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GET

Applying Technical

Analysis

Updated Feb 99

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Applying Technical Analysis

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TRADING TECHNIQUES, INC.

DISCLOSURE AND DISCLAIMER

The information presented in this manual is con- Past performance is not a guarantee of future re-

fidential and proprietary to Tom Joseph and Trad- sults. Only risk capital should be invested in the

ing Techniques, Inc.. This information cannot Futures or Stock Market or any other financial in-

be used, disclosed, or duplicated, without the strument. Neither Trading Techniques, Inc., nor Tom

prior written consent of Tom Joseph or Trading Joseph, nor anyone else representing Trading Tech-

Techniques, Inc.. This work is protected by the niques, Inc., or Tom Joseph, take or assume any

Federal Copyright laws and no unauthorized responsibility or make any guarantees or make any

copying, adaptation or distribution is permitted. specific trading recommendations in any of the above

mentioned products, any of their additions, revisions,

The material represented in the GET computer and addenda. All investments and trades carry risk,

software, the GET User's Guide, Technical Sec- and all trading decisions of an individual remain the

tion and any additions, revisions, or addenda, responsibility of that individual.

are believed to be accurately presented. How-

ever, it is not guaranteed as to accuracy or com- The client acknowledges and agrees that neither Tom

pleteness, and is subject to change without no- Joseph nor Trading Techniques, Inc., (or their re-

tice, at any time. There is no guarantee that the spective heirs or successors) makes any representa-

systems, trading techniques, trading methods, in- tion or guarantee regarding the information and tech-

dicators, and/or other information presented in niques described in the above mentioned products

this manual will result in profits, or that they marketed by Tom Joseph or Trading Techniques,

will not result in losses. It should not be as- Inc., or regarding how it may perform in the future;

sumed, or is any representation made, that the regarding client's ability to utilize the information

methods presented in the GET Software or User's and techniques described in the above mentioned

Guide, any additions, revisions, and addenda, can products; or regarding client's likelihood of success

guarantee profits in the Futures or Stock Mar- in attempting to utilize same. In the event that any

ket or any other financial market instruments, or liability is alleged or awarded in any forum notwith-

that future performance will equal that of the standing the above, such liability shall be limited to

past. the price paid by the client for the aggregate of all

products purchased by client from Trading Tech-

niques, Inc., or Tom Joseph.

The Expert Trend Locator (XTL) is NOT a mechanical Trading System. The XTL is

one of the many Studies (methods) available in Advanced GET.

The hypothetical computer simulated performance results provided are believed to be accurately presented.

However, it is not guaranteed as to accuracy or completeness and is subject to change without any notice.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance

record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed,

the results may have been under or over compensated for the impact, if any, of certain market factors such as

liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit

of hindsight. No representation is being made that any account will, or is likely to achieve profits or losses similar

to those shown. All investments and trades carry risks.

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Applying Technical Analysis

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Technical Table Of Contents

Elliott Wave Technique ................................................................................................ T-5

Impulse Patterns ....................................................................................................................... T-6

Indicator To Provide Elliott Wave Counts ............................................................................. T-9

Elliott Oscillator: Step-By-Step Illustration ....................................................... T-11

Minimum Pull Back Required ............................................................................................... T-15

Maximum Oscillator Pull Back ............................................................................................. T-16

Using The Elliott Oscillator in Wave Three ......................................................................... T-17

Using The Elliott Oscillator in Wave Four ........................................................................... T-18

Using The Elliott Oscillator in Wave Five ............................................................................ T-19

Oscillator Breakout Bands ..................................................................................................... T-20

Adding PTI (Profit Taking Index)......................................................................... T-21

Adding Wave Four Channels ............................................................................... T-23

Profit Taking Index & Wave 4 Channels............................................................. T-24

Adding Displaced Moving Average (DMA) ........................................................ T-25

Elliott Wave Rules & Guidelines .......................................................................... T-26

Elliott Wave Corrections ....................................................................................... T-27

Alternation Rule ..................................................................................................................... T-31

Wave Measurements & Ratios ............................................................................. T-32

Ratios For Wave Three .......................................................................................................... T-34

