Irregular Corrections

In this type of correction, Wave B makes a new high. The final Wave C may drop to the beginning

of Wave A, or below it.

5

B

B

3

IRREGULAR

5

3

C

A OR

4

C

1 1

4

A

2

C

DOWNWARD

2

IRREGULAR

After 75% retracement, it is then

CORRECTION

considered a complex correction.

5

Fibonacci Ratios In An Irregular Wave

Wave B = either 1.15 x Wave A

or 1.25 x Wave A

Wave C = either 1.62 x Wave A

or 2.62 x Wave A

T-29

Applying Technical Analysis

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Triangle Corrections

In addition to the three wave correction patterns, there is another pattern which appears time and time

again. It is called the Triangle pattern. The Elliott Wave Triangle approach is quite different from other

triangle studies. The Elliott Triangle is a five wave pattern where all the waves cross each other. The

five sub-waves of a triangle are designated A, B, C, D, and E in sequence.

5

3

b

d

e

c

1 a 4

2

Triangles are by far most common as fourth waves. One can sometimes see a triangle as the Wave B of

a three wave correction. Triangles are very tricky and confusing. One must study the pattern very

carefully prior to taking action. Prices tend to shoot out of the triangle formation in a swift “thrust”.

2

a 2

4

c 1

e 1

4 4

a c e

d

b THRUST

3 3

d

5

3 b

5

5

When triangles occur in the fourth wave, the market thrusts out of the triangle in the same direction as

Wave 3. When triangles occur in Wave B™s, the market thrusts out of the triangle in the same directions

5

as the Wave A. C

3

C

A 4

A

b 1

d THRUST b

5 d

3

2

e

e

c c

4

a B

a B 1

2

T-30

Applying Technical Analysis

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Alternation Rule

• If Wave Two Is A Simple

Correction, Expect

Wave Four To Be

A Complex Correction.

• If Wave Two Is A

Complex Correction,

Expect Wave Four To

Be A Simple Correction.

T-31

Applying Technical Analysis

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Wave Measurements & Ratios

LENGTH OF EACH

WAVE

The price distance of each wave is measured as a vertical distance

INDICATED BY

from the beginning of the wave to the end of the wave. The length

LENGTH OF EACH

is measured in price points or units.

ARROW

1

Length of Length of

2

Wave One Wave Two

1

2

3

24170

Length of

LENGTH OF WAVE 3 =

Wave Three 3 24170 - 23560 = 610 PTS

1

23560

2

3

Length of

4

Wave Four

1

4

2

5

3

Length of 5

Wave Five

1

4

2

T-32

Applying Technical Analysis

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Fibonacci Ratios Of Waves

The first wave in an Elliott sequence is Wave 1. The measurement of Wave 1 is used to find ratios of

other waves. These ratios are not rules, but guidelines in estimating the lengths of different waves. Prior

to wave ratios, we need to discuss Fibonacci.

Fibonacci Ratio Background

Fibonacci ratios are mathematical ratios derived from the Fibonacci sequence. The Fibonacci sequence

is the work of Leonardo Fibonacci around 1180ACE. The Fibonacci sequence is used in many applica-

tions including engineering, space studies, stock market actions, and many other fields. This is all the

information one needs as to the origin of the Fibonacci ratios, at least for trading purposes.

The most common Fibonacci ratios used in the stock markets are:

1 - 1.618 - 2.618 - 4.23 - 6.85 (multiples)

0.14 - 0.25 - 0.38 - 0.5 & 0.618 (ratios)

The ratios used in this manual slightly deviate from the standard Fibonacci ratios listed below. These

deviated ratios best fit the short-term wave pattern.

Ratios For Wave Two

Fibonacci Rules for Wave Two are as follows:

Wave 2 is always related to Wave 1

Common Ratios for Wave Two are:

Wave 2 = either, 50% of Wave 1

or, 62% of Wave 1

1

Length of Wave One

}

50%

of Wave 1

62%

2

T-33

Applying Technical Analysis

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Ratios For Wave Three

Wave 3 is related to Wave 1 by one of the following:

Wave 3 = either 1.62 x length of Wave 1

or 2.62 x length of Wave 1

or 4.25 x length of Wave 1

The most common multiples are 1.62 and 2.62. However, if the 3rd Wave is an extended wave, then

2.62 and 4.25 ratios are more common.

