "lW<I'I,'"e .5 bresks d-own into the requi:red fh-e ~'a\1'C5,. bu.t f..riJs. to ~ceed the top {Ifv,-'lI~'e 3,

Fallil lines

1Woextneroe PQinl!::s are id,entmt:d on the ,ehatr[, usua.t~y an iDporum.t rtop and hQ~ro:m., A "le11icaili.llc js then d~":I1 ft'llm the second ~e ItO the 'begirutLn,g of' the: moVie .. This rerti.cai

liln,e is then c:l1.'!.1ded by' 38%, 50% rulDJ 62%,. wirh Hoes· dr.liwn. wougb each polfl.l .fN·J:i1] the beginning of the trend, These th..«e llines should rum:Unl1, as support and restseance paints on suhaequeut reactions by nreasueing 38%,. 50% and 62% Fi~d retracements.

Fibon·ijcci I11I!Imbit'1'S

A number sequence rediscovered by rlibon~d. 1n ]jbcr A.bad, the !Fibonacci sequence is firs!: presensed asa so~uHon. ·to a . . matb.C-.m;]Jtlc~1 problem im'Olvl.:l1g the reprodueuon rate of rsbbits.The number sequence presenred its 1, t, 2,:3,5., S, l3·, 21, 34, :5:5, 114 and SO on ro i:nflnity:

]~ redlrucilil aJliml:fiSi~!!i, the Hh(ln.acci numbers arc used to. p:redkt ·or measure future IDQ!"es aft slo.cks or to pr~d.ilct retracernenr le"l;-e~ s,

Filter r1!llles

The Nl·e for conflrming a breakthrough or a brelk·out.Am. exaenpte of :;i f.dtcr rule is tbe 3% penetration crl.terion. This price moo ter is used m:;l!.irJtly folt breaking off longer-teEm trend lIDes, but n;;quires that l:he tt!i:nd line be broken on a dosiQg bas·is by at least 3%. The 3% rule: does not apply tosome fiin.ao,dial m1tU.fe!':, .suoo as Ule Interest rate markets.

Flitg$ (tOliltinUlaitionl pattern)

A fias looks lilk.c a Il~g on the dl:aI't_'I'll.at is, it looks like a tlJlg if it :appears ln an upt~d!. The .p~ctlilre is fiatu!i:'a!1~y upside down 'liQ a dowitlt.knd_ It xnlglu be d.cscrlbed as a small, a:;I1I1lPfl!Ct paralIelogram of price fluctuauon !'I , ora Wted .re.c;:tangle whkh slopes back modern~cl.y against the pr-e"".JIiling trend,

How of funds ilrtaJ)"slli refers to the cash position uf the dIffer-e1iU ~Upli, such as muturu funds· o.r·l.arg·c .imltfitutiunal aceounes. The· tt:l~: here I:s ·that the' l:l~et theeash pcsidon, me :mQre funds w.hich are ilivaiilbk for sto<ck, purchases .. Whik these [onns of ~is are ge.nernlIy OOfiSklt::rcm W be of 5oco:!u1ary Importance, it often seems that stock markc,t tecbni~iatl"'! place more l"C:i~:mce on them tha,rn ol1t.rndftion;a:J market ooatlysi8,

GJun di .... 1ded price ;3,Cil:.iOJ1:'l into e.ightllhs: 1/.8, 2/6, .... 8/S. H~ aifso divided p:r.i!cc actions into t'hlrd~: 113 and 213:

1.18 =: 12.5'%

218 "". 25.0%

113"" 33.0%

;/8"" 375%

4/8::150_0%.

5/8:;; 62.5%

21.3", 67 .. 0%

,6/8 = 7500%

718'~ 875%

SIS == 1<£))..'0%

The :;0% retracement is the most important to Gana. GaJ!fin belkved that me oilie'f pen:e:nt~gc5 'Ii\;~re also p~seill~ in TI&I:rkei: !l:cllion, but with dim.iniS:hil'l.,g. importance.

fr.l:ps are ~p]y. areas onthe bar cllUlli."t whcl"C no. trading has Utlk'm pbc·e;. I:I1 an uptrelld, fur ~am.p[.e, priccs open above the .blght:~t price 0·' the pt'eviom, day. lea,!,'''mg; :I gap or open s-pace ·0lI a chart 'wtiJi.chis nor filI.iJ.·t:d dilJl"iJlg the clary_ In u down.trend, the da,ry's Iii,p)u!'st price is below tile previous da-y's. low

