Elliott Wave Principle ( Part IV )

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Lesson 4 :

 

Flats (3-3-5)

 

A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1-29 and 1-30. Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction, not surprisingly, seems to inherit this lack of countertrend pressure and terminates near the start of wave A. Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags.

 

 

Figure 1-29 Figure 1-30

 

In a bear market, the pattern is the same but inverted, as shown in Figures 1-31 and 1-32.

 

 

Figure 1-31 Figure 1-32

Flat corrections usually retrace less of preceding impulse waves than do zigzags. They participate in periods involving a strong larger trend and thus virtually always precede or follow extensions. The more powerful the underlying trend, the briefer the flat tends to be. Within impulses, fourth waves frequently sport flats, while second waves do so less commonly.

 

What might be called "double flats" do occur. However, Elliott categorized such formations as "double threes," a term we discuss in Lesson 9.

 

The word "flat" is used as a catchall name for any A-B-C correction that subdivides into a 3-3-5. In Elliott literature, however, three types of 3-3-5 corrections have been identified by differences in their overall shape. In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 1-29 through 1-32. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular" flat, although the word is inappropriate as they are actually far more common than "regular" flats.

 

Expanded Flats

 

In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown for bull markets in Figures 1-33 and 1-34 and bear markets in Figures 1-35 and 1-36. The formation in the DJIA from August to November 1973 was an expanded flat correction of this type in a bear market, or an "inverted expanded flat" (see Figure 1-37).

 

 

Figure 1-33 Figure 1-34

 

 

Figure 1-35 Figure 1-36

 

 

Figure 1-37

 

In a rare variation on the 3-3-5 pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended, as in Figures 1-38 through 1-41. Apparently in this case, the forces in the direction of the larger trend are so powerful that the pattern becomes skewed in that direction. It is always important, but particularly when concluding that a running flat has taken place, that the internal subdivisions adhere to Elliott's rules. If the supposed B wave, for instance, breaks down into five waves rather than three, it is more likely the first wave up of the impulse of next higher degree. The power of adjacent impulse waves is important in recognizing running corrections, which tend to occur only in strong and fast markets. We must issue a warning, however. There are hardly any examples of this type of correction in the price record. Never label a correction prematurely this way, or you'll find yourself wrong nine times out of ten. Running triangles, in contrast, are much more common, as we'll see in Lesson 8.

 

 

Figure 1-38 Figure 1-39

 

 

Triangles

 

A triangle appears to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. The triangle pattern contains five overlapping waves that subdivide 3-3-3-3-3 and are labeled A-B-C-D-E. A triangle is delineated by connecting the termination points of waves A and C, and B and D. Wave E can undershoot or overshoot the A-C line, and in fact, our experience tells us that it happens more often than not.

 

There are three varieties of triangles: contracting, barrier and expanding, as illustrated in Figure 1-42. Elliott contended that the horizontal line of a barrier triangle could occur on either side of the triangle, but such is not the case; it always occurs on the side that the next wave will exceed. Elliott's terms, "ascending" and "descending," are nevertheless useful shorthand in communicating whether the barrier triangle occurs in a bull or bear market, respectively.

 

 

Figure 1-42

 

Figure 1-42 depicts contracting and barrier triangles as taking place entirely within the area of preceding price action, which may be termed a regular triangle. Yet, it is extremely common for wave B of a contracting triangle to exceed the start of wave A in what may be termed a running triangle, as shown in Figure 1-43. Despite their sideways appearance, all triangles, including running triangles, effect a net retracement of the preceding wave at wave E's end.

 

 

Figure 1-43

 

Triangle Examples

 

There are several real life examples of triangles in the charts in this course. As you will notice, most of the subwaves in a triangle are zigzags, but sometimes one of the subwaves (usually wave C) is more complex than the others and can take the shape of a multiple zigzag. In rare cases, one of the sub-waves (usually wave E) is itself a triangle, so that the entire pattern protracts into nine waves. Thus, triangles, like zigzags, occasionally display a development that is analogous to an extension. One example occurred in silver from 1973 through 1977 (see Figure 1-44).

 

 

Figure 1-44

 

A triangle always occurs in a position prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse, wave B in an A-B-C, or the final wave X in a double or triple zigzag or combination (to be shown in Lesson 5). A triangle may also occur as the final actionary pattern in a corrective combination, as discussed in Lesson 5, although even then it usually precedes the final actionary wave in the pattern of one larger degree than the corrective combination. Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, it is usually due to the fact that a triangle is part of the correction, which is in fact a double three.

 

In the stock market, when a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle. Elliott used the word "thrust" in referring to this swift, short motive wave following a triangle. The thrust is usually an impulse but can be an ending diagonal. In powerful markets, there is no thrust, but instead a prolonged fifth wave. So if a fifth wave following a triangle pushes past a normal thrust movement, it is signaling a likely protracted wave. Post-triangle advancing impulses in commodities at degrees above Intermediate are usually the longest wave in the sequence, as explained in Lesson 29.

 

Many analysts are fooled into labeling a completed triangle way too early. Triangles take time and go sideways. If you examine Figure 1-44 closely, you will see that one could have jumped the gun in the middle of wave b, pronouncing the end of five contracting waves. But the boundary lines of triangles almost never collapse so quickly. Subwave C is typically a complex wave, though wave B or D can fulfill that role. Give triangles time to develop.

 

On the basis of our experience with triangles, as the example in Figure 1-27 illustrates and later in 3-11 and 3-12 illustrate, we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides with a turning point in the market. Perhaps the frequency of this occurrence would justify its inclusion among the guidelines associated with the Wave Principle.