4.25

3

X (times)

3

2.62 length

of Wave

1

1.62

3

1

Wave One

Length of

2

Ratios For Wave Four

Wave 4 is related to Wave 3 by one of the following:

WAVE 4 = either, 24% of Wave 3

or, 38% of Wave 3

or, 50% of Wave 3

3

The 24% and 38% are the most

X (times)

common ratios for Wave 4.

24%

Length of Wave Three

length

4

of Wave 3

38%

4

1

2

T-34

Applying Technical Analysis

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Ratios For Wave Five

Wave 5 has two different relationships. Both are shown below.

• If Wave 3 is greater than 1.62 or extended, then Wave 5 ratios are as follows:

Wave 5 either = Wave 1

or = 1.62 x Wave 1

5

or = 2.62 x Wave 1

3

4

5 based on length of 1

1

1 2

• If Wave 3 is less than 1.62, Wave 5 ratios are as follows:

When Wave 3 is less than 1.62, the 5th Wave over-extends itself. From research, the ratio of Wave 5

will be based on the entire length from the beginning of Wave 1 to the top of Wave 3.

Extended Wave 5 = either 0.62 x length of

(beginning of Wave 1 to top of Wave 3)

or = length of

(beginning of Wave 1 to top of Wave 3)

5

or = 1.62 x length of

(beginning of Wave 1 to top of Wave 3)

3

5 = based on

1 length of 1 3

4

3

2 1

T-35

Applying Technical Analysis

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Elliott Channels For Top Of A Wave Five

Once the 5th Wave starts, the Elliott Channel Technique can be used to project the end of the 5th Wave.

Once Wave 4 has been completed, draw a straight line between Waves 2 and 4.

3

4

1

Lower

Channel Line

2

Now, draw two lines parallel to the lower channel line connecting the tops of Waves 1 and 3.

5

Wave 1 Upper

Channel Line 5

3

4

1

Lower

Channel Line

2

Expect Wave 5 to end on one of the two upper channel lines. Usually, if Wave 3 was a normal wave,

Wave 5 tends to end on the channel drawn from the Wave 3 top. If Wave 3 was extended and a runaway

type of wave, Wave 5 tends to end on the channel drawn from the top of Wave 1.

T-36

Applying Technical Analysis

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Statistical Analysis of Wave Two

Ratios

Only 12% held within a

38%

38% retracement of Wave

‚ One

73% Retraced between

50% 50% and 60%

‚ 62%

15% Retraced below the

62% level

62%

‚

T-37

Applying Technical Analysis

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Statistical Analysis of Wave Three

Ratios

1.60 X 1

}

1X1

Less than 3 = 1 only 2% 15% of the time

of the time

‚

‚

2.62 X 1

}

1.75 X 1

1.75 X 1

}

1.6 X 1 30% of the time

45% of the time

‚

‚ 2.62 X 1

Greater than 2.62 X 1

8% of the time

‚

T-38

Applying Technical Analysis

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Wave Three Ratios

4.25 X Length of

2.62 X Length of

1.62 X Length of

Length of

T-39

Applying Technical Analysis

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Statistical Analysis of Wave Four

Ratios

Retrace 24-30% of Wave 3

only 15% of the time

‚

30%

} Retrace between 30-50%

of Wave 3 60% of the time

50%

‚

50% Retrace between 50-62%

}

of Wave 3 15% of the time

62%

‚

Under 62% retracement of Wave 3 = 10% of the time

T-40

Applying Technical Analysis

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Wave Four Ratios

Length of

Ç

Retracements of

Length of

ÇRetracements of

T-41

Applying Technical Analysis

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Elliott / Fibonacci Ratios

Wave Five

(Extended if Wave Three is less than 1.62 X Wave One)

… = .62 X Length of 0 to 3

… = 1 X Length of 0 to 3

… = 1.62 X Length of 0 to 3

…

?

