This article “How to label Elliott Wave Theory counts correctly and accurately” is actually a reply to one of my student’s query. He sent me a chart analyzed by famous Elliott Wave Theory practitioner and asked me for comments. So, I prepared this article to explain why I am seeing abnormalities in these Elliott Wave counts and what are my probable Elliott Wave counts for the same chart with reasons, logics, calculations and trading strategy. This is the chart I received:
How to count Elliott Waves Accurately (Chart 1)
This is the analyzed chart I received from one of my student. He asked me about comments but I was not convinced with it. Then he told me to check it as it is the analysis by world famous Elliott Wave analysts Wayne Gorman, Jeffrey Kennedy and Robert Prechter and he also suggested me to check this in video “http://www.wiley.com/WileyCDA/WileyTitle/productCd-1118445600.html”.
Though, I was not able to see this video as it is paid version, and I don’t want to challenge other’s counts. So, I am going to explain only my observations on these counts based on my knowledge and experience.
My Observations and Abnormalities in these counts:
I observed main 4 abnormalities in these counts marked with yellow number 1, 2, 3 and 4 explained below:
As I know, wave (C) is always an impulsive wave. But in this chart wave (ii) is overlapping (iv) making it Diagonal Triangle (Leading Diagonal or Ending Diagonal) which is not possible for wave (C).
Even if it is an Ending Diagonal Triangle, the wedge drawn is not correct. No part of the waves of of ED can be out of the lines of wedge. But in this chart, waves are going out of wedge (green lines).
There is one more high above end of wave (C). What is the new high if he is assuming the end of wave (C) at previous high?
Even if analysts is assuming the new high above end of wave (C) as part of Irregular Correction, the also the next fall should not break below start of wave (C) or previous low.
These were my observations; let me show my counts for the same chart and also the reasons and factors behind those counts:
How to count Elliott Waves perfectly (Chart 2)
These are my counts for the same chart. Other counts are same the difference is only in the inner waves of (c). It is difficult to identify my counts in this chart so I am showing the same counts after zooming this chart to the area marked within white box for more clarity.
Next chart cover only the area marked within in white box as the abnormalities is in this part only.
How to count Elliott Waves correctly (Chart 3)
Wave (A) upward is an impulse
Wave (B) downwards is a Corrective Wave
Wave (C) upwards is a clean Impulse with faster waves (i), (ii) and (iii). Wave (iv) didn’t overlap (ii) and wave (v) of (C) is an Ending Diagonal Triangle which is highly extended.
And this Ending Diagonal is also following all rules.
All waves 1, 2, 3, 4 and 5 are “abc” waves.
Wave 4 overlapped wave 2
The ED is progressed in clean wedge and no part of any wave is out of this wedge. Fall after the breakout from wedge is also carrying the same personalities of breakout after ED.
When I calculated the Fibonacci Ratio of wave (C) with respect to wave (A), (C) ended exactly 100% of (A) which is shown in next chart. Thus, Fibonacci Ratios also confirming the counts.
How to count Elliott Waves accurately (Chart 4)
Reason behind these counts:
If we see the first chart, there was an impulsive bounce followed by corrective decline which didn’t break previous low and bounced again above previous top. This pattern can have only two possibilities. Either it is waves 1, 2 or progress of 3 or it is waves (a), (b) and (c).
Move till end of wave (B or 2) is clear, we need to confirm if next bounce is wave 3 or (C). Now, we need to refer the personalities of wave 3 and (C). These are:
Both wave (C) and 3 must be a clean impulse. We tried to identify the possibilities of impulse and same is confirmed as shown on chart.
Wave 3 is often steeper and fastest wave but here, next wave (C or 3) took more than double times to reach 100% of (1 or A). See the next chart:
How to count Elliott Waves accurately (Chart 5)
How to count Elliott Waves accurately (Chart 5)
This is the chart where I shown the time taken by both the waves. You can see, wave (A or 1) took is covered in 1 box but next wave (C or 3) took 2 and half boxes of same width and height which is not normal for wave (3) as it is already double slower than (1).
This condition increases the possibilities that the pattern is not 1, 2 and 3. It can be “abc” or something else.
Trading Strategies from this Elliott Wave Pattern:
Let me explain possible trading strategies after seeing these wave counts,
If you have bought this stock at second bottom in the hope of an impulsive upside then it is time to book profit at high when you see the next upside impulse has gone slower than previous impulse. Because, there are maximum possibilities that upside impulse is not wave 3. It can be (C) and we can always expect new low after completion of wave (C) upwards.
The safe and best trading strategy in these conditions is to wait for breakout below lower line of ED (shown on 1st chart). Short positions can be taken on breakout below lower line of ED with stoploss above high for minimum target of new low as there is always a start of new impulse after end of wave (C).
Even if you are not able to identify the 2nd upside as an Impulse with inner wave (v) as ED, Then also buying must be avoided after seeing the 2nd upside is double slower than first upside. So, Buying must be avoided even if you are not confident in sell.
Notes for Students to count Elliott Waves Accurately:
Elliott Wave Theory analysis is not just to counts waves 1, 2, 3, 4, 5 and a, b and c. It is a combination of wave’s cycles, wave’s personalities, wave’s patterns and Fibonacci Calculations and is the secret to count Elliott Waves Perfectly.
Whenever you are identifying any pattern, just confirm rules, Fibonacci ratios and personalities of that particular pattern for the aim of accurate Elliott Wave Counts . You will definitely get a most probable conclusion after checking all rules. But still, if you are not seeing any clear pattern, just wait and watch. You will definitely get a clear pattern soon.
But again, you need to aware of rules and must have picture of all patterns in your mind so that you can identify the probabilities easily even after a first look on chart. You must have clear image of some important patterns like Leading Diagonal, Ending Diagonal, Triple Zigzag, Flat Correction, Irregular Correction etc in your mind if you want to succeed in Elliott wave theory analysis.
So, concentrate on learning wave’s cycles first and then try to remember the structure of all Elliott Wave Patterns to label Elliott Waves perfectly and correctly. These are just 5 or 6 pattern and are easy to remember.
Never confuse yourself with the free material available on Net in the form of Web Articles, eBooks and Videos. Most of the information about Elliott Wave Theory on internet is wrong or incomplete and is just posted for advertisement and publicity.
By: Deepak Kumar
This post was first published on author’s blog