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nowing which Elliott Wave a stock is trending in will help you forecast probable turning points... well, in advance.
The Elliott Wave consists of five trending waves up and three counter-trend waves down, for a complete eight-wave bull market pattern. The opposite will be true for a bear market... five down, three up.
The ideal wave pattern looks like this...
There are two types of wave patterns -- impulse waves and corrective waves. The following illustration shows impulse Waves 1, 3 and 5. Waves A and C are impulse waves, as well.
Waves 2, 4 and B are corrective waves.
Elliott Waves are fractal by nature... meaning each wave will subdivide into its own complete eight-wave pattern. Additionally, wave patterns repeat in all time frames... from tick charts all the way to yearly charts.
In order for the waves to be valid, the following rules must be applied:
Wave 2 may not be longer than Wave 1 or retrace beyond the beginning of Wave 1.
Wave 3 may not be the shortest compared to Waves 1 and 5.
Wave 4 should not overlap Wave 1.
Wave 3 usually is the strongest wave... if not, Wave 5 will be.
Wave 5 must exceed Wave 3.
There also are rules for the corrective A-B-C Zigzag pattern which follows the fifth wave. They are...
The pattern is made of 3 waves.
Waves A and C are impulses. Wave B is corrective.
Wave B's retracement is no more than 61.8 percent of Wave A.
Wave C must extend beyond Wave A.
Wave C usually is equal to Wave A.
"How is Elliott Wave analysis used
to forecast price movement?..."
Here's one method you can put to use...
Right, now!
Use a channel to forecast the end of Wave 4.
For example, once the end of Wave 3 is formed, draw a line connecting it with the top of Wave 1. Then, take the parallel of the line and place it at the end of Wave 2.
Wave 4 will likely terminate at the bottom of the channel!
Click For Elliott Fourth Wave Forecast Examples
Now, continue the channel concept and forecast the reversal point for Wave 5.
Next, draw a line connecting the termination points of Waves 2 and 4. Take the parallel of the line and project it from the end of Wave 3.
Use this channel as a projection for Wave 5 price action.
Elliott Fifth Wave Forecast Example Charts
This is just the beginning of your Elliott Wave education. There is much, much more to know! Learn more about wave analysis by purchasing the following books...
Elliott Wave Principle - Key To Market Behavior
by Robert Prechter and Alfred Frost
New Classics Library
1995
ISBN 0-932750-23-0
298 Pages
Get This Book, Now!
R.N. Elliott's Masterworks - The Definitive Collection
by Robert R. Prechter, Jr.
New Classics Library
1994
ISBN 0-932750-37-0
308 Pages
And... for the latest Elliott Wave news and commentary, click here.
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