3

3

4

1

28400

2

0

28300

28200

„

28100

‚

28000

T-42

Applying Technical Analysis

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Elliott / Fibonacci Ratios For Wave 5

(0-3) 100%

(0-3) 62%

(2-3)

Length of 0 - 3

0 = Beginning of Wave 1

Even when Wave 3 is extended, our research has found that the Wave

5 sequence will often end inside the ratios calculated form 0 -3 where

'0' (Zero) is the start of Wave One. This is the start of the new Five

Wave sequence. The length of 0 - 3 is extended from the end of Wave

4.

Wave 5 usually ends inside the windows of 62% of 0 - 3 and equal to

0 - 3 added to the end of Wave 4.

T-43

Applying Technical Analysis

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Rules: Type 1 Trade

(Buying at the end of a Fourth Wave retracement)

Once the software confirms a Wave Three rally, look for the following conditions:

A. Look for the Elliott Oscillator to pull back to the zero

(Projection for Fifth Wave)

(base) line.

”5”

B. Once the oscillator pulls back to zero, check to see if the

3

prices have retraced at least to the 38% level of the proceed-

48

ing Wave Three.

Profit

C. At this time, the Profit Taking Index should be above

Taking Index

35 (preferred). The Profit Taking Index is a propri-

etary indicator that aids in determining the prob-

ability for a Wave Five. When the Profit Taking

Retracements

38%

Index drops below 35, the statistical odds for —

——————

—

——

—

4

—

—

a Wave Five rally is greatly reduced. In — —

—

—

—

50%

addition, it also increases the odds — —

— —

—

— —

—

—— —

for Fifth Wave failures. —

———

—

62%

—

—

1 Wave Four

Channels

Oscillator to pull

2 back to the zero

(base) line.

Elliott Wave

Oscillator

D. Retracements should hold above the Wave Four channels. Wave Four channels are proprietary

channels that provides the much needed timing element for Elliott Wave analysis. An ideal Wave

Four should complete above these channels. Containment of the retracement levels above the top

two channels provide a higher probability for a stronger rally in Wave Five. This step is not as

critical as the Profit Taking Index in Step C.

E. Calculate the stop two Fibonacci levels under the entry level. For example: if your entry is at the

38% level, the stop should be placed two levels under (which is below the 62% retracement area).

F. Look for the fifth wave projection target given by the software. Calculate the potential profit/stop

ratio. If this ratio is greater than 1.5, the trade is worth considering.

The Reverse Logic Applies For A Declining Five Wave Sequence.

T-44

Applying Technical Analysis

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Rules: Type 2 Trade

(Selling at the end of a Fifth Wave rally)

Once the software confirms a Wave Five rally, look for the following conditions:

5

A. Look for prices to be near the Fifth Wave projection.

”5”

B. Make sure the Elliott Oscillator confirms a

3 (Fifth Wave

Fifth Wave by providing clear divergence

Projection)

and the Oscillator pulling back to zero

(base-line) in between.

DMA

4

Divergence in peaks

1

compared to

new highs in price

confirms Fifth Wave.

2

Elliott Wave

Oscillator

Pulled back to zero (base-line) in between peaks

C. Use a DMA (Displaced Moving Average) to sell on a crossover. The DMA is a simple

moving average displaced or shifted to the right. As long as the momentum in the market

continues, the DMA stays out of the way. When the price tops out in Wave Five, it eventu-

ally breaks (crosses) the DMA. This provides a confirmation to enter a position. This also

provides a defined stop above the highs.

D. Place stop above previous high.

(DMA) stands for Displaced Moving Average. Our software automatically calculates this for you.

The Reverse Logic Applies For A Declining Five Wave Sequence.

T-45

Applying Technical Analysis

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EXAMPLES OF

TYPE ONE

AND

TYPE TWO

TRADES

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.

© Trading Techniques, Inc.

677 W. Turkeyfoot Lake Road

Akron, Ohio 44319 U.S.A

Telephone # (330) 645 - 0077

All Rights Reserved. Printed in the U.S.A.

T-46

Applying Technical Analysis

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AMR (Weekly)

Wave Five

TYPE ONE BUY SETUP

Projections

Profit Taking

Index

Wave Four

Break of a Trend line can

Channels

also be used as a technique for

entering the trade.

Elliott Oscillator

to zero

TYPE ONE BUY SETUP

STEP A - The Elliott Oscillator has pulled

RESULT Using the

back to zero.

