WAVES

ELLIOTT

// Elliott Wave Theory

“Charts represent human psychology in
its purest form, and psychology is
repetitive. Read it right once, and you will

// Elliott Wave Theory

always have the answer to what’s next”
 1
INDEX OF CONTENTS

Introduction Advanced Real time

Topics Application
• Basis • Zigzags
• Flats USDINR
• Wave modes

// Elliott Wave Theory

• Cycle • Triangles NIFTY
• Market • Guidelines of Greek Stock
Structure wave formation Index
• Wave Trivia Gold
• Wave types 1 year OIS
• Extensions &
Truncations
 PART 1
INTRODUCTION

// Elliott Wave Theory

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BASIS OF EWT
• The Wave principle is governed by man’s social nature

• The expression of our behavior in the society is patterned

• Because such behavior is repetitive, it has predictive value

• The Market has a Law of its own – sometimes affected by outside factors but most of the
times unaffected

// Elliott Wave Theory

• Because the expression of fear and greed are repetitive, the market simply patterns these
sentiments on a chart

• These sentiments take the form of Waves

• Bull markets end when the fundamentals are the ____________ (best, worst)

• Bear markets end when the fundamentals are the __________ (best, worst)
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5 WAVE PATTERN
• Progress always occurs in a natural, 5 wave pattern

• Waves 1, 3 and 5 occur in the direction of the main trend

• In an uptrend, 1, 3 and 5 propel the market in the direction of the uptrend

• In a downtrend, 1, 3 and 5 propel the market in the direction of the downtrend

• Waves 2 and 4 are countertrend interruptions

// Elliott Wave Theory

• These interruptions are a requisite of the 5 wave pattern

• Three common aspects to any and every 5 wave form:

 Wave 2 never goes beyond the origin of wave 1

 Wave 4 never enters the price territory of wave 1

 Wave 3 is never the shortest of the waves in the direction of the larger trend
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2
3

4
5 WAVE PATTERN
5
4

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WAVE MODES

• Two modes of wave development – Motive and Corrective

• Motive waves have a 5 wave structure

• Corrective waves have a 3 wave structure or a variation thereof

• In an uptrend, because waves 1, 3 & 5 move in the direction of the uptrend, they are
themselves motive waves. Same is the case with 1,3 & 5 in a downtrend

// Elliott Wave Theory

• Irrespective of the trend, wave 2 & 4 are corrections

• Corrections only retrace a part of the prior motive wave and represent a stall or a pullback
in the larger trend
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COMPLETE CYCLE

• One complete cycle is made up of 8 waves

• It consists of two phases - Motive (5 waves) and corrective (3 waves)

• Motive waves are numbered 1-2-3-4-5 for a total of 5 waves

• Corrective waves are labeled ABC (simple) or a variation thereof (complex) for a total of 3
waves

// Elliott Wave Theory

• Wave 2 corrects the progress made in wave 1 and wave 4 corrects the progress made in
wave 3

• Similarly, the entire motive wave labeled 1-2-3-4-5 (5 subwaves) is retraced by an ABC
correction (3 subwaves)
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ONE COMPLETE CYCLE
5
3 B

// Elliott Wave Theory

C
1 4

2
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EVERY WAVE IS ANOTHER WAVE
(1)
5
3 B

// Elliott Wave Theory

A
C
1 4
(2)

In the uptrend, which ones are motive waves?

In the downtrend, which ones are motive waves?
2
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MARKET STRUCTURE
(1)
5 B
3

// Elliott Wave Theory

A
C
1 4
(2)

(1) and (2) = 2 waves (primary)

1-2-3-4-5 & A-B-C = 8 waves (major)
2 Minor waves = ?
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WAVE TRIVIA #1
(1)
5 B
3 Where in the
structure is this?

