Elliott Structure versus the Modified Harmonic Relationships

Elliott Structure Relationships versus the Modified Harmonic Relationships

As another example of how the extended waves in Elliott's original structure fail to stand up to rigorous wave relationships, I will provide an example of an apparent impulsive decline in hourly GBPUSD and compare wave relationships between Elliott's structure and the harmonic structure.

Figure 4.11 displays the decline in the hourly GBPUSD market. This appears to decline in a complex five-wave move in which Wave (3) has a double extension. Apart from the correction in Wave (2), all the swing highs and swing lows are declining, confirming a bearish move. This decline followed a previous move lower and therefore the implication is for another five-wave decline.

Figure 4.11 A Complex Five-Wave Decline in GBPUSD

The decline in Wave (1) does follow Elliott's structure of five waves with Wave 3 being the longest and providing the main thrust of the decline. The correction in Wave (2) appears normal, and this is followed by a Wave (3) which has extended twice. Wave -2-is an Expanded Flat with the rest of the decline developing normally.

The problems I habitually encountered with Elliott's structural development were twofold. Firstly, these extended waves frequently lacked any consistent wave relationships, and this generated the second problem of being able to forecast where price should stall. To demonstrate the frustration I commonly encountered, the wave relationships are displayed in Table 4.6.

Table 4.6 Wave Relationships

As can be seen, there is a mixture of wave relationships. While there are some that have the normal wave relationships I look for, within a reasonable deviation, I have highlighted those which really would have posed serious issues in forecasting.

It was this type of imprecision that I found difficult to accept. On many occasions the failure to be able to identify turns within a reasonable margin saw reversals much earlier and left me in no man's land wondering whether a correction was being seen and not a reversal. Anticipating extended waves and where each Wave 1 would stall was a hit-or-miss affair, and then everything became much more problematic.

Now let's look at the same decline employing the harmonic wave structure.

Figure 4.12 labels this completely differently as a three-wave decline. There will be many Elliott Wave practitioners who will question this, but the evidence for the count comes through the wave relationships which in this case provide exceptionally accurate ratios that provided me with a much easier call for a reversal higher.

Figure 4.12 A Harmonic Three-Wave Decline in GBPUSD

The clarity of the wave relationships stands out from the first five-wave decline in Wave (A) (as shown in Table 4.7). All relationships are common for their position; the 198.4% projection in Wave (iii), the 33.3% retracement in Wave (iv), and the 76.4% projection in Wave (v). The maximum variance was just three points.

Table 4.7 Wave Relationships for Three-Wave Decline in Figure 4.12

The correction in Wave (B) developed as an Expanded Flat with the pullback being exactly 61.8%. These common relationships continued throughout the entire decline, even to the end where the extension in Wave (v) of Wave (C) was only four points while the projection in Wave (C) was one point away from the exact 161.8% projection of Wave (A).

Figure 4.13 displays the resulting reversal higher to confirm the accuracy of the harmonic structure.

Figure 4.13 Rally Following the (A)(B)(C) Decline in GBPUSD