DMA as a

Prices rallying

STEP B - Trend line entry technique. The

stop kept you

to projection.

idea is to use the break of the trend long at the

line for entering the trade. This first price

technique reduces the risk of pre- projection.

mature entries.

STEP C - Profit Taking Index is at 46 which

is above the minimum required

LONG

level.

Buy on the break

STEP D - The retracement has broken the

of the trend line

Wave Four Channels. The Wave

Four channels however, are not as

critical as the Profit Taking Index.

STEP E - There are two projections: one at

$70, and the other at $79.

T-47

Applying Technical Analysis

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TYPE TWO BUY

JUNE'90 T-BONDS (Daily)”

TYPE TWO - BUY SETUP

Software

generated

DMA

BUY on

cross of

DMA with

stop under

the lows.

Wave Five near projected prices

Elliott

Elliott Oscillator to zero in between peaks

Oscillator

showing

clear

divergence

TYPE TWO BUY SETUP

STEP A - Prices are near the Fifth

Wave projections. RESULT:

Use DMA

Prices rallying

STEP B - Elliott Oscillator confirms a

to protect

Fifth Wave with clear diver- in new phase. profits

gence. The Elliott Oscillator

also pulled back to zero in be-

tween the peaks.

STEP C - Use the cross of the displaced

moving average (DMA) to en-

ter LONG.

STEP D - Place the protective stop un-

LONG

der the lows.

STEP E - Once the next phase is in

progress, protect profits using

the DMA. Now keep watch-

ing for a TYPE ONE

SETUP.

T-48

Applying Technical Analysis

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Wave Five near

projected prices

CRAY RESEARCH - CYR (Daily)

TYPE TWO - SELL SETUP

SELL on

cross of

DMA with

stop above

the highs.

Elliott Oscillator

showing clear

divergence.

Elliott Oscillator

to zero in between peaks

TYPE TWO SELL SETUP

STEP A - Prices are near the Fifth

Wave projections.

SHORT

RESULT

STEP B - Elliott Oscillator confirms a Prices declining

Fifth Wave with clear diver- in new phase.

gence. The Elliott Oscillator

also pulled back to zero in

between the peaks.

STEP C - Use the cross of the dis-

Use DMA

placed moving average

to protect

(DMA) to enter SHORT.

profits

STEP D - Place the protective stop

above the highs.

STEP E - Once the next phase is in

progress, protect profits us-

ing the DMA. Now keep

watching for a TYPE ONE

SETUP.

T-49

Applying Technical Analysis

GET

FORECASTING 5TH WAVE FAILURES OR DOUBLE TOP

MARCH '92 (Daily) WHEAT ”

Wave Five

FAILURE SETUP

Projection

Profit

Taking

Index

below 35

Wave Four

Channels

Elliott

Oscillator

to zero

FIFTH WAVE

double top as

FAILURE SETUP RESULT:

forecasted

Prices drop sharply

The key here is that the after

a double

PROFIT TAKING INDEX

top.

dropped below 35. Statistically,

this indicates a potential Fifth

Wave failure, or at best a double

top.

In situations such as these,

one can use the TYPE TWO

THE CONSERVATIVE AP- SELL RULES and sell on the

cross of the DMA.

PROACH IS TO IGNORE

THIS LONG TRADE.

If the trade is taken long (using

an aggressive mode), one should

have very close stops.

T-50

Applying Technical Analysis

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FORECASTING FIFTH WAVE FAILURES OR DOUBLE TOP

Wave Five Profit

GENERAL MOTORS - GM (Daily) Projection

Taking

FAILURE SETUP Index

below 35

Retracement

Levels

Wave Four

Channels

Elliott Oscillator

to zero

FIFTH WAVE FAILURE

SETUP double top as

forecasted

RESULT

Prices drop

The key here is that the sharply after

PROFIT TAKING INDEX a double top.

dropped below 35. Statistically,

this indicates a potential Fifth

Wave failure or at best a double

In situations such as these,

top. one can use the TYPE TWO

SELL RULES and sell on the

THE CONSERVATIVE AP- cross of the DMA.

PROACH IS TO IGNORE

THIS LONG TRADE.

If the trade is taken long (using an

aggressive mode), one should

have very close stops.