Ratios For Wave Four ............................................................................................................ T-34

Ratios For Wave Five ............................................................................................................. T-35

Elliott Channels For Top Of A Wave Five............................................................................ T-36

Statistical Analysis of Wave Two Ratios ............................................................................... T-37

Statistical Analysis of Wave Three Ratios ............................................................................ T-38

Statistical Analysis of Wave Four Ratios.............................................................................. T-40

Elliott / Fibonacci Ratios ........................................................................................................ T-42

Elliott / Fibonacci Ratios For Wave 5 ................................................................................... T-43

Rules: Type 1 Trade .................................................................................................... T-44

Rules: Type 2 Trade .................................................................................................... T-45

Examples Of Type One & Type two Trades ......................................................................... T-46

Type One Buy Setup ............................................................................................................... T-47

Type Two Buy .......................................................................................................................... T-48

Type Two Sell Setup ................................................................................................................ T-49

Forecasting A Double Top ...................................................................................................... T-50

Fifth Wave Failure Setup ....................................................................................................... T-51

Power of 60 Minute Charts ........................................................................................ T-65

Cross-Referencing to Weekly Data ........................................................................... T-80

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Alternatives In Elliott Wave Analysis ....................................................................... T-84

Locallized Elliott Wave Counts: ............................................................................................ T-84

Alternate Counts ..................................................................................................................... T-84

Alternate 3 (Long Term) ....................................................................................................... T-85

Alternate 2 (Short Term)....................................................................................................... T-86

Alternate 1 (Aggressive) ........................................................................................................ T-87

Gann Techniques ........................................................................................................ T-90

Gann Angles And Lines ......................................................................................................... T-91

Using Gann Angles With Elliott Waves ................................................................................ T-95

Optimized Gann Angles ......................................................................................................... T-97

Gann Box Analysis ................................................................................................................. T-98

Regression Trend Channels .................................................................................... T-105

T.J.â€™s Web Levels ...................................................................................................... T-107

Fibonacci Time Clusters........................................................................................... T-112

Fibonacci Extension Price Clusters .................................................................................... T-115

Fibonacci Retracement Price Clusters .............................................................................. T-117

Andrews Median Lines............................................................................................. T-120

Extended Parallel Lines ....................................................................................................... T-123

Extended Parallel Lines ....................................................................................................... T-124

Combining Median Lines With Wave 3 ............................................................................. T-127

Automatic Regression Trend Channels .................................................................. T-129

Expert Trend Locator - XTL ................................................................................... T-132

Designated Use For XTL ............................................................................................................ T-135

Settings For XTL: ...................................................................................................................... T-135

Taking Profits: ............................................................................................................................ T-139

Trade Continuation: ................................................................................................................... T-140

Guidelines for Trade Continuation ........................................................................................... T-141

Using Different Settings for XTL .............................................................................................. T-142

MOB (Make or Break) ............................................................................................. T-147

Bias Reversal ............................................................................................................. T-156

Elliott Wave Trigger ................................................................................................. T-158

T.Jâ€™s Ellipse................................................................................................................ T-160

Ellipse Projection (Shadow): ............................................................................................... T-163

The Joseph Trend Iindex (JTI) ................................................................................ T-167

How Can JTI Be Used .......................................................................................................... T-172

Cycles ......................................................................................................................... T-173

Trade Pofile .............................................................................................................. T-176

Applying Technical Analysis Index ...........................................................................T179

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Elliott Wave Technique

The Practical Approachâ€” In Conjunction With GET

Elliott Wave is a collection of

complex techniques. About

60% of these techniques are

clear and easy to use. The

other 40% are difficult to

identify, especially for the

beginner. The practical and

conservative approach is to

use the 60% that are clear.

When the analysis is not

clear, why not find another

market which is conforming to an Elliott Wave pattern that is easier

to identify?

From years of fighting this battle, I have come up with the following

practical approach to using Elliott Wave principles in trading.

The whole theory of Elliott Wave can be classified into two parts: (a)

impulse pattern and (b) corrective pattern. We will discuss the

impulse pattern and how to use the Elliott Oscillator to identify these

impulse patterns. We will then discuss some general rules and guide-

lines followed by numerous examples.

