Impulsive Wave Modification

Impulsive Wave Modification

After reading my first book on Elliott Wave it took me a long time to feel comfortable when using it for forecasting. The basic concept of wave development is quite simple, but when faced with the daunting task of actually recognizing waves among all the apparently disjointed and erratic movements seen in a chart it is all too easy to make mistakes.

Some leading Elliotticians talk elegantly on the use of Fibonacci ratios, which are calculated from a simple sequence of numbers and which appear not only in nature but also in financial markets. They detail how market retracements and extensions develop in line with Fibonacci ratios, implying that their analysis blends harmoniously with the ratios. However, when you see their analysis there appears to be few occasions where there are any relationships. To be fair, some believe that the ratios are secondary to the actual wave structure and concentrate on ensuring that the rules are followed and they identify correct five-wave movements.

In my early days I followed what was probably the normal progression of any analyst learning to apply Elliott Wave. I would look for projections of 161.8%, but when they didn’t & apos; develop I began to look at the waves and think, “Well, this looks about right.”

Over time I began to be able to provide relatively acceptable forecasts, but I was never fully satisfied. There were just too many errors in stalling points, depths of corrections, and wave extensions that all too often fell short or exceeded the accepted Fibonacci projections.

After a spell away from direct involvement with trading and forecasting I began my own service, but still found these issues of identifying sufficiently accurate stalling points detracted from the success of the forecasting. Quite often I would find there was a wave missing at Wave 5.

Given that I believe quite strongly in the use of natural order ratios in both retracements and wave projections, I would spend a lot of time working out which waves were related. It was through this process that I thought I noticed a “A Special Wave ” move that Robert Prechter noted in 1986. He observed that a Diagonal Triangle wave development, which is normally associated with an extended Wave 5, was occasionally seen in a Wave A position (see Figure 3.1).

Figure 3.1 Prechter's Special Wave A Developing in Five Sets of Three Waves

However, what I was facing was a five-wave move that developed in a similar manner to a Diagonal Triangle, in which Waves (i), (iii), and (v) all developed in three waves and not five. This implied that any individual five-wave move could only develop in a Wave A position or in a Wave C position. In the next higher degree, this ABC sequence actually formed one section of a larger five-wave sequence all constructed of three waves.

If I attempted to apply Fibonacci relationships to the standard count, that would treat these as an example of an extending wave (see Figure 3.3) and everything fell flat. There were no relationships. When I used the three-wave structure for Waves (i), (iii), and (v), the wave relationships were perfect—and there was no missing wave at completion.

Figure 3.3 Modified Structure in Five-Minute Chart of EURUSD

As I went through my daily ritual of tapping out various potential waves and finding relationships, I suddenly found myself using this alternative all the time. The projections and retracements began to become consistently accurate.

Figure 3.2 displays how the modified impulsive wave now appears. Note that each Wave a and Wave c is constructed of five waves as Elliott originally proposed. As opposed to the five-wave impulsive move in Elliott's original version that could form a Wave 1, Wave 3, Wave 5, Wave A, or Wave C, the modified version can only form Wave A or Wave C.

Figure 3.2 A Modified Impulsive Wave

Figure 3.3 displays this modified structure in the five-minute chart of EURUSD. All the waves had very close adherence to common wave relationships and this five-wave sequence was the culmination of a rally from 1.3442. Thus it cannot be considered as a Triple Three. An alternative count of an extended impulsive wave in Elliotts & apos; original structure is also impossible since the correction in Wave (ii) dipped one point below the initial correction labeled as Wave (b) within Wave (i). I shall cover this example in Chapter 4 to highlight the wave relationships.

While a few Elliotticians with whom I have discussed the modifications have shown some shock, and in most cases disbelief, this is not such a radical modification. Firstly, it merely represents what Robert Prechter noted, but in special instances of a Wave A. Secondly, it actually adheres to the Dow Theory which recognizes a three-wave development in price. However, it does change the number of rising waves. In a simple five-wave rally in Elliott's structure there are three impulsive moves higher. In a single extended rally there are five impulsive moves higher, while in a double extended rally there are seven impulsive moves higher. In my modification there are a standard six impulsive moves higher (as shown in Figure 3.4).

Figure 3.4 Comparison of the Modified Rally versus a Single Extended Elliott Rally

Implications in Wave Relationships

As has been mentioned on several occasions, the basis quoted by leading Elliott Wave followers is that market movements follow natural ratios and therefore the sequence of waves in a structure should reflect this principle of relationships.

For the original Elliott structure the commonly quoted relationships are Fibonacci-based. I will not list these in this chapter as I will lay down the foundation and application of ratios in the next chapter. At this point I will merely list the waves that should be related.