Ur1i",,jde ~ps are signs of: ma~et :;tR'ogllh, w.hile dOWtlSide gOlp5 are l,fi:s:~;aJ!l.r signs of w'Gik"nE..'l.5_

"-I. LIO TT W ... 'i' II $1 M 1'1.1 l'l I!.I) 1l.7

... The over:aJll .itIl!ttrkt:t coasisrs of .rn:my stock groups which are a refJ.!ecrio:o olf rhe clJm1P~.!I!ti!es maidng uptne \-'alions segments of tlieecu.ii..(iFliY; Thl': t:,coTIomy, dcfl.11ied byau apegate m.e.aSllll"C such as Gr"(:"18S .iN~Lti.una1 Prod~cil. (GNP), i.s ei~ler ris.ilng or .fhl!lrng at ::l!..fiyg±vcl!i. time. However; there are ve ... q' few periods in which 30111 !iegm.~iIlitt> are Ji~;h'3jlld1.t.!§ 01:' dt:c.l!.iIllmg .5.imu.ltm].e[Jus~ th~~ ~s because the e.cOilOj]'MY is IlU~ one homcgeneeus u~f.llt"Grou:p rom, tinn is Hle rot:llti.UH wlilthin the different grolJPs o.f S"roc.ts dep.end. ing en :'1[ w~ch. stage the economic cyc]le is at the moment.

Hedging

10 obviate risk and! avnud. s.pe,cuhliiiiuB. Futures and opHo.n:s can De nSt:d flJ!l;: nc:dgi:rlg,.

H igh,·low lndlcater

De new l:uigh.low ,cu.mll~~alll'),:-'"e .inilic;uo·Jt is a Jo'n.:g,.te.~m. m:,1!;'k.CI: mOme1il.ruM iifidiCtl tor, It .is ~~ c[lmllLativt': ilotal Qf ifue dlfle.rell!ce between ~lle number of MUcks reachlng a new 5~week Wg]l !m.d!. tb~ number of stuck:;; reaching a Ge'W 52·week [.ow,Thi.s m.d!lc!to.r proll'ides aeonftrmation ali thecurrent trend, Mo~t of the rime the .indkaWF w.il] rnove h~ the same direction as the li'liaj@-t .mam,r:t inellces, However, when ~Ile jn.()]h:;~tOF aml market m.Cive In opposite direcnons (diVre!:g~llce}. the mark.eti5, likely 'to re,\le.rSt:.

·t'!.:!1!Y· tpGr~m1, wI'"!.Q directly ur im.hocr;:tly owns more dIan 10%' (}f any class I)f st(:);1:::'k listed QU :iii national e~:ehangc, or who, L~:!i.ri, office:r Or diulcwr of (he oompany ]0. q;1lJIt:i!ition..

An interm.ediJ;II te, Or sc::cum.d:,,,y, trc ndl j:s (he. dii.r,ectjo,n of the t.tttiLdi in ilJ period from rhree weeks to as .m.:any months,

:iI.La. I!.LLI QTT W A.V! :>1. .... " 1..1. ~ ].1; n

-~

Ilnitra-day

A record 'of prlce dat::t diLU:ing th~ diay; such :at.<i 15-nl~nIJJte bar chaers, These i[lltra\-d:ll!ych.art!'l iilire ~u'e:me1y i mp ort lint :ror ·tj~e timing as,P!l:':C1i:8 of trn.d:ing_

The term '"key reversal dr~y"'o Is wikidy mlsamderstood. All Q.D~ d~,y reversals 11K potemi...iJ keyreversal diill.y.s, but ouiy <Ii few actually become kt:'f tt"l"t'ni~ni d.tlYS .. Many of the une.dalY reversals n'ep!r'Cscnl Il'Dt!h:i!og more than 1!empul':I!l."f pauses in the CXlsiiIng mend after whk:h the ~r;;H.d i!',ctl'umes Hs course. The·~.rue .~y reversal day marb an imPOil"tatlt tu1"tling pomt, hut :lit cannot be ,con'~ctlyide[l!d'iil,ed i3...~ such "Itti'll!] well :after 'the flli.ct; tllat is, :t'!.'\Jt unit:lii ~d'ter' plice!': have'moved!. sigfli'fj,c:I!o"tly ;In lile oP'Pos:ite di:rectiO!1 from the prlor trend.