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Impulse Patterns

The impulse pattern consists of five waves. The five waves can be in either direction, up

or down. Some examples are shown below.

Wave 5 Downward

Upward Wave 2

Impulse

Wave 3

Impulse

Action

Action

Wave 1

Wave 4 Wave 4

Wave 1

Wave 2 Wave 3 Wave 5

The first wave is usually a weak rally with only a small percentage of the traders partici-

pating. Once Wave 1 is over, they sell the market on Wave 2. The sell off in Wave 2 is

very vicious. Wave 2 will finally end without making new lows and the market will start

to turn around for another rally.

Vicious selling

in Wave Two

1

2 Wave Two will not

make new lows

The initial stages of the Wave 3 rally is slow and it finally makes it to the top of the pre-

vious rally (the top of Wave 1). At this time, there are a lot of stops above the top of

Wave 1.

Traders are not convinced of the upward

STOPS

trend and are using this rally to add more 1

Top of Wave One

shorts. For their analysis to be correct, the

market should not take the top of the pre-

Wave Three in

vious rally.

2 initial stages

Therefore, a large amount of stops are

placed above the top of Wave 1.

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The Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1

high is exceeded, the stops are taken out. Depending on the amount of stops, gaps are left

open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out,

the Wave 3 rally has caught the attention of traders.

Wave Three

in progress

Gap of Wave Three

STOPS

1

Top of Wave One

2

The next sequence of events are as follows: Traders who were initially long from the

bottom finally have something to cheer about. They might even decide to add positions.

The traders who were stopped out (after being upset for a while) decide the trend is up

and they decide to buy into the rally. All this sudden interest fuels the Wave 3 rally.

This is the time when the majority of the

Traders 3

traders have decided that the trend is up.

buying

Finally, all the buying frenzy dies down,

Wave 3 comes to a halt. In general,

Stops

a majority

taken

of traders

Profit taking now begins to set in. Trad- out

1 decide and

ers who were long from the lows de-

agree that

cide to take profits. They have a good

the trend

trade and start to protect profits. is up.

2

This causes a pullback in the prices

and is called Wave 4. Wave 2 was a

vicious sell-off, Wave 4 is an orderly

profit taking decline.

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While profit taking is in progress, the majority of traders are still convinced the trend is

up. They were either late in getting in on this rally, or they have been on the sideline.

They consider this profit taking decline as an excellent place to buy-in and get even.

On the end of Wave 4, more

buying sets in and the prices Profit

3

start to rally again. taking

decline

Vicious

4

sell-off

1

2

The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The

Wave 5 advance is caused by a small group of traders.

While the prices make a new high above the top of Wave 3, the rate of power, or

strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance.

Finally, when this lackluster buying

5

interest dies out, the market tops

out and enters a new phase.

3

Rally with Price makes

great strength new highs.

However,

4

strength in

rally is weaker

1

in comparison

to the third

wave rally.

2

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Indicator To Provide Elliott Wave Counts

The examples of five wave impulse patterns shown on the previous page are very clear and

definitive. However, the markets are not that easy all the time. It becomes almost impossible and

very subjective to identify Waves 3 and 5 from looking at price charts alone. The price chart

fails to show the various strengths of the waves. The following illustration is used to discuss this

concept. Two drivers left the same town at the same time in different vehicles. Driver A drove

within speed limits all the way, while Driver B exceeded the speed limit .

DRIVER A â€”

ALWAYS WITHIN SPEED LIMIT

DRIVER B â€”

TOOK A

DIFFERENT ROUTE;

EXCEEDED THE

SPEED LIMIT.

Both drivers took the same amount of time and traveled the same distance. However, the two

drivers used different strategies to arrive at their destination. While Driver A proceeded at a

normal speed, Driver B drove like a bat-out-of-Hades, so to speak. An observer at the other

end would be unable to tell the difference between the two drivers driving patterns. To a

casual observer, both left the same time and arrived at the same time. This is the same

problem we face when we try to distinguish between Waves 3 and 5. Wave 5 makes new

highs; a trader looking at price charts may not be able to tell the difference between a

Wave 3 or Wave 5. However, the internal price pattern of Wave 3 is much stronger in compari-

son to that of Wave 5. Therefore, we need to use an internal strength measuring indicator to tell

the difference.

