Unbreakable Rules

Unbreakable Rules

Elliott detailed only three rules in the entirety of his findings, and all were confined to the actions of impulsive waves.

• Rule 1: Wave 2 can never retrace more than 100% of Wave 1.

This is quite logical. If we are talking about an impulsive wave representing the underlying trend, it would be illogical to have a retracement that breaks the basic definition of a trend as defined by classical technical analysis.

An uptrend is a sequence of higher highs and higher lows. Once that sequence is broken, the uptrend can be assumed to have ended. A downtrend is a sequence of lower lows and lower highs. Once that sequence is broken, the downtrend can be assumed to have ended.

• Rule 2: Wave 3 is never the shortest of the three impulsive waves.

Elliott also noted that statistically Wave 3 is generally the longest, and of all extended waves it is Wave 3 that most commonly extends as this is where the market has realized that it has the wrong position, and exits from its prior trending position to enter into the anticipated new trend direction.

• Rule 3: Wave 4 in an impulsive wave never retraces to a level below the peak of Wave 1 in an uptrend or above the trough of Wave 1 in a downtrend.

This rule basically highlights that during a trend that indicates a sustained movement in one direction, the extreme of Wave 4 would not be expected to retrace so deep as to overlap with the extreme of Wave 1.