// Elliott Wave Theory

Where in the
structure is this? A
C
1 4
(2)
Minor (iii) of Major 3 of Primary (1)
Minor (i) of Major C of Primary (2)
These are called “degrees of trend”
2 When major 5 ends, primary (1) ends
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WAVE TRIVIA #2
5
5
5 3
3
3
1
1 1
4

// Elliott Wave Theory

4
4

2 2
2

(A) (B) (C)

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WAVE TYPES

• Two modes – Motive and Corrective

• There are two types of motive waves – Impulses and Diagonal triangles

• In an Impulse, all 3 rules must apply

• Wave 3 of a motive wave is always an Impulse

// Elliott Wave Theory

• Most impulses contain an extension, i.e. or an elongated impulse with exaggerated
subdivisions

• Generally, the extension occurs in one of the one of the actionary subwaves (1, 3 or 5)

• Whenever there is an extension, the number of subdivisions increase from 5 to 9

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EXTENDED IMPULSE
3 5
(v)
(iii)

// Elliott Wave Theory

4
(i) (iv)
1
Total number of waves = 9
(ii) This is a 3rd wave extension

2
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IMPULSE UP

Chart 1: Crude oil Impulse @ 147

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Chart 2: Gold Impulse complete @ 1921
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IMPULSE DOWN

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Chart 3: LME Lead impulse complete @ 854
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TRUNCATED WAVES
3 (1)
• Truncation refers to a situation
in a motive wave where the 5th (v) 5
wave does not go beyond the
endpoint of wave 3

• Truncated waves can be

identified in two steps:
(iii)
 Wave 5 has completed 5
waves

// Elliott Wave Theory

4
 The correction after the 5th
wave breaks the end of wave 4 (i) (iv)
• Truncated 5th waves often occur
after a very powerful 3rd wave
1
• When a truncated 5th wave is
complete, the entire motive
wave labeled 1-2-3-4-5 is
complete, that also results in
(ii)
the end of a wave of higher
degree 2
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WAVE TYPES
• Diagonal triangles are the only other type of motive waves

• There are two types of diagonal triangles – Ending and Leading

• Diagonal triangles are the only motive waves where wave 4 overlaps wave 1

• The other two rules for motive waves hold true for a diagonal triangle

• Diagonal triangles are also made up of 5 waves 1-2-3-4-5, but the subdivision of each
wave is 3-3-3-3-3

// Elliott Wave Theory

• Ending diagonals occur in the final 5th wave when the preceding 3rd wave has gone too far
too fast. Some have been seen to occur in the final C leg of an ABC correction

• As the name suggests, the completion of an “Ending diagonal” results in a sharp and
dramatic end to the prevailing trend

• Ending diagonals typically take the shape of a “wedging pattern”

• Rising ending diagonals are very bearish, while falling EDs are very bullish

• Leading Diagonals are similar patterns occurring in the wave 1 position of a motive wave
or wave A of a Zigzag correction (to be discussed later)
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ENDING DIAGONAL 5
(v)
(iii)
3 (i)
(v)
(iv)
(iii)
(ii)

// Elliott Wave Theory

4
(i) (iv)
1
Ending Diagonal peak is confirmed on
a break of w(iv) of 5
(ii) The selling then accelerates towards
atleast the prior w4
2
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ENDING DIAGONAL

// Elliott Wave Theory

Chart 4: NIFTY Ending Diagonal at the 2007 peak
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LEADING DIAGONAL

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Chart 5: GBPUSD Leading Diagonal in Apr 2009
 TOPICS
PART 2
ADVANCED

// Elliott Wave Theory

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CORRECTIVE WAVES
• Corrections represent a partial retracement of the larger trend

• Only 3 wave affairs – never 5.

• Corrections have two styles – Sharp and sideways

• There are broadly 4 types of corrections

// Elliott Wave Theory

Zigzag Flat Triangle Combination

• Simple • Regular • Contracting • Double 3s

• Double • Expanded • Expanding • Triple 3s
• Triple • Barrier
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ABC ZIGZAG
• Simple Zigzag, labeled A-B-C is a
5-3-5 sharp correction

• A subdivides into 5, B subdivides into 3 and C

subdivides into 5 subwaves
B
• Because A and C subdivide into 5 waves,
what are they?

