Essential Elliott Wave Patterns Pt. 2

[RichardCox 10]

Essential Elliott Wave Patterns Pt. 2

 

In part one of this article, we look at four basic Elliott Wave patterns that are necessary for understanding and implementing this form of technical analysis. These patterns included Motive Waves, Diagonals (or Diagonal Triangles), Corrective Waves, and Double and Triple Zigzag patterns. It is important to have a firm understanding of the rules that govern these patterns, so if you have not yet read the first section of the article, you should do so now. This is important because this is the only way to ensure you will not be mistaking one of those patterns for the patterns discussed in this article. It is also important to have an understanding of the patterns in the first section because some of the rules for the following patterns build on the structures covered in part 1.

 

Like all forms of technical analysis, there is some degree of subjectivity involved when identifying and using these patterns, so without an understanding of the rules of all Elliott Wave patterns, it would be unwise to place live trades based on this analysis. In the following sections, we will cover Flats, Double and Triple Sideways patterns, and Expanding and Contracting Triangles. This collection will round out the set of essential Elliott Wave patterns that will be needed in order to conduct this form of analysis.

 

Flats

 

In Flats, we have an Elliott Wave pattern that unfolds in a three-wave structure that proceeds in a sideways direction -- meaning there is no series of higher highs or lower lows, and instead looks more like a trading range. These patterns are labeled using the A-B-C format, and are corrective in nature. Since Flats move sideways, they are considered to be “counter-trend” as they do not agree with any bullish or bearish wave structures. Flats are one of the most common patterns in Elliott Wave analysis. The first charted example is a Flat. Notice the lack of directional movement, as it is essentially a sideways patter.

 

Rules for Flat Formations:

 

1) Wave A is a corrective pattern that can take any form.

2) Wave B is also corrective pattern, and can take any form except that of a Triangle.

3) Wave B retrace at least 50% of the price movement that is seen in Wave A.

4) The price movement in Wave B is less than 2-times that of Wave A.

5) Wave C is either an Impulse Move or Ending Diagonal.

6) Wave C must cross into the price territory of Wave A.

 

Double and Triple Sideways

 

Double and Triple Sideways patterns (which are sometimes called Double 3s or Triple 3s) possess some similarities when compared to Flats. Typically, Double and Triple Sideways patterns consist of two or three corrective patterns that are connected by a joining wave. This joining wave is called an “x” wave. Double and Triple Sideways patterns are corrective in nature, but the Triple Sideways pattern is must less common. The labeling format for the Double Sideways is w-x-y. For Triple Sideways, the labeling is w-x-y-xx-z. In the second charted example, the Double Sideways (the more common formation) is shown. Note the dual A-B-C formations that are connected by the middle X wave. The third charted example shows the difference between the Double and Triple Sideways formations.

 

Rules for Double and Triple Sideways Patterns:

 

1) Wave W is a corrective pattern but cannot be a Triangle, Double or Triple Zigzag or its own

Sideways pattern.

2) Wave X is a corrective pattern but cannot be a Triangle, Double or Triple Zigzag or its own

Sideways pattern.

3) Price moves seen in Wave X must retrace at least 50% of Wave W.

4) Wave Y is a corrective pattern but cannot be a Double or Triple Zigzag or its own Sideways

pattern.

5) If Wave W is a Zigzag, Wave Y cannot be a Zigzag.

6) Price moves in Wave Y cannot be more than 2-times the price move seen in Wave W.

7) If Wave Y is not a Triangle, it must be at least as long as the price move seen in Wave X.

8) Wave XX is a corrective pattern but cannot be a Triangle, Double or Triple Zigzag, or its own

Sideways pattern.

9) The XX Wave must retrace at least 50% of the price move seen in Wave Y.

10) Wave Z is a corrective pattern but cannot be a Double or Triple Zigzag, or its own Sideways

pattern.

10) If Wave Y is a Zigzag, Wave Z cannot be a Zigzag.

11) The price move seen in Wave Z must be longer than the price move seen in Wave XX.

 

Contracting and Expanding Triangles

 

A Triangle is a very important Elliott Wave pattern that consists of a regular 5-wave corrective pattern, and uses the labeling format A-B-C-D-E. Since Triangles are corrective, it is important to remember that these moves run counter-trend. Triangles also operate within two channel lines (which are essentially shorter term trend lines) that drawn to connect waves A to C, and waves B to D. There are two types of Triangles: Contracting (sometimes abbreviated CT) or Expanding (sometimes abbreviated ET). Whether a Triangle is a CT or ET depends on the direction of the channel lines. When the channel lines move closer together, a Contracting Triangle is in place. When the channel lines move further apart, an Expanding Triangle is in place. Expanding Triangles are rarer than Contracting Triangles. The final charted examples show graphics that illustrate both forms.

 

Rules for Contracting and Expanding Triangles:

 

1) In an Expanding Triangle, all waves must be a Zigzag, Double Zigzag, or Triple Zigzag.

2) In a Contracting Triangle:

- Wave A can only be a Zigzag, Double Zigzag, Triple Zigzag or a Flat.

- Wave B can only be a Zigzag, Double Zigzag, or Triple Zigzag.

- Wave C will be a corrective pattern but cannot be a Triangle.

- Wave D will be a corrective pattern but cannot be a Triangle.

- Wave E can only be a Contracting Triangle, Zigzag, Double Zigzag, or Triple Zigzag.

3) The cross-section of the channel lines is seen past the end of a Contracting Triangle, and before the beginning of an Expanding Triangle.

4) The channel lines will always be converging or diverging. Essentially, these lines can not parallel or forming a range.

5) Only one channel line in a Contracting Triangle can be horizontal.

6) Neither channel line in an Expanding Triangle can be horizontal.

7) The end-point of Wave E must enter into the price territory of Wave A.

 

Conclusion: Elliott Wave Patterns Build Off of One Another

 

Elliott Wave theory works on the assumption that market psychology repeats itself in the form of wave movements that build into larger patterns. In this way, Elliott’s theories are somewhat similar to Dow Theory, given the fractal nature of both approaches to technical analysis. Elliott Wave theory dissects markets into much greater detail, however, as these structures can inwardly repeat themselves indefinitely. Impulsive Waves travel with the trend, and unfold in five-wave patterns. Corrective waves work counter-trend in groups of three and push prices back toward the mean. These 5-3 moves complete the trend cycle, but it is important to watch the specific rules of each pattern to ensure the validity of the overall analysis.

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