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Indicator To Provide Elliott Wave Counts

To keep tab of the Elliott Wave logic, we require an indicator that measures the rate of

price change in one wave against the rate of price change in another wave. Standard

indicators fail to perform this comparison. They merely compare price against price and

fail to compare the rate of price action. After years of research, the Elliott Oscillator

was developed. The idea of the oscillator is described below.

An Elliott Oscillator is basically calculated

Wave Three Rate of price

from finding the difference between two

increase is

moving averages. If we were to use a small

much faster

moving average and a large moving average,

the difference between the two will show

the rate of increase in prices.

Small moving aver-

age representing

The small moving average represents the current prices

Difference

is large in

current price action, while the larger moving

Wave 3

average represents the overall price action.

When the prices are gapping up inside a

Wave 3 the current prices are surging; the Large moving average

representing

difference between the small and large mov-

price actions

ing averages is great and produces a large

oscillator value.

However, in a Wave 5 the cur-

rent prices are not moving up at

a fast rate and, therefore, the Wave Five

difference between the small

and large moving averages is

Rate of price increase is slow

minimal. This produces a

smaller oscillator value.

The analogy is similar to the Difference is very

small in Wave 5

two drivers.

Wave 3 is like Driver B who

accelerates beyond speed lim-

its and has a higher rate of

speed, while Wave 5 has a

slow, dragging price action.

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Elliott Oscillator: Step-By-Step Illustration â€”

We will use the same chart for illustration. When the prices rally above the top of Wave

1, the Elliott Oscillator is making new highs. Notice also the gapping action. The current

rally is labeled Wave 3.

Finally, the buying subsides in Wave 3. Traders begin to take profits. However, the gen-

eral public is eagerly waiting for a neutral area to buy into this market. When the Elliott

Oscillator pulls back to the zero level, or slightly below, the market is entering a neutral

area.

Sample Price Bar Chart 5

3

Prices making

1 4 new highs, but

no lasting strength

2

Small and Large Moving Average

Small MA

represents

Current prices

current

moving with slower

price

rate shows wave

five

Larger MA represents overall price

Current prices moving up rapidly

shows wave three

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Once Wave 4 is over, buying comes in from traders who missed the entire Wave 3 rally.

The prices move to new highs. However, the rally does not have the fast rate of price

increase that was seen in Wave 3. This difference in the rate of price is picked up by the

oscillator and can be easily identified. MORAL OF THE STORY: Always let the Elliott

Oscillator track Elliott Wave counts.

Sample Price Bar Chart 5

3

Prices making

1 4 new highs, but

no lasting strength

2

Small and Large Moving Average

Small MA

represents

Current prices

Ã¸

current

moving with slower

price

rate shows Wave

Ãµ Five

Larger MA represents overall price

Current prices moving up rapidly

shows Wave Three

The Elliott Wave Oscillator

Prices making new

Majority accepting the trend

Ã¸

highs without strength

Ã¸

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Identifying a five wave impulse

Five Wave Impulse (up) using the Elliott Oscillator,

(UP) which is part of the software.

3

5

Strength

Ã¶ Divergence

in rally

Elliott

Oscillator

pulls back

to zero

Ã·

5

3

Ãµ

New

New

highs

Phase

with

less

4

strength

Ãµ

Labeled as

Ãµ Wave Four

Rally

because

with strength

oscillator

labeled

1

pulled back

as Wave

to zero

Three

2

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Identifying a five wave

Five Wave Impulse (DOWN) impulse (down) using the

Elliott Oscillator, which is

part of the software.

2

Labeled as

Wave Four

1

because

oscillator

pulled back

to zero

Ã·

Decline Ã¶ 4

with strength

New Phase

Ã¸

New Ã¶

3

lows

with less

strength

5

Ãµ

Elliott

Oscillator

pulls back

to zero

Divergence

5

3

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The Elliott Oscillator

Minimum Pull Back Required

Historically, 94% of all Wave 4 sequences that have ended in a Wave Five making a new

high or a new low, had the Elliott Oscillator pull back at least 90% from the Wave 3 peak.

