ELLIOT WAVE THEORY

• Markets movements ultimately take the form of five waves. Three of these waves, which are labeled 1, 3, and 5, actually effect the directional movement. They are separated by two countertrend interruptions which are labeled 2 and 4.

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1) There are two modes of wave development: motive and corrective.

2) Motive waves have a five wave structure, while corrective waves have a three-wave structure.

3) Motive waves constitute the basis for the five-wave pattern. Their structures are called "motive" because they powerfully impel the market.

4) Waves 2 and 4 are corrective because they move against this bigger trend and form 1 and 3 waves.

5) After completion of the 5 waves cycle, the wave three begin to form. These corrective waves are denoted by letters a,b,c.

DIAGONAL TRIANGLES

A diagonal triangle is a motive pattern yet not an impulse, as it has one or two corrective characteristics. Such patterns are seen on the fifth and the final wave position. As with impulses, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, diagonal triangles are the only five-wave structures in the main trend direction within which wave 4 almost always overlaps the price territory of wave 1.

An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast." A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple peaks they appear only as of the final "C" wave. Ending triangles are found at the termination points of larger patterns, indicating a further market movement.

When diagonal triangles occur in the wave 5 or C position, they take the 3-3-3-3-3 shape. It has recently come to light that a variation on this pattern occasionally appears in the wave 1 position of impulses. The characteristic overlapping of waves 1 and 4 remains as in the ending diagonal triangle. However, the subdivisions are different, tracing out a 5-3-5-3-5 pattern.

A zigzag is a simple three-wave declining pattern labeled A-B-C. The subwave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A.

As shown in the figure below, a flat correction differs from a zigzag in that the subwave sequence is 3-3-5. Since the first active wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction unfolds in 3 waves. Wave B rises to reach the peak of wave A indicating a strong market trend.

Triangles reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles contain five overlapping waves that subdivide 3-3-3-3-3 and are labeled a-b-c-d-e. A triangle is outlined by connecting the termination points of waves a and c, and b and d. Wave c can undershoot or overshoot the a-c line.

Ascending triangle

Reverse Symmetrical triangle

Elliott called sideways combinations of corrective patterns "double threes" and "triple threes". A double or triple three is a combination of simpler types of corrections, including the various types of zigzags, flats, and triangles. As with double and triple zigzags, each simple corrective pattern is labeled W, Y, and Z. The reactionary waves, labeled X, can take the shape of any corrective pattern but are most commonly zigzags.

Sometimes the end of a pattern differs from the price extreme level. In such cases, the end of the pattern is called the "orthodox" top or bottom to differentiate it from the actual price maximum or minimum that occurs inside the pattern.