ASX Charting Course

Chapter 36

The Elliot Wave Principle

Associated Rules and Guidelines

The Rule of Alternation

This rule should be kept in mind at all times when analysing wave formations and projecting targets. Alternating patterns should be expected in all wave formations.

The most basic aspect of this rule can be applied to corrections and it virtually states that no two sequential corrections of the same magnitude will ever be the same type. For example if wave two is a simple correction, then wave four will most likely be complex.

Simple corrections are usually zigzag’s or basic flat corrections, while complex corrections are more likely to be triangles, double threes, intricate flats or any other complex pattern.

The same rule can be applied to large magnitude complex corrections. A complex three for example will probably alternate between patterns. For example a large correction might start with a flat ABC type correction and then be followed with a zigzag. Alternatively if the correction started with a zigzag we could expect a flat to follow.

Strength of Trends

Corrective patterns provide a lot of information about the strength of an underlying or subsequent trend. The slope of the impulse waves can also be revealing with respect to the underlying trend.

In general zigzags indicate ordinary or normal conditions and therefore normal trend strength. Complex corrections on the other hand denote a strong trend and often occur prior to or immediately after an extension. Extensions are also a sign of strength.

Zigzag or double zigzags indicate ordinary strength

Flat and Irregular corrections indicate a strong trend

Running corrections reveal an unusually strong trend

Double and triple threes indicate a strong trend

Triangles indicate thrust, swift but short

Depth of corrective Waves

How low can you go? A vital piece of information is provided by Elliot wave theory when it comes to market corrections. The rule is that corrections, especially wave four corrections, tend to terminate within the range of the previous wave four by lessor degree. The most likely level of retracement is the bottom of wave for by lessor degree.

Wave equality

It is one of the tenets of Elliot wave theory that two impulse waves will always tend toward the same size in both time and price. It generally holds true for two non-extended waves and especially true if wave 3 is an extension. If two of the waves are not perfectly equal then the relationship is probably a multiple of 0.618.