90%

5

3

4

Elliott Oscillator

(not shown to any scale)

Divergence

0

Minimum

90% Pullback

Required

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The Elliott Oscillator

Maximum Oscillator Pull Back

Just as it is important for the Oscillator to pull back to the zero line (or at least 90% of the

Wave 3 Oscillator as discussed on the previous page) it is just as important that the

Oscillator does NOT pull back more than 38% of the Wave 3 Oscillator on the other side

of the zero line.

90%

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38% of the Wave 3 Oscillator

5

3

4

Elliott Oscillator

(not shown to any scale)

Divergence

0

Minimum

90% Pullback

Required

Maximum Pull Back = 38%

of Wave 3 peak in the

Opposite Direction

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Using The Elliott Oscillator in Wave Three

Â¤ When a market rallies with a strong Elliott Oscillator as in Chart A, the rally is

classified as a Wave Three.

Chart A Chart B

Wave 3 Ã¶

Once Wave 3 is over,

profit taking sets in.

Strong Oscillator Ã¶

Oscillator

Pullback to

Ã¯ Zero

Â¤ Once Wave Three is over, the market will pull back on a profit taking decline.

During the profit taking decline, the Elliott Oscillator should pull back to zero (as

shown in Chart B).

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Using The Elliott Oscillator in Wave Four

Â¤ Once the Elliott Oscillator pulls back to zero, it signals the end of a potential Wave

Four profit taking decline as shown in Chart A.

Chart A Chart B

New Highs Ã°

Ã±

New

Buying

Ã¶

Profit Taking Ã¶

Decline Over Profit Taking

Ended

Oscillator

Pullback to

Zero

Ã²

Â¤ New buying comes in and the market makes new highs (as shown in Chart B).

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Using The Elliott Oscillator in Wave Five

Â¤ The market is making a new high with less strength in the Elliott Oscillator as shown in

Chart A.

Chart B

Chart A

New High Ã°

When 5 Waves are com-

plete, the market changes Ã°

direction

With Good Oscillator

Divergence

Ã±

Previous

Wave 4

Oscillator Low

Divergence

Â¤ This indicates that the current rally is a Wave Five and once the Fifth Wave is over, the

market should change direction.

Â¤ When the market changes direction after completing a Five Wave sequence, the previous

Wave Four will become the first target. In Chart B, the market changed direction and is

trying to test the previous Wave Four low near 3630.

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OSCILLATOR BREAKOUT BANDS

A major task in using Elliott Wave Analysis is to identify Wave Three's accompanied with a strong Oscil-

lator. In the past we have done this by

visually comparing the size of the cur-

rent Oscillator with that of the past.

The Oscillator Break Out Bands pro-

vide an UP Band and a LOW Band.

Anytime the software labels a Wave

Three, the Oscillator needs to be

comfortably above the Break Out

Band. We recommend a setting of

80% for these bands.

The chart on the left is the Daily Swiss

Franc Dec 94 contract. Here the soft-

ware labels a Wave Three Rally and

this rally is accompanied by a strong

Oscillator that is breaking above the

Breakout Bands.

Therefore, this Wave Count can be

Oscillator above used for this market at this time. An-

Breakout Band. other example is shown below where

the Oscillator is above the Breakout

Band and confirms with the Elliott

Wave analysis.

Confirmed Wave Three in progress.

Oscillator above Breakout Band.

Ã®

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Adding PTI (Profit Taking Index) - Theory

Using Elliott Wave analysis, any major rally or decline can be classified as a Wave Three.

Once a Wave Three is in place, Elliott Wave theory continues to look for a Wave Four

Retracement followed by second attempt in the same direction. This last phase is called

Wave Five.

WAVE FIVE - 2nd

5

attempt in the same

direction.

3

WAVE FOUR

Retracement

WAVE THREE

4

WAVE THREE

Initial Strong

Initial Strong

Rally 4 Decline

WAVE FOUR

Retracement

3

5

WAVE FIVE - 2nd

attempt in the same

direction.

