Waves 2 and 4, General Guidelines
Five wave impulse structures are usually more symmetrical in form and predictable in price objectives than corrective patterns. The analyst must keep clearly in mind that one or the most important purposes of Elliott wave, pattern analysis is to determine if the market is in a trend or
counter-trend position and what is the relative degree of that trend or counter-trend.
1. Once we believe a five wave sequence has completed, we can antici- pate that at least an ABC correction will follow. In most cases, the C wave will test or exceed the extreme of the A wave.
2. The correction to a five wave sequence will usually be greater in price range and time range than the corrections within the preceding five wave sequence.
3. An A wave can be either a five or three wave sequence. If an initial three wave sequence unfolds, the question arises whether that three wave sequence is the completed ABC correction or just the completion of the A wave of a larger degree ABC. If the initial ABC sequence is less in price or time range than both of the waves 2 and 4 of lesser degree, it is most likely a three-wave, wave A of the correction, 4. Once the market makes a five wave sequence against the trend direc-
tion of the correction, we have a strong indication that the correction
has terminated. B Waves (correction of the correction) should be a three wave structures.
5. Principle of Alternation: If wave two is an ABC correction, wave four will probably be a complex correction (any sequence that is not either a five-wave impulse or ABC). If wave two is a complex correction, wave four will probably be an ABC correction. Wave two is usually an ABC correction.
A five wave sequence is always part of the larger degree trend. A three wave sequence is always part of a counter-trend
A correction always follows a five wave sequence. The correction will be a three wave, ABC pattern at a minimum. Completed corrections are usually not a five wave sequence. A five wave sequence may be only one wave of the larger degree collective trend.
In the illustration below, once we recognize that the market has declined in an initial five wave sequence, we know that the correction should not be over. We know there will probably be a three part B-wave advance, followed by another decline to test or exceed the A-wave low.
A five wave sequence should not be a completed correction. The five wave decline shown above is probably wave A of a 5-3-5 (ABC) correction.
Trading Implication
The A wave is only the initial section of the decline. Following the correction to wave A which will be labeled as wave B, the market should make another decline to test or exceed the wave A low.
The five-wave decline should not be a completed correction. Completed corrections should not be five-wave structures.
A correction will usually be greater in price and time than the prior corrections of lesser degree.
A five wave sequence is followed by a correction to the entire sequence. The correction to the entire sequence should exceed in price and time the corrective waves two and four within the five wave sequence.
If it appears an ABC correction has developed but it is less in price and time than the waves two and four of the five wave sequence, more than likely it is not a complete ABC correction, but probably waves 1-2-3 of wave A or a completed three-wave, wave-A, Whichever the case may be,
the most important information is that if is probably not the completion to the correction to the previous five wave sequence.
The ABC correction shown above is probably not the completion of the correction to the five wave advance. If what appears to be an ABC correction is less than the price and time of waves two or four, it is probably not the completion of a correction.
Trading Implication
Don't consider entering against a three wave correction unless it has overbalanced in price and Lime the prior waves two and four.
3-40
The Wave-c low is probably not the completion of an ABC correction to the five wave advance.
Five wave sequences are always in the direction of the larger degree trend.
If a five wave sequence unfolds against the direction of the counter-Trend, it is an initial indication that the counter-trend has terminated.
In the chart below, the minor five wave advance from £ signals the correction should be complete and the larger degree bull trend should continue. If the rally from c. was an ongoing part of a complex correction, it should only be a three-wave structure.
Trading Implication
The five wave sequence from c suggests that the ABC correction should be complete and a new impulse sequence of larger degree is probably beginning. This marker should continue higher without exceeding the Wave-c low. Prepare to enter on the correction to the initial, minor five wave sequence from c.
Five- wave structures are always in the direction of the larger degree trend.
Principle of Alternation
Wave four usually alternates corrective patterns with wave two, If wave two is an ABC correction, wave four will probably be a complex correction. If wave two is a complex correction, wave four will probably be an ABC correction. Wave two is usually an ABC correction.
In the chart above, wave two was an ABC correction. Wave four will probably not be an ABC correction but some form of complex correction. It is unlikely the abc decline from the wave three high has completed a wave four correction.
Trading Implication
You usually do not want to enter at the end of wave C of wave four if wave two was an ABC correction unless time and price factors strongly suggest wave four is complete. The odds are high that wave C of four is not the end of the correction.
3-42
Wave 4 b probably not complete at c:4,
Since Wave 2 was a simple ABC, Wave 4 will usually be B "complex" correction, not a simple ABC