The Ko.ndnti.eifwa,,-e, a. 54-ytat c",},"(:Je,. ]5· named 3lft:tt a RU!'ltl1an OCOfi0 Il'llis,t. 'J1:l:is is a J.ong-1cHD cycle j(!ci.llwLd Jnpriccs and LCO.nOl!tl.ic activ.ity~ .since th~ 'l1:yck: ~::; extremely I.ong term, i.t has repeated itsdf only three times in the sto(:'km:.mket,

"Tbe up·m:vt i.s ch:3!J:aCt':;1'~.edi byriM.Q&l; prices" a g!:'Owingecono-my andmfldly b!lllilS11 .8ood;: ftlJit'lk"et8. Th ~pl:l!!teal~i.s characterilz.edl by slta!i):le prices, pe:tk economlc QlP:lcH.r :li'i.dI strong DlIlH:iJshstock. markets. The down-wave is cfufi!rnctenzt:d by fu.I1iil!lg prices, severe bear .~rket:;, and often a major ~~.&r:.

A move llinil,ed by ib.elliptick or downtick rule in .c;(lOlmo<lity urJ.dlng,

Ptic,es 1P].otred on rarlo Of" lug scales show ~qtllal d!i~1ic~:§, fu:r simdar pcrcc:ntag:c: meves. .for CX<'J!mpl!:O" a move from ]0 to ::m (:J! 100% incITas~)wouJ',j be the same diisEallce on a log I;:hart a~ a move from 20 to 40 or'ii>O to S{l,

long-term 'Y·de

The .It!i.3jo.r market trend .is the p:rirnJ!!"}' wir'Gctioo of th~ mme:t. The Dow theory class.m.~s. the major trend a:sbc:in,~ in dftot fu:r ]finger ilShM aytaf; Putures traders v."Ol1lId! bc:indmc:d tosharten 'the .fIllkljiOf trend to ~mrll:iing l;,'J~;t::r than sUo months.

TI:tis occurs when itrl! m't"Cstot pays partof the pllrCIi3~G p.r.itt rur a ~OClIJritt~· and burrows the h .. ilance, liIsuaflIy from ::J! broker; i(:'hli;' ID<l!!:'gin I:;: the difftre11.(;c between WI;' :m.il!rket value of the srod:: and. the ~o.l:in which is made :a,g::llnsr it,

'Margin: commodities versli s stecks

The ~1: Important dilfkft:flCC between srocks a@d commodifY futures i$ the lower R1al:g;rn i'cq'1J:hremeillU'i on stock futur.es" All futures are traded at Q. margin, w11J.ot:fiJ Is li5~ial.liy Jess {hill iO% ef the '1.'~JI!.!e of the COi1lf;ICt. The resl.drr of these [ow rnargtn requiremems is rremend OI.JS 1c::yc.::r.J,~~ _ Rdativdy small pr~oc m.oves in dtnt::r dkc::cticm. tend to be magnilllcd acco!t'diln.g 10 tb.cit Impact. ':H:I overall trnding results.

~n seoek marker analysis,. the t:;~ pomt. 'Of. all market ~~V'lilS is M:w.ay:s the broad market av:eragc:s, s'1!JCb as the DO'w JO'~C;s A~ge or the Stan(l:.lFd. &; Poor's 5000 :lnde:x.A .I!r13i1'k:e[ av.e.ragc·i:s. USl!!:llI.y a~l md:U of th(; most impo~t stoch ill the m~k¢l 0'1 oil hroad! mark:ct ind~x 'm~1t covers 98"99% .of the nux1;;ct as a ·,·tnQle. - --

The member shore DI,tlo (M:SR) is ;a .ma:r.ke,t8entimc:nt Indic.ator whldl m~mlU1'eS 'the :slon ~ i3W.v:ity o!l'tln: members ai lbe:

New YOrk. S,tm;:k lExchrutgc. "M~~s" trndoe on tile floor of 'the exchange, crt-bel' on tb.ei11' ow:n behalf 01'. fQrU~ek cH~:[Its. KNOWd:Qg what the ",smart .i1l!LOfl:I1:!Y" :is· domg is oil!;en a. g·ood ind!i(~t:iQn 'oirilie ne3!['ot~r1U mMk.et df:re,ct!ofi. ..

TbC. m:inO!il, O'ti:ilf;aN.erm, trend us,ullIny Iasts l;e'5s tllil;lJI1 rhree weeks a:od ttpre:5eJil.t!; m'ort:I;:!:'"(erm fh.:Jotntatioru;;in the lntermed]ate tJR::rnl..