• In a bull market, the Zigzag pulls the market

// Elliott Wave Theory

lower & vice versa

• Wave A almost always subdivides into an A

Impulse

• Wave B can be any corrective pattern

(ZZ, FL, Triangle)

• Wave C almost always is an Impulse, but

C
sometimes can be an Ending diagonal

• Wave B can never exceed the origin of A

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DOUBLE ZIGZAG
Two Zigzags connected by 1 X wave
B
(X)
A B

// Elliott Wave Theory

C A
(W)
C
Two number of subdivisions = 7 (Y)
A-B-C-X-A-B-C = W-X-Y
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TRIPLE ZIGZAG
3 Zigzags connected by two X waves
B (X)

B (XX)
A
B

// Elliott Wave Theory

A
C
(W) A
C
(Y)
C
Two number of subdivisions = 11
A-B-C-X-A-B-C-XX-A-B-C (Z)
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BULL MARKET ZIGZAG

Chart 6: NIFTY Zigzag in June 2009

// Elliott Wave Theory

Chart 7: Gold Zigzag in March 2010
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BEAR MARKET ZIGZAG

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Chart 8: 5 year INR OIS Zigzag in June 2011
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ABC FLAT
• Flat, labeled A-B-C is a sideways 3-3-5
pattern
B
• A subdivides into 3, B subdivides into 3
and C subdivides into 5 subwaves

• Three types – Regular, Expanded and

Running

• In a Regular Flat, all three subwaves, A-B-

// Elliott Wave Theory

C have similar length (needn’t be exact)

• In an Expanded Flat, wave B ends beyond

the origin of wave A and wave C ends
beyond the end point of A
A C
• In a Running Flat, wave B ends beyond
the origin of wave A but wave C does not
exceed the end of A

• Wave A of a flat can never be a triangle

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FLAT PATTERN
B B

// Elliott Wave Theory

A C
C
A

Expanded Flat Running Flat

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BULL MARKET FLAT

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Chart 9: M&M Expanded Flat in Nov 2009
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BEAR MARKET FLAT

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Chart 10: Nifty Expanded Flat in Apr 2012
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TRIANGLE PATTERN
• Triangle represents a 5 wave pattern
that subdivides into 3-3-3-3-3

• Associated with a pause as volatility

B
shrinks D
• In isolation, triangles are always
continuation patterns

• Triangles always occur in the last but

// Elliott Wave Theory

one position for the wave of one higher
degree

• In an Impulse, the triangle occurs in the E

wave 4 position C
• In a Zigzag, the triangle often occurs in A
the wave B position

• In a Double Zigzag, seen in wave X and

in a Triple Zigzag, seen in wave XX The appearance of the triangle means that the
move post the triangle will be the final move for
• Triangles are extremely rare in wave 2 the prevailing trend (*conditions apply)
positions (close to non existent)
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TRIANGLE TYPES
B
D
Contracting triangle

B
D

// Elliott Wave Theory

E
C
A
Running triangle
E
C
A
 33
TRIANGLE TYPES

B D
Bullish Barrier triangle

// Elliott Wave Theory

E A
C C
A E

Bearish Barrier triangle

B D
 34
BULL MARKET TRIANGLE

Chart 11: M&M Contracting triangle in Oct 2011

// Elliott Wave Theory

Chart 12: JPY contracting triangle in Apr 2013
 35
BEAR MARKET TRIANGLE

Chart 13: LME Lead Triangle in Sept 2008

// Elliott Wave Theory

Chart 14: EURINR Triangle in Dec 2011
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GUIDELINES OF WAVES
• Alternation between wave 2 and wave 4 in an Impulse

• Alternation in the subwaves of a corrective pattern

• Wave (2) pullback after the end of wave (1) with a 3rd wave extension

• Wave (2) pullback after the end of wave (1) with a 5th wave extension

// Elliott Wave Theory

• Wave equality in price (primary) and time (secondary)

• Channeling technique for Impulses

• Treating a “Throw-over”
 37
W2-4 ALTERNATION
5
Alternation can be in terms of
form, price retracement or time
3
(v)
(iii)

