In order for the stock market to start moving in the opposite direction from a higher trend, it needs to make an effort. A larger trend offers resistance and seems to prevent moving patterns from forming. Thus a struggle is formed between different directional type movements. All this greatly complicates the process of identifying the corrective waves for the analyst. This task is more complex than the identification of the driving waves, as they develop in the direction of a larger trend.
Rules for the development of remedial models
The result of this conflict of trends is the formation of a greater variety of corrective patterns. They have a more complex structure (compared to driving patterns), which in addition can change greatly during the development of the corresponding wave.
Difficulties in identifying corrective waves usually last until their completion. However, their completion and reversal in history – is a difficult event to predict against the background of trend waves. The analyst is required to show more flexibility and patience during the analysis of the market when the market is in a corrective phase.
An important nuance that must be taken into account in the development of corrective models is the impossibility of forming a five out of a correction. The five can only form moving waves. This implies that the initial five-wave movement against a large trend is never a correction in the final stage, but only part of it. The following images will demonstrate this rule.
Correctional patterns develop in two ways.
- The first is sharp corrections. They carry out a powerful movement in the opposite direction from the main trend. Single, double and triple zigzags refer to sharp corrections.
- The second one is the lateral corrections. They carry out a horizontal movement characterized by low price volatility. Side corrections include planes, triangles and combinations.
Correction models are usually divided into three main categories:
- Zigzag (5-3- 5).
- Plane (3-3-5).
- Triangle (3-3-3-3-3).
Each model has three variations, and the triangle additionally has one more subspecies. All of them will be discussed in detail in this article.
There are also combinations of the above models – double triple and triple triple triple.
A single zigzag consists of three waves, it is denoted by letters A, B and C.
Fig.1.22 shows schematic examples of zigzags formed in a bull market.
In a bear market, the zigzag, acting as a correction, occurs in the opposite direction, as shown in Figure 1.23.
Zigzags can occur sequentially (twice or three times). Then they are separated from each other by intermediate correction models, so they form a double zigzag (Fig. 1.24) or a triple zigzag (Fig. 1.25). Such variations are in many respects similar to the impulse stretching, but in practice occur much less frequently.
The Dow Jones index correction developing in July-October 1975 (Fig. 1.26) acts as a double zigzag.
The correction of the Standard and Poor’s 500 is identified in exactly the same way. It took place in 1977 and 1978 (Figure 1.27).
The main difference between a plane and a zigzag is the internal structure. The waves of the plane form the symbolic 3-3-5 (Fig.1.28).
Wave A of the plane has no downward force, which could develop into a full-fledged 5-wave structure. Wave B of the plane, predictably adopts this disadvantage of counter-trend pressure and ends close to the starting point of wave A.
In a bear market, you can observe the same pattern, but inverted (Fig. 1.29).
A flat is a sideways correction, which is why it most often makes a much shallower pullback than a zigzag. A flat appears at the moment of a strong larger trend, which means that it precedes or follows a stretch almost every time. Based on practical observations, in an impulse, the fourth wave is very often a flat, but the second wave is very rare.
“Flat” is a general term for any A-B-C correction of the 3-3-5 model. However, in his works, Elliott called three types of 3-3-5, between which there was a noticeable difference in shape.
More often than not, wave B of the plane is slightly beyond the level of the beginning of wave A, and wave C ends, slightly beyond the end of wave A (Fig. 1.30 – Fig. 1.32). Such a plane is called an extended plane.
Much less common in the market are “running planes”. In a running plane, wave B is noticeably beyond the beginning of wave A. But in this variation, wave C cannot reach the level of completion of wave A (Fig. 1.33 and Fig. 1.34). That is, we see how the forces, the action of which is directed towards the main trend, are so strong that they cause the curvature of the figure in this direction.
The internal structure of the models is very important, but it is especially important when identifying a running plane. For example, if wave B of the assumed plane splits into 5 waves instead of 3, then with high probability it is not a plane, but the first wave of a higher degree impulse.
It is also important to remember that running planes in real markets are rare. During analytical activities, there is no need to rush to mark up any part of the chart with this model. Otherwise, there is a high risk that in nine out of ten cases you will come to an erroneous conclusion.
The “regular” planes are the most rare. In them, wave B corrects 90-100% of the length of wave A. Wave C in a regular plane slightly goes beyond the end of wave A. (Fig. 1.35 and Fig. 1.36)
The triangle reflects the balance of buyer and seller forces in the market, it illustrates the sideways price movement, which often leads to declining volume and volatility.
Triangles consist of five waves and are denoted by the letters A-B-C-D-E. For clarity, triangles on the chart are highlighted with forming lines. These lines bound the triangle and connect the ends of waves A and C, as well as B and D.
Wave E of the triangle is capable of extending to or piercing the A-C line, and it is safe to say from market analysis experience that this occurs most often.
There are three variations of triangles: tapering, expanding and barrier (Figure 1.37).
Figure 1.37 illustrates tapered and barrier triangles, referred to as regular triangles. That is, they are completely contained within the price range of the previous movement.
