Rule Concerning the Overlap of Wave 1 and Wave 4

Elliott's Rule Concerning the Overlap of Wave 1 and Wave 4

As one of Elliott's unbreakable rules he stated that the correction in Wave 4 should never penetrate the extreme of Wave 1. In my findings. I do not really see any evidence of this, and whether or not the extremes of Wave (i) and Wave (iv) overlap really depends on whether the Wave (iii) has been a normal projection or a strong projection. While I will cover the degrees of projections in Chapter 4, for now I will merely point to Wave (iii) projections of between 161.8% and 194.43% as being normal with projections of 223.6% or higher being strong projections. It is probably fairly obvious that the stronger the Wave (iii) the less chance there is of the Wave (iv) retracement being able to reach the extreme of Wave (i).

Furthermore, since instances of Wave (iii) will only occur in a Wave (a) or Wave (c), which in turn appear in both impulsive five-wave moves as well as corrective structures, the most common occurrences of overlap are in corrective structures. Extending this concept, it is also logical that since a Wave (iii) in an impulsive (trending) move has the greatest occurrence of strong projections the instances of overlap are least. In Waves (i) and (v), overlaps are more common.

Figure 3.17 displays an (a)(b)(c) rally in a Wave (b) of the next higher degree. Note in Wave (a) the peak of Wave -i-is not touched by the low of Wave -iv-. However, in Wave (c) the low in Wave [iv] does overlap the peak in Wave [i]. This does not necessarily mean that overlaps are seen only in Wave (c). They can happen in either Wave (a) or Wave (c). What is more important to understand is that the overlap occurred in a corrective structure of the next higher degree and not a true impulsive, trending move.

Figure 3.17 Zigzag Higher in 30-Minute EURUSD with Overlap in Wave [i] and Wave [iv]

Figure 3.18 displays a decline in Wave efc of an Expanded Flat Wave (iv) in USDCAD. In this example, the extremes of Wave -i-and Wave -iv-are not close at all.

Figure 3.18 A Decline in Wave efc in 10-Minute USDCAD to Complete what was a Wave (iv)

Note: The two examples will be used in Chapter 4 to confirm the remarkably accurate relationships between all related waves.

Alternation

Elliott's guideline on the alternation between Wave 2 and Wave 4 holds true in the modified structure. However, it does raise one additional complication. To recap on Elliott's guideline, Elliott noticed a strong tendency for corrective waves within an impulsive structure to alternate in terms of depth and complexity. If Wave 2 develops in a simple manner (an ABC Zigzag move) then Wave 4 will tend to be complex (Triangle, Flat, Expanded Flat, or Triple Three). If Wave 2 develops in a complex manner then Wave 4 tends to be a simple ABC move.

In addition, alternation covers the depth of the retracements in Waves 2 and 4. If Wave 2 was shallow then Wave 4 will be deep, and vice versa.

Figure 3.19 displays a five-wave decline in a Wave (c) in the hourly USDJPY. Note how Wave -ii-was almost non-existent. In fact, the extension in Wave -iii- held a moderately good relationship with Wave -i-and the correction in Wave - iv-is clearly a deep and long correction. This also held what is a very common relationship in a deep Wave -iv-, and will be covered in Chapter 5.

Figure 3.19 A Five-Wave Decline in Wave (c) in USDJPY which has Wave -i- and Wave -iv-Alternating