T-51

Applying Technical Analysis

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FORECASTING FIFTH WAVE FAILURES OR DOUBLE TOP

Profit

DELTA AIRLINE - DAL (Weekly)

Taking

FAILURE SETUP Index

below 35

Wave Four

Channels

Elliott Oscillator

to zero

FIFTH WAVE FAILURE

The key here is that the PROFIT

RESULT 5th Wave Failure

TAKING INDEX dropped be-

Prices drop as forecasted.

low 35. Statistically, this indicates sharply after a

a potential Fifth Wave failure or 5TH WAVE

at best a double top. THE CON- FAILURE.

SERVATIVE APPROACH IS TO IG-

NORE THIS LONG TRADE.

In situations such as these,

Also note the Profit Taking In- one can use the TYPE TWO

dex is at 15 (A VERY LOW) SELL RULES and sell on

crossing the DMA.

number. THE LOWER THE

PROFIT TAKING INDEX,

THE GREATER THE ODDS

FOR A 5TH WAVE FAILURE.

T-52

Applying Technical Analysis

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Identify Failed Fifth Waves (Double Top)

The weekly chart of Apple Computer is shown below with software generated Elliott Wave

Counts. Notice the Profit Taking Index (PTI) is at 14 (below 35). This indicates a potential

for a Failed Fifth Wave, also known as a Double Top.

Possible Double

Top

Profit Taking

Index is at 14

(less than 35)

¤ When the Profit Taking Index (PTI) is less than 35, greater than normal profit taking is

seen in the Wave Four. This leads to failed Fifth Waves and Double Tops (see next page).

T-53

Applying Technical Analysis

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Double Tops (Failed Fifth Waves)

Apple Computer (Weekly)

¤ Once the market trades to the previous high (with the Profit Taking Index less than

35, as seen on the previous page), the odds increase for a Double Top or Failed Fifth

Wave.

Sell

·

ï Previous

Wave Four

low

¤ Use the Displaced Moving Average (DMA) to enter a short position with a stop above

the high.

¤ Again, the first target is the previous Wave Four low near 43.

T-54

Applying Technical Analysis

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Another Double Top (Failed Fifth)

The weekly chart of AMGEN is shown below with software generated Elliott Wave

Counts. The current Wave Four decline has a Profit Taking Index (PTI) of 30 (which is

below the minimum requirement of 35). This again indicates greater than normal profit

taking in the current decline.

PTI Less

Than 35

¤ This usually leads to a Double Top or failed Fifth Wave high (see next page).

T-55

Applying Technical Analysis

GET

Double Tops (Failed Fifth Wave High)

AMGEN (Weekly)

¤ With the Profit Taking Index at 30, when the market approaches the Wave Three

high, the odds increase for a Failed Fifth Wave or a Double Top.

Sell

·

Double Top with

PTI at 30 (below

35)

¤ Use the Displaced Moving Average (DMA) to enter a short position with a stop above

the high.

¤ The previous Wave Four low near 50.00 is the first target. At this time, one can

tighten stops or monitor the software generated Elliott Wave count for a new Wave 3

in the same direction.

T-56

Applying Technical Analysis

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Type One Buy in March 94 Cocoa

¤ Chart A shows the end of a Wave Four decline. The Elliott Oscillator has pulled back

to zero confirming this.

¤ The Profit Taking Index is greater than 35 (at 54) showing good potential for a rally

to a new high.

B

A

PTI

Buy

·

±

Wave 4 Channels

Stop

¤ The Wave Four channels are holding, confirming a good potential for a new rally.

¤ Buy on the cross of a trend line or DMA (Displaced Moving Average) with a stop

below the Wave Four low. The target is to new highs above 1250. Software projec-

tions are shown with a -5- (with dashes on either side).

¤ This also sets up a Type Two sell (seen on next page).

T-57

Applying Technical Analysis

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Type Two Sell in March 94 Cocoa

¤ Chart A shows the end of a completed Wave Five Rally.

¤ The Elliott Oscillator shows clear divergence

A B

Sell

·

±

Previous

Wave 4

Divergence

¤ Sell on the cross of a trend line or DMA (Displaced Moving Average) with a stop

above the high.