In this case, the B wave of the narrowing triangle usually goes beyond the beginning of the A wave (Fig. 1.38), a so-called “running triangle” is formed. It is important to remember that any triangle is a sideways correction, including a running triangle.
In the illustrations you can see some real examples of triangles. After reviewing them, we can conclude that many of the sub-waves in triangles are zigzags, but sometimes any of the sub-waves (most often C) is capable of taking the form of a multiple zigzag. Much less frequently, the D or E wave of a triangle becomes a triangle by itself, thereby stretching the entire pattern into nine waves. One such example occurred between 1973 and 1977 in the silver market (see Figure 1-39).
The triangle arises each time in a position that precedes the final wave of the acting type in a model with a degree one unit higher. Plus, the triangle is able to arise as the final model of the active type in a corrective combination, but even in this case it will precede the final wave of the driving type in the model, the degree of which will be higher than the degree of the corrective combination.
When the triangle appears in the fourth wave of the impulse, the fifth wave is sometimes very fast, so it overcomes the distance commensurate with the widest part of the triangle. Elliott called this phenomenon a “jerk.”
A jerk is an impulse, but it can also act as a finite diagonal. Powerful trending markets do not have jerks; they are replaced by lingering fifth waves. If the fifth wave moves even after the jerk, it signals a quite probable subsequent prolonged similar condition. Growing impulses with a degree that is higher than the intermediate degree, occurring immediately after triangles, tend to be the longest.
The second wave of an impulse cannot be a triangle. But the second impulse wave can be a combination, which wave Y will contain a triangle (Fig. 1.40).
Many analysts make mistakes when marking up a triangle, prematurely determining its completion. In practice, triangles develop in a horizontal direction for a long time. If you study Figure 1.44 carefully, it is not difficult to note that there were conditions for a “false start” in the middle of wave B. At this point it was reasonable to assume that all five waves of the model were complete.
The forming lines of a triangle almost never converge in a short period of time. Subwave C in most cases is complicated into a double zigzag, but sometimes the other subwaves of the triangle take on similar properties and tasks. Any triangle should be given the necessary amount of time for it to fully complete.
Given our many years of experience analyzing charts, we can say with certainty that often a tapering triangle ends at the moment of the convergence of the forming lines. This moment acts as a market reversal point. The frequent occurrence of this feature of triangles in practice quite justifies its use as a norm of wave analysis.
Combination (double and triple three)
Elliott called lateral combinations of two correction patterns “double triples” and three patterns “triple triples”. While a single triple can be either a zigzag or a flat, a triangle is an admissible last component of such combinations and is also called a “triple” in this context.
Double and triple triples (also called combinations) consist of simpler types of corrections, including zigzags, planes and triangles. The combinations seem to be a kind of way to lengthen the lateral action of the flat correction. As with double and triple zigzags, the components, which are simple correction patterns, are denoted by the letters W, Y, and Z. Each counteracting wave, labeled X, can take the form of any corrective
Elliott did not always label combinations of threes in the same way, but each time the model took the form of two or three closely spaced planes (Fig. 1.41 and Fig. 1.42).
It is often possible to observe an alternation of patterns in form. Thus, a flat correction preceding a triangle is the most common type of double triplet (combination). For example, this pattern could be observed in the market in 1983 (Fig.1.43).
The plane preceding the zigzag illustrates another example of a double three (Fig. 1.44). All of the images shown here show corrections in a bull market. To present an identical pattern in a bear market, it is enough to flip each image.
As a rule, the combinations are horizontal. But the author of the theory pointed out that the combination is able to deviate from the initial direction, following in the opposite direction from the larger trend.
The reason for this is the absence of two or more zigzags in the combination. The same can be said for a triangle: there cannot be more than one. The formation of triangles indicates the beginning of the last movement of a larger trend. That is why short triangles appear as the last wave of a three.
Double and triple zigzags always have an angle to the main trend. However, double and triple triples differ from the corresponding zigzags in both angle and target.
In a double or triple zigzag, the first zigzag is rarely large enough to lead to an adequate price correction of the previous wave. A doubling or tripling of the initial shape is usually necessary to create a correction of adequate size.
In combination, the first simple pattern often results in an adequate price correction. Doubling or tripling is necessary to extend the duration of the corrective movement, once price targets are reached. Sometimes additional time is needed to reach a channel boundary or to achieve more similarity to another correction in an impulse. As the consolidation progresses, the accompanying psychological and fundamental trends, respectively, also continue.
Tops and troughs
Often the divergence of the model does not coincide with its price extremum. Then the end point of the model is referred to as a “true” top or trough. This makes it possible to distinguish it from the maximum or minimum value in the price plan inside the model or after the termination. Understanding this concept is important if only because the success of any analytical activity depends primarily on correct model markup.
Assuming that the price extremum is the starting or ending point of the wave, there will be difficulties with the correct calculation of the waves, and the analyst will simply “go astray”. The search for the known wave forms provides an opportunity to stay on the right track and avoid common mistakes. In addition, known methods of analysis are based on the following principle: it is possible to determine the length and duration of a particular waveform by measuring and projecting true endpoints.
Sources: from the book by J. Frost and R. Prekter: “Eliot’s Wave Principle. The Key to Market Behavior” 2005