What Happens After Elliott Wave 5?
Truncations occur when the fifth wave in an impulsive pattern fails to exceed the peak of its third, typically after an especially powerful third wave, and usually indicate that major trend reversal may be in motion.
A typical fifth wave stretches over only a short distance in horizontal units and its subwaves resemble those found in waves one and three; this phenomenon is known as “Rule of Alternation.”
Wave 5
Wave 5 is an impulse, the strongest and most common waves found in an impulsive sequence; these waves typically push prices higher before experiencing an aggressive correction after finishing their run.
Market participants who participated in an impulse buy take profits, which causes prices to decrease and forms a correction. Typically this corrective price movement lasts longer than waves 2 and 4.
Fibonacci ratios provide the ideal way to determine the length of wave 5. On average, wave 5 typically equals or retraces at least 38.2% but frequently up to 61.8% of its predecessor.
Additionally, drawing a trend line connecting the ends of waves 1 and 3, as well as an parallel line at the end of wave 4, will give an estimate for wave 5. This channel usually extends all the way to its peak; however, in many instances this trend line will break.
Wave 6
Elliott wave theory provides several guidelines that apply to particular waves. Though these rules cannot guarantee 100% accuracy, they provide an impressive level of precision.
Example: According to the “Guideline of Alternation”, wave five cannot retrace more than 100% of its preceding wave three, as defined above. Also, its duration must equal that of wave two and wave four combined.
Elliott stipulated a rule regarding overlap which stipulated that corrective waves cannot overlap their preceding wave. Furthermore, depth of correction would depend on retracement guidelines which must cover between 38-78% of original wave i length.
Wave 7
Wave 5 is usually the most complicated impulse wave and may take many different forms: flat, zigzag, combination or triangle. However, it must not overlap the start of wave 1 as that would constitute an Elliott Wave Theory failure and provide a potential spot to place stop losses for long positions.
Corrective waves a-b-c typically retrace 50% to 61.8% of their respective impulse waves; wave 5 will typically retrace at least 38.2%. Wave B tends to start near where A began while C often finishes well beneath it; In strong markets, wave b-c length may reach as much as 1.618 times that of waves 1 through 3.
Wave 8
Wave 5s should never exceed the price extreme of Wave 3, when they do this is known as truncation and suggests that the trend may soon change direction.
One of the fundamental rules of Elliott Wave theory is that corrective waves should never retrace more than 100% into their starting point territory. A similar rule holds for wave 4, as this wave typically extends past its ending but should never overlap it.
Corrective waves are three-wave patterns which consist of flat corrections, expanding flats or complex corrections. With flat corrections, wave C may often measure 1.618 times Wave A; this ratio can help determine target levels for future down moves while channel lines may provide support and resistance areas.
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