1MI01i:U~liItl!l Il1iI lndlcater

The: memensum indicatolt measures the; amount :i!. seeurlrv's price ]~ilS L~han~ over ag-iv-el:ltUne span, It ,dJs.p~me rn~.e ·Qf change m~ a :ra!l.@"

The most accU:re 51t~ are' srodi:s dl;iII.t :awe: t-mdled the most ~u a c~.rutill period, Stttlst:!cs on the nl.l.)S¢ actiVE stocks are pub. J:.isli!led :in the gell.ernl press OF!! both :J!. Q:illy and V!o--c;~. ~is.

[l'sl!!illy ;fu~ 20 Most:l.Cil::lve i5Wc:ks .tt£t: I'e~. -

iMlovill1g a'iJ,e:r a 9 ~

A roo.vm!4 ;i1vernge i.'i: [he: average ill theclnslng prices of :x periO<ll::; added up and divided by x. The term "moving" ls used beeanse the c!I!1cu]ation FLIU'i'eS forward :In lime" Moving, aver- 3!.ges arc used! to help j(I-i:::nti[}' the di.Uereillt kinds of trends (short.term, :inrermediat,e medsum, etc).

• Ot1cHoi,ba:lance index (OWl) .Oddblo'[ s:hort ~l'io

~' Odd-iot purchases/sales

A smoothing device with a time lag ..

The moving average is one of the most verS3.ti.l!e and widely used ot all rechntcal indicasors. necause Q,[ the way it Is cnnstruotcd a:nd. w,e f.l.ct: tha~ ]t can be ro ea.s.iL\:l!' q ~mr!J.tilicd and tested, ~t IS the bll!sis for most mechanical t]'ttl:(Hdlll.o""'ing systems, in use 'today,

,":Ie OI1U Is a market aenti!mcn1! I1ldlicailO!:" thaE shows I:h,e I"dti,O of odd-lot sales, lID purchases (an "odd-lot"';is a stock trru:l8iK1:i.on of Jess tllttm 100 sharesj.The assumption js thai: "odd·ioue.c:s,"'the matkd's smailes,t traders, do Dot .lm.ow what they ure di!JIin,g,

When the odd-to.t ibal:mce index is high, odd-lottl':l;s are selling more than they an: bu,y'mp,; and are theref'l)te bearjsh on the I'llMW. To trade cootnu'.iIy to the m.!d·]ottets, you shouldbuy wnen thc;y Me stl]il1g.

One method used hy technicians ~r.i terms nf movlng a verages. A buy sigrJ,ails produced when the ('j,hocter l'Iiyt:mgc:: crQ'SSCS above the l(II]~t:r·tcrm movlng avera~"T~""Q popular corn.biinatiO'J1S ~re the , and 2(}<I,ay averages and the ] fI and 40·dar fIi,,'r.caglt's.

S:illiPport 01' reslsrance level ill! a !fi~ad &:. Shoulders pattern .. The [[~iCk]lne connects rhe ,Io,w~ or highs of the "'shouick:rs" depenoing on the sl,ru:at.i,on (H &: S bottom or mp formation),

On-balance volume (OBV) is a momentum ,irldiicatL'){ Uta! rebl!tes .. oluroe to p.r~cc.11:1f~ OSV ~ a rW'l!iing total of volume. ]r shows whether volume Is flu wing :iloto or aut of a security. '\';'1!!.{;Q the security closes higher ithan the prevtous close, all of the d;:tfs volume hi c{'}osiciered up-'vol um e. \'Vlieo the secu:ruy closes lower 'I'bm the preeteus close, atl of the day."s volume is, co.mi,d· ered dbwlJovo'iur.ne.

Nomlfllalitty

The bas:ic' assumption in OBV a_rudy.sis is 'U~t OiBV chao:gc::sprecede price changes, The 1tbe:Q!fY is that smart money can be seen, as iflowmg into a security Do} it ris.lng, OEw. W'h.eJ!lI the public then moves iDt:o, a: security, 'both the secUJr]ty and the Q:OV will. surge ahead.

Jrt"h~ principl,e of nominality is based onthe premise 'that, despite t]lt' differences wbich exist In the 'i'arJ,om f.ill9ifke~ 'nul alIov.'irl,g for some 'i'a:ll'ia:t~O:rl! In, impkmc.nting cycbcal prinCi.ples, there. seems to be a set of harmontcatlyrelated cYl:l.es that :a:fl'e1l:!1t an .mrui:,elS.A nomtnal model o:f cycle leugihs can be: used asa sit3rtil1g: p{YilU fur my- m~lr,h:"iL

Open tneeresr ~s the number of open contracts of a ,gi.ven furores CIt op-tlons coneact.An open !;.;QJ]Jl£r,a,ct crui be a long, or short open OOOIt:r.t.Cl whid\ has not been exercised, 0, has been

closed oul~ Of.' a!l.1~·ed to expae. Open InOCOC.fit .is really rl'WFt: 1i; dlaUi fk:ld tl:t .. l!!rl i~n. tndi.cawr.

