What Happens After Elliott Wave 5?
The next Elliott wave will likely take the form of a complex correction, taking either an ascendant or descendant path, with its length likely retracing 38% of its original distance and not crossing over onto previous fourth waves.
As a rule of thumb, each completed five wave sequence on a smaller time frame represents one wave in an unfolding larger sequence on higher time frames.
Wave 3
An Elliott wave sequence progresses in a specific pattern and can appear on multiple time frames simultaneously; an Elliott sequence that comprises five waves may only represent its first wave and not all subsequent waves will follow suit on another chart.
At the conclusion of each wave, market participants begin taking profits and exiting long positions, leading prices lower as Wave 2 unfolds and often ending abruptly; at which point market participants see undervaluation and start buying again forming Wave 3.
Wave 3 in an ascending wave should never be the shortest or overlap the starting point of wave 1; also, according to common rule, wave 4 shouldn’t retrace more than 100% of wave 2. These rules serve as guidelines and may not always work perfectly, yet are highly reliable foundation for Elliott Wave Theory.
Wave 4
Elliott Wave Theory predicts that once an impulsive five-wave sequence on a higher time frame has finished unfolding, a deep correction should ensue as an indicator that the main trend has finished its advance and begun a countertrend move.
Wave 2 of corrective waves is usually identifiable by its movement against an uptrend. There may also be more complex corrective patterns such as flats, irregulars and triangles.
These patterns occur due to market participants taking profits during Wave 1 as prices advance; as a result, prices begin to decline again during Wave 2, creating a corrective wave pattern.
Wave 5
Elliott Wave Theory can help traders identify market trends. According to this theory, markets move in repetitive patterns. Each trend comprises an impulse wave and corrective wave; an impulse wave typically moves prices in one direction while corrective waves go against it.
Each wave of an impulse typically breaks down into five waves: waves 1 through 3 are always zigzag-shaped; waves 4 through 6 can vary between flat or triangular formation, although waves 5 and 6 will never overlap.
The Tom Joseph Elliott Wave study also plots minor pivots of Wave 5. If a trend line breaks, this is an additional indicator that an upward wave has ended and correction is under way. Furthermore, this research investigates the Profit Taking Index of the market to assess its likelihood for initiating a Wave five rally; higher PTI values increase chances for strong wave five rallies to occur.
Conclusions
Elliott Wave Theory provides traders with rules and guidelines that help them better understand how stocks move and when they might retrace. It is based on the theory that market trends consist of five waves moving in one direction followed by two corrective waves moving against it – this five-wave pattern allows traders to determine how mature an emerging trend is as well as potential levels of retracement that might occur in due course.
Traders should monitor for a trend line that connects the end of Wave 2 and beginning of Wave 4, which will serve as an indication that a wave four rally may be underway. For optimal odds of a strong Wave 5 rally to remain high, this trend line must remain above Channel 1. Additionally, corrective waves iv should never overlap price territory from previous waves 3, an ideal length being 38% of wave iii length.
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