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. 2
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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 ƒ
ƒ 1.60 X 1
}
1X1

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


‚ ƒ

2.62 X 1
ƒ }
1.75 X 1
1.75 X 1
}
1.6 X 1 30% of the time
45% of the time




ƒ

‚ 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
ƒ
Retrace 24-30% of Wave 3
only 15% of the time



ƒ

30%
} Retrace between 30-50%
 of Wave 3 60% of the time
50%




ƒ

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 ƒ


Ç
Retracements of ƒ
Length of ƒ




ÇRetracements of ƒ




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
ƒ
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
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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
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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
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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.

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