RALLY PHASE DECLINE PHASE

The above patterns are completed Five Wave sequences and are great after the fact.

However, while the pattern is in progress, the Trader is left with a major dilemma at the

end of the WAVE FOUR Retracement. This dilemma is because many times the 2nd

attempt fails to materialize.

Anticipated

WAVE FIVE - 2nd

5 5

WAVE FIVE

attempt in the same

direction.

3 3

WAVE FOUR

WAVE THREE WAVE THREE Retracement

4

Initial Strong Initial Strong

Rally Rally

4

WAVE FOUR

Retracement

Market continues to

drop without reversing.

Normal Five Wave Pattern False Five Wave Pattern

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From our years of research and development, we designed the Profit Taking Index (PTI).

The Profit Taking Index compares the Buying/Selling momentum in Wave Three with the

Buying/Selling momentum in Wave Four. This comparison is then passed to an algorithm

that calculates the PROFIT TAKING INDEX VALUE.

CASE 1 - Normal Five Wave Pattern

WAVE FIVE - 2nd 5

attempt in the same

Statistically, if the Profit Tak- direction.

3

ing Index is Greater than 35,

the market exhibits a greater WAVE THREE

59

tendency to initiate a Fifth Initial Strong

Rally

Wave or a 2nd Attempt 4

PTI

Phase. WAVE FOUR

Retracement

CASE 2- False Five Wave Pattern

3

Statistically, if the Profit Tak-

29 ing Index is LESS than 35,

WAVE THREE

4 the market generally FAILS

Initial Strong

PTI

Rally to initiate a Fifth Wave or 2nd

Attempt Phase.

Market continues to

drop without reversing.

CASE 3 -Failed Five Wave Pattern - Double Top

DOUBLE TOP

3

5

If the Profit Taking Index is

WAVE THREE

LESS than 35, and the market

Initial Strong

still initiates a Fifth Wave Phase,

29

Rally

the potential for a DOUBLE 4

WAVE FOUR

PTI

TOP becomes very high. Retracement

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Adding Wave Four Channels

Wave Four Channels are another proprietary study developed along with the Profit Taking

Index. The Profit Taking Index mainly deals with Buying/Selling momentum at different

stages. The Wave Four Channels deal with time. After a strong rally, the retracement phase

is allowed a certain amount of time prior to initiating the 2nd attempt (Wave Five) Phase.

Statistical studies show that if the retracement phase consumes too much time, the 2nd

attempt phase diminishes its full effect. The Wave Four Channels are three time/price lines.

If the Wave Four Retracement holds above the Wave Four channels, the odds for a

strong 2nd attempt are greater.

If the Wave Four Retracement breaks below the Wave Four channels, the odds for

a strong 2nd attempt is very low.

WAVE FIVE - 2nd

5

attempt in the same

direction.

3

PTI Greater

59 than 35

WAVE THREE

4

Initial Strong

ch 1

PTI

Rally

ch 2

ch 3

WAVE FOUR

Channels WAVE FOUR

Retracement holding above

Wave Four Channels

The Significance of Wave Four Channels

1) If the wave four retracement holds above the first channel (displayed in BLUE), the

statistical odds are better than 80% for a strong wave five rally.

2) If the wave four retracement holds above the second channel (displayed in GREEN),

the statistical odds for a strong wave five rally is only 60%.

3) The third channel (displayed in RED) is a final stop, because once this channel is

broken the odds for a new high in wave five is very low. The very few times a fifth

wave is generated after breaking the RED channel, the rally becomes a tedious, slow

and drawn out process which literally eats out your patience and option premiums.

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Profit Taking Index & Wave 4 Channels

Â¤ In Chart A, when the Elliott Oscillator pulls back to zero, the Profit Taking Index

(PTI) should be greater than 35. In this case the PTI is at 47 which indicates normal

profit taking in the Wave Four Decline.

