Credit: Shutterstock photoIntroduction variations of structure in motive/impulse waves
In our previous introduction to Elliott Wave Basics - Structure , we looked at the conventional rules and guidelines for the structure of an impulse and corrective wave as well as the fractal nature of waves. We now move on to explore the variation of impulse or motive waves.
2 main rules that dictate incorrect counting:
wave 4 and 1 should not overlap:
wave 3 should not be the shortest:
In fact wave 3 is conventionally the strongest. However, the market varies from this guideline quite a lot . The other obvious rules are: wave 2 should not completely reverse wave 1, and wave 5 should break past wave 3. We will see that there is an exception to the latter.
In Frost and Precter's Elliott Wave Principles , it was noted that " In an impulse, wave 4 does not enter the territory of (ie. overlap) wave 1. This rule holds for all non-leveraged "cash" markets. Future markets, with their extreme leverage , can induce short term price extremes that would no occur in cash markets. Even so, overlapping is usually confined to daily and intraday price fluctuations." Forex trading involves leverage and is known for its volatility so we can expect some violation to non-overlap rule within the weekly prices. Since forex markets close over the weekend, we should not allow this violation to occur with weekly charts.
Even when we stay within these rules, there are still many variations to the conventional structure of financial market movement:
Impulse wave variations:
Extended 1st - A strong push to start an impulse wave is seen where the structure of the first wave is clearly identified. As long as the 3rd wave is longer than the 5th, it follows the rule that wave 3 is not the shortest.
Extended 3rd and Nesting - An extended 3rd reveals the internals of the third wave and follows the convention of being the most dynamic wave in this motive structure. Some clues that we are in extended wave 3 is that in our initial wave count, what is suppose to be wave 4 overlaps 1, but the market still continues to develop in the direction of 1. In this situation, "nesting" could be developing. Another clue is that after counting 5 waves, wave 3 is shortest, and wave 5 seems longest. That's when you can propose that the wave 5, is actually the internal wave 3 of the extended wave 3. You see therefore that initial violation of the conventional rules for impulse wave can actually imply a stronger impulse wave is developing.
Robert and Frost also notes that 'in the stock market, "the most commonly extended wave is wave 3″.
Nesting describes extended wave 3′s. Image we start counting 1, 2, 3, and then wave 4 overlaps 1. Then we can propose a non-impulse wave development. This can be further confirmed if the market starts to reverse entire swings. However, the market can also be "nesting" an extended wave 3 (as long as the market continues to higher highs and higher lows in the bullish scenario, or lower highs and lows in the bearish scenario). In the illustration below, we see 2 degrees of nesting.
Extended 5th - The terminal wave can sometimes become the most dynamic one to develop in a motive wave. This is usually not apparent until initial high for wave 5 is broken. Strong price action and/or market moving risk events can provide the impetus for an extended 5th and really for all extended motive waves for that matter.
9-wave unclear extension - Sometimes the market does not offer clear clues of which type of extension a motive wave is taking. Note that all these variations simply reflect a committed trending move. You can imagine also 13-wave motives with for example an extended third wave within the extended third wave ( with nesting?).
Truncated 5th - A "failure" or "truncation" describes the inability of the 5th wave to break across the end of wave 3, an exception to the rule. This is likely to follow an exhaustive wave 3. The 5th wave has an impulse structure. The practitioner therefore knows that even if it does not go through wave 3, it is not a wave B in a correction , and that the correction has yet to begin.
Diagonal Triangles (Ending) - Diagonal triangles are basically the conventional wedge pattern . These break the rule that the internals of an impulse wave should also have impulse waves. In ending diagonals Frost and Prechter notes that diagonal triangle wave 5s have internal ABC structure throughout. This type of action can also be spotted in ending wave Cs. The rule to this exception however is that this structure can not be a wave 3 or B. It can be a leading wave (1 or A), but the internal structure is most likely different.
A break against the direction of the wedge has a conventional target back towards where the wedge originated, or start of wave 4.
Diagonal Triangles (Leading) - Wedges also exist at wave 1s and As. The difference from the ending diagonal is that we see motive wave development in the direction o the trend or correction . Double 5′s for example, which are usually marked by WXY (similar to ABC) where W could be a diagonal triangle . We will explore more variations of corrective waves in the next issue.
Expanding Triangle (Ending) - While the wedge or the diagonal triangle is formed by converging trendlines, an expanding triangle has diverging ones. These however were dismissed by Frost and Prechter as valid variations, although we do see them in rare occasions.
Note: It may save a lot of headache to know that even all these variations won't describe all market action. Sometimes practitioners forego trying to identify all the internal structures and just deem them to be "complex" or "abnormal" waves. As you can imagine, the multiple variations and allowance of different scenarios as well as "abnormality" before the wave count is complete invite criticism about EWP and its predictive power. It is however a great way to start your analysis and get context. Even wave practitioners often combine wave analysis with other technical tools to assess the market from other angles (momentum, volatility etc.).
Previous: Structure
Next: Variations in Corrective Waves
Fan Yang CMT
Chief Technical Strategist
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