// Elliott Wave Theory

(iv) 4
(i)
1 When wave 2 is a ZZ, wave 4
is either a FL or a triangle
(ii) When wave 4 is a ZZ, wave 2
will be a flat or a complex
2 corrective
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SUBWAVE ALTERNATION
Alternation can be in terms of
form, price retracement or time B
y

// Elliott Wave Theory

w
a
x
c
C
A
Zigzag Double Zigzag
 39
W(2) POST W3 EXTN
(1)
5
3 B
(v)
(iii) A

// Elliott Wave Theory

(iv) 4 C
(i) (2)
1
After the end of (1) which had a 3rd wave
extension, the first major support is wave 4 of
(ii) (1) with minor support at wave (iv) of 3 of (1)
 40
W(2) POST W5 EXTN (1)
5
(v)
(iii)
B

3 (i) A
(iv)

// Elliott Wave Theory

(ii) C
4 (2)
1
After the end of (1) which had a 5th wave
extension, the first major support is wave (ii) of
5 of (1) with minor support at wave 4 of (1)

2
 41
WAVE EQUALITY
3 5
(v)
x
(iii)

// Elliott Wave Theory

(iv) 4
(i)
1 When wave 3 is extended, waves 1 & 5
tend to equality

x (ii) The next best relationship is wave 5 =

0.618 of the net distance travelled from
the start of w1 to the end of w3
2
 42
CHANNELING WAVES
5

// Elliott Wave Theory

1 Once w3 ends and the 4th wave correction
begins, draw a trendline connecting the
highs of w1 & w3

The parallel to this line drawn from the low

of w2 will provide an estimated price
2 support area for the completion of w4
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CHANNELING WAVES
3 5

// Elliott Wave Theory

1 When w3 is almost vertical, drawing a
trendline from the w3 top to capture the
w5 peak becomes unviable

In such cases, experience has shown that

a parallel to the 2-4 line drawn from the
2 high of w1 provides a good w5 endpoint
 44
THROW OVER
5

// Elliott Wave Theory

1 When the final 5th occurs on the back of heavy
volume, there is a chance that the 5th wave will
exceed the upper channel line

Generally, this throw over will be followed by a w4

2 break of the 1-3 parallel drawn from the low of 2
 45
THROW OVER (1)
5
B
3
A

4 C

// Elliott Wave Theory

(2)
1 When the market breaks back inside of the
1-3 trendline, it is the first sign that the entire
impulse at one degree higher has ended

When the drop inside of the trendline happens

in 5 waves, it is confirmed that the A-B-C
2 correction in wave (2) targeting the previous
4th has begun
PART THREE
REAL TIME
APPLICATIONS

// Elliott Wave Theory

 46
USDINR IMPULSE

// Elliott Wave Theory

Elliott waves called for a rally upwards of from around 44 - 45. The actual low in July 2011 was 43.85
 47
NIFTY TRIPLE ZZ

// Elliott Wave Theory

Nifty Weekly chart sporting a triple Zigzag – ABC-X-ABC-XX-ABC
Since Elliott did not identify anything called a “Quadraple Zigzag”, Elliott waves suggested the entire
downtrend ended on a break above the final wave (a) low
 48
GREECE (ANTICIPATED)

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Greece Dow Jones Stock Index: The clear impulse on the Greece stock market suggested
that the strongest part of the decline was ahead of us. On the 22/4/10, this market was at 152………
 49
GREECE (HAPPENED)

// Elliott Wave Theory

Greece Dow Jones Stock Index: Today it is at 48
 50
GOLD (ANTICIPATED)

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Gold contracting triangle in the B wave position. One tick below the low of (c) was the stop to go LONG
 51
GOLD (HAPPENED)

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What did the appearance of the triangle tell us about the thrust out of that triangle?
 52
1 YEAR OIS (ALERT!)

// Elliott Wave Theory

How many subwaves can you count from the low?
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1 YEAR OIS (ANTICIPATED)

// Elliott Wave Theory

Since there were 5 waves from the low, the chart was very clear that the trend had turned UP.
 THANK YOU

// Elliott Wave Theory