What Happens After Elliott Wave 5?
Elliott discovered the fractal nature of market trends, meaning smaller patterns fit within larger ones and the same patterns are repeated at all levels.
Elliott Wave Theory shows us that in any trending movement there should be five motive waves and three corrective waves; this 5-3 cycle structure must exist for any trend to successfully make progress and have volatility simultaneously.
Wave 5
Wave five in an impulse sequence is the longest actionary wave; its length relates directly to its amplitude (wave four). It may extend past wave three’s end point but should never overlap it.
Extensions within an impulse structure are common, but must adhere to the rules of alternation. Wave C must equal or at least equal Wave A for it to count, while it is rare that wave B retraces more than 61.8% of Wave A (exceptions being double zigzags and triangles).
Double zigzags occur most frequently in waves A, X and 2; triangles appear occasionally in wave 4, often either as wave A or part of a flat (wave 2 or B). Triple threes are exceptionally rare corrections which comprise three corrective waves connected by two corrective waves X & Y; this complex correction typically retrace 61.8% from wave Y while 100% when seen from flat ground.
Wave 6
Wave 5 in a bull cycle tends to be sideways affairs. They are typically strong across commodities, stocks and currencies & often accompany high volume trading activity. Waves 5 usually end with some degree of disappointment that advances haven’t continued as predicted by previous waves in a bull cycle.
Elliott’s rules dictate that any correction should retrace no more than 100% of the length of an impulse wave that preceded it; however, this retracement may be either shallow or deep – usually, however, between 38-78%.
Corrective waves typically take the form of zigzags, with double threes or triangles usually occurring as counterparts in waves 2 & 3. When this pattern does emerge, remember that alternation only occurs 61.8% of the time.
Wave 7
The next corrective wave will likely be deep. It will retrace all of the impulse wave’s movements before reaching channel lines or Fibonacci targets.
Frost & Prechter contend that most impulse waves contain only one extension in their actionary subwaves; this will likely occur at Wave 5 during an uptrend cycle.
As shown above, the first correctional wave within an impulse typically retraced 50-61% of its length while subsequent waves usually retraced 38-78%.
Retracements often follow zigzag patterns inside triangles; outside, both tend to zigzags. Wave 2 may be sideways and/or flat; Wave 3 typically features the highest volume as brokers, traders and central banks cash in on profits made during previous waves; the third correctional wave may end in a leading diagonal formation if prices reach 70% of its origin; it may also retrace in any number of corrective patterns but not flatness.
Wave 8
Wave 8 is the culmination of any five-wave sequence. It represents both its longest and fastest waves; as well as being possibly its deepest or strongest wave.
This wave marks the initial sign that a new trend is underway, when market participants who were long in the previous trend begin taking profits, which causes prices to drop sharply and form a correction, followed by buyers returning and inducing an upward surge – or impulse.
Retracement in Wave 4 usually only covers 38-78% of the length of its preceding impulse move, so as to not overlap with Wave 1 start point. This rule of alternation applies equally well for both corrective and impulsive waves – an essential foundation of Elliott’s wave theory and key to successful trading.
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