Method of crc:iting an Indicator; The oscularor is. e_x.t~e.rti.e!.y usefu[ bl non-u-cnding markets ·~~thei!'c prices fluctuate lfJ! a horn·oo.tal pncehand, or tc~diflg f'~lnge, ·creating ... m;,1rrka situatiun in which most trend-tollcwmg sfUcm.S. s,Jtllp[y do not work that weil

The three most imponl'l.nl: uses for the oscilli~tol':

- The uocHl;]!t.or is most useful when i~s v::uut" reaches an estreme lIE'ading near the llI'rpel' or Jower end of ]ts· bound aries .. The- m~d(et is -s.ud to be (}verbo!,ligb~ wt:lie'll it is near the lJPPcr extreme and oversold when i1 is ncar mt;: Iower extreme, Thil warns dtal the price trend is ov~enderl and wmer:ahle;

.,.A dlvergenc.e between the oscillator and Ute price acnoa, when th<:: oscillator is,in:a1li extreme position, Is 1I..i_~uan}' an i:m.portmt warn.irtg signa]; and

" Ct',osslng the zern line c-..m g1\'c Imporrane trad~r.tS slgnalJ!s rn ttu:: direct1ol1i of the price tre.!'lid.

Ovenbought leve:l

An o.p.ooon Oil the price level. Ir Illta), rdc:r to a specific 111ldicator Qr to the market as a whole :;Jiiter ~I pe.riocl of l'ig,utous burling, ~ftL':r' wluch 1t mar' be ;lli"gUC{l. ~hat prices are o'i'el;'eXtc:noodi for t]u.~ tim.e ~eillg a:rJ!o::I are Ul need ofa pt:riod of (Jov,,'l1WI'!.:OO {]IE' horlWfltal 'c'li(!jTtI:'itmem,

An opinio,n on the price ievcl. A price JillOV'C:: that hasoverea·[)f.1jjderl itself'L):11I t:1le dQwru.idt:.

A ,::U'odl: j8 (M;l~edl. Vlrtten: msNon-co'J1sdOl-1S investors are all! interested in buyin,g ,a c-enam stock.

Po:im: ,I Rgll.c

MetB1od. of chaning p:r~ll.A]]t;W plot on So P&.F ,d:wt is madt: only w1l1en the price cWmgc.s by a given :amou:IIt. P&'f ~ aile .only cOEi .. oemed with ml.:aS-uring price.

!P&F charts ~ ,ooMuuewd Ulili:!1g c:omb~oati:O'in!S of X"s and O's limown 0115 "buses," The X :sbowstihat prices aFt· m.oving up,the o that they are m.ovmg dowll.TbG SiZiC ot the box and the amount of dn: :rc:v'f-tsa! ~ lffiportant.

Primary 'tfend

1'Ills ~$ the mos,t .important long.ite.rm trend, ,.t\ pri.m:liif:Y t:ren.d usually CQ,ll~bt:-s oJ five: mJtfi'mediate trends. ThMe of the tR:nds .form p.m: of thepI'm'Oiming trend! wMe: ttte remaining it'WO run. oomter 1'0 iliat ~ilL

'Publi'fI:speclall:st :short sale rafio

It measures 'the rol,U]Ji~1!ot :sbort s:dlii:1s by the public ~1l8't t,be N,t::w 'York Stock EXchange speclaltsts om. the floor of i!th,e exchange:. lit p~!tS the i!im::un. ~noney against one of the ~ea!lt £lIfo.rmed cI.U:.egones ofmame,t p~ctpants.