PTI > 35

Chart A

Chart B

Ã±

Ã±

Buy For New

Highs

Prices Holding Above

the 2nd Wave 4 Channel

Â¤ In addition, the prices should hold above the Wave Four Channels which indicate the

ideal length of time for normal profit taking. In Chart A, the prices are holding above

the Wave Four Channels.

Â¤ Everything here looks good for a buy.

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Adding Displaced Moving Average (DMA)

Â¤ We introduced the DMA concept in 1988. The DMA is a normal moving average

shifted to the right. The purpose behind the DMA is to allow the market to continue

its momentum.

Â¤ When the market finally completes a Five Wave sequence, prices will cross the DMA.

Sell on cross

DMA of DMA

Fifth Wave HighÃ°

Ã·

Ãµ

7 Period MA

displaced 5

periods

Ã±

DMA stays out of the way and lets the

market continue its momentum

Â¤ At the end of Wave Five, use the DMA to enter the trade. We suggest a 7 period

moving average shifted (displaced) to the right by five periods.

Â¤ WARNING: The DMA is designed to enter positions at the end of a Fifth Wave and

on certain patterns at the end of Wave Four. DO NOT USE the DMA as a tool to buy

or sell at other places. The accuracy for the DMA as a tool by itself is less than 21%.

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Elliott Wave Rules & Guidelines â€”

1.) WAVE 3 IS NEVER THE SHORTEST (RULE).

This means that Wave 3 is always longer than at least one of

the other two waves (Waves 1 or 2). Usually, Wave 3 is

longer than both these waves.

Wave 3

You should never look for Wave 3 to be shorter than both

Is Never The

the other two waves. At times, Wave 3 may end up to be Shortest Wave

equal in length, but never the shortest. There is no exception

to this rule.

2.) WAVE 4 SHOULD NOT OVERLAP WAVE 1 (RULE/GUIDELINE).

This means the end of Wave 4 should not trade below the peak of Wave 1. This rule cannot be

violated in Cash Markets. In the Futures Markets, a 10% to 15% overlap can be allowed.

However, use an overlap count as a last resort.

5 5

3

3

1

NO OVERLAP 4

1

OVERLAP

4

2

2

INCORRECT

CORRECT

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Elliott Wave Corrections

Corrections are very hard to master. Most Elliott Traders make money during an impulse pattern and

then loose it back during the corrective phase.

An impulse pattern consists of five waves. The corrective pattern consists of 3 waves, with the excep-

tion of a triangle. An Impulse pattern is always followed by a Corrective pattern. Corrective patterns

can be grouped into two different categories: 1) simple correction 2) complex correction.

Simple Corrections

There is only one pattern in a simple correction. This pattern is called a

Zig-Zag correction. A Zig-Zag correction is a three wave pattern where the 5

B

Wave B does not retrace more than 75% of wave A. Wave C will make

new lows below the end of Wave A. The Wave A of a Zig-Zag correc- 3

tion always has a five wave pattern. In the other two types of correc- A

tions (Flat and Irregular), the Wave A has a three wave pattern. 4

C

1

Thus, if you can identify a five wave pattern inside Wave A of

any correction, you can then expect the correction to turn out as a Simple

2

Zig-Zag formation. (Zig Zag)

Fibonacci Ratios Inside A ZigZag Correction

Wave B = usually 50% of Wave A. B

Wave B should not exceed 75% of Wave A.

Wave C = either 1 x Wave A

A

or 1.62 x Wave A

or 2.62 x Wave A

C

not to scale

Be alert for angle divergence

A simple correction

is commonly called

a Zig-Zag correction.

You typically see

divergence with the

Oscillator in a

simple correction.

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Complex Correctionsâ€” Flat, Irregular, Triangle

The complex correction group consists of three different patterns: 1) Flat, 2) Irregular, and 3) Triangle.

FLAT

Flat Correction b

In a Flat correction, the length of each wave is identi-

cal. After a five wave impulse pattern, the market

drops in Wave A. It then rallies in a Wave B to

the previous high. Finally, the market drops one c

a

last time in Wave C to the previous Wave A low.

B B

5

5

3

3

C

4 A 4

1

A C

1

2

2

2

2 1

C

A

1

4

C 3

4 A

3

5 B

5 B

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