IRaIIy

A b~ rise roRowimg. a d~e'lill1e Of" C'OWulioot1o[l of the ~nt:1'::tl price leve[ "Ii the ~

An RS line or index ls calculated by dJ.,..-:idi:ng one price by another:. USllilJlily the divisor is a measure of "the market," such as the DjL~. ill' the (om!llooil:)' Research fh,J.JIC:lli!J (eRn) Index.A risii:l.g; line tlJ!dl~cate:;. ~l1at the ]Mex 01" stock i'! ,perform.ilfig hetrer than ,j themarket" and vice versa, Tn:::1'1Ids Ml the 11:11 rna be moni· t,Qt'Cd. by mO'iing avera!:te crossovers, tn.".-,fl!d line brr.akl!l, etc, ~n the same 'w.ay as ~l!fiy other indiicator,

llrslst!!tDce is theopposite of ,sup'pon and represents a price h:vd or areaover 'me madb:t where :o;en.liug PCit:S::;UTC ~'€'oco:ntles bU!liyiRg p,:t''eS-..-mte and a pnce advance is ~,urfied back.A reelseenee level js· USIlla.i[y identified by a previous peak.

Reuaoemel':lfl

Betracements are basically countertrend raoves AfI:'I:!r a prutllCUlar ~·t move, prices retrace a portion of tile previous trend !before re:Sl:mi.ng the: movie in the oriKirud di.recHQn.TI1iese OOIllfieertrend moves tend W fall into Certain pn;:djctaole percentage pa.tamt:tcrs. The best known llppli{::atiQfl of this. phenomenon Is the 50% retracernent, Ferexample: a market ls trending higher and uaIVCh: from lile ],00 level ttl, the 200 Le,,'d_ The subseq)\.'lem 1!"I;.'~.lI;.'doll. verr often ,[tlr:llCI::!i abour b~l.lf of the- priQr' move.

Seaso:rutl 9'(1t:s :[lIT." cycles caused by the seasonal changes In the supp~y=clcmand re.lationship (caused by :lfacLDI;s that oecurae a:l!xfut the :,!lame time every year).

Secondary 'I!f'f! nd

SecOiid~Mj 'l:.re:m;ls, are COIE'rtt:UOfloS in the p.rimlUy trend and usu.allt)' censtst Qf shorter W~i ves that would! be :ideU:l.ithd as rue9i.d'term dips ~ 'cal.lles,

Sentlilment: indicator

- Speda..list f.\Jbllic lilaoo

- Shor~ ~.nterest: htio

- IliISidet'lli].dmg

- Advilsory Servtees

The shQrt interest is ill flgurepubHshed MOund the end of the ~~ntl~ dtktg the' number of shares tlruu haee been sold short on the: NYSE.

Teehntque that combrnes the trepd ]~lJje 'With percentage retracements. The speed :res!st:anoce l:i:nes measure the raee of a U'cnd's ascent or descent (in other words, i.ts speod) ..

stock i'ndex futures

Suppan .area

Suppmt fu; a level OJ' ~.J. on [he chart ll:n.rjt!:;!!, the !ll!iU:ket Where buying Interest j5 :suffldC:llt1y strong to overcome se_ !p.ressure. A~ a result, a dccHlle is halted and prtces tum h:lck up again. A support level is usuiilUy Jd'enti6edi beforeI'lilmel b,' a pre",100m; -reacUOli\ low.

rrend line

A trend line is III :W':lJight line drswn up' EO Me fight twa1: C:O,]'![· nects ilnponant point.'! in. a ol:lart .. M. \ltp, uend line: is a llinc tJMt connects the successive reacuon [OWS, aDd ~. down tren.d ~e connects t11!e successtve mill' peaks.

In LIOTT W~" 'liE 51 MPLI 1'1 ED iI.27

MeasJUiiemc:fits 'of 'upsidc/downsi(lJe volume try to separate 'the vo]ume m:lio ,iicl'vaodrig and declining ~-mc:::ks. ny !!lSID,g this teon. (IJq!:Je, h can be s:UbHy' determinedwhether ;liccnmu.1.a:Uon 0'.1:' dl.strl"bmio.n is taking place.

VoiU:merepresents, the toe:d amount of trading acth-ity !in that m.arlcct Or stock over a given perfod,

Whipsaws:

About the .Autho,r

C IIf 0"'. ke.. ;".be .e.d:ltOr 0. f. the. w.e-c. k.ly """'1"""'. s Leading lndJeatot"$ illod Int'ernet Stock OutloOk; and

the ibJ~weekly Gold SITategi~s. R;eview .. And he ts lI:be autb,Qr off Tecbnir;:oj Atialy:sls .simp/ifie'a. The author also ror-e.C:3Lft tb,e st:oc;/.{ madcet crashes, of 1997 Jnd ]998 us:.ing many of the tc·chni'ilues OlJtUHed ~n this book and tbli!l iR-ewsletters .It:ned ;abn,ve'.