3 Seminario Elliott Wave

The Elliott Wave Theory By Diego Rolando (Roclerman) Well, the Elliot wave principle was made it by Ralph nelson Elliot during 1934. After the years of panic Elliot was an accounting professional that get sick nearly 1927 and he with a lot of free time took the time to analyze prices and see patterns in those prices he was watching the Nyse and Dow Jones during the 29-32 years and with his results on this research's made up the theory during 1934 the wave principle was his first article near 1938 but, what is the EWT (Elliot wave theory) the Elliot wave theory is a way to watch the social behavior as well how the mass reacts to events this principle show how groups of people behave this we can see it in a lot of places but the financial markets may be is the best place to watch this closely because the people think and never lie with his pockets the key in the theory is not only the patterns and how it works, the wave patterns, the impulsive and correctives patterns, the key is also the interpretation of how the people react in he same way trough the time in similar situations the theory watch the psychology as a key i mean, the basement of the theory is that people move their self because of their optimistic thoughts on the market and some times nothing can change a bad feeling on the mass, no matter the good news this is very easy to watch during bear or bull markets sometimes during bull markets no matter what happens people just buy and buy stocks without real reason

and if we ask them why may be they even know why they buy stocks thinking the stock will fly until the skies without thinking in anything more else this a common situation in V (five) waves but we are going to talk about it later. As well in bull markets bad news doesn't matter and people are very optimistic during bear markets (like the bear market that we have here on the Nasdaq at least until now on) no matter the good news, the people will react badly to any news or events trought the time until the psychology of the mass change A way to see that is in waves during the action on the market here the ewt talks about impulsive waves and correctives waves. During a trend to the upside the waves with the trend will be the impulsive and the correctives are the waves against the trend this is important think during the action because is the basement for the entire theory The theory is based in the five wave pattern that is a great discovery (in my opinion) because of the accuracy in some cases of the theory the five wave pattern thinks that we have 3 waves with the trend (impulsive) and we have 2 waves against the trend in the classic pattern we have the pattern like we have in the figure 1 (cycle example)

Figure 1

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On this "cycle example" we could see in a very easy way the classic pattern with 5 waves impulsive (in this cases to the upside) and 3 waves correctives in this cases to the downside (this is an example for a bull market, of course) well, 1,3,5 are impulsive waves and 2,4 are correctives as well the A and C waves are impulsive and the B is corrective inside the correction.

see on the figure 2 (cycle example with minor degree waves)

On the classic pattern we have some rules to build the structure an example is that the 4 wave never can gets in the territory of the first wave another rule is that the wave 2 never can retrace the 100% of the prior wave each wave have their own personality

Now i will talk about the personality of each wave during and impulsive market

Personality and the key (in my opinion) is how implement when we are watching charts those "psychology" on the trading.

The impulsive pattern is in five waves with some restrictions like i was talking the third wave is usually the biggest one and the 3 or 5 waves are extensive than the first wave. the cycles have another cycle inside and another cycle inside until the infinite so, during an trending to the upside we can see corrections or impulsive corrections that is because if we are (example) during a 3 wave inside a C wave we are in a correction (because we are inside the C wave) but during and impulsive wave inside the (C) wave this is hard to understand to novice students of the theory sometimes but is very easy to implement like you can

There you can see how inside the wave 1 you have another 5 waves and inside the (2) wave (corrective one) you have an ABC this concept is key to understand that we can a(always)are inside a huge movement and remind us to set stop always (like I was saying during the intraday talk a week ago).

the first wave is the start of the entire cycle, this wave may occur after a huge bear market, or in the beginning of a new business when the first wave starts nobody take the entire project as a serious thing i mean is just a dream or something the idea that the people have about it and nothing is real yet a good example of this is when we have a huge and devastating bear market and nobody believes on the company and the company made a run and all the people thinks is a rebound this is because first waves a lot of times (or in the most of the cases) starts as rebound during bear markets, or at least things that the people thinks that are rebound squeezes are also a good reason for (I) waves. During the start nobody believes in huge targets prices so there is not a lot of pressure on the stock and after a good run but that all people denies we have a (2), after the run of the first wave came up a corrective phase that is a (II) wave during the ii waves the things very new and nobody believes on the movement that is beginning is very regular to watch people say that stock "sucks" during (II) waves because they are

Figure 2

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tired of hold and nothing happen that's is because during this wave we don't have yet any confirmation of the trend that has born and people think that we are still during a bear market(in this case that im talking about a bull market example) During a II wave then the key is the denie to the first move and the thought that we are still on the prior trend nobody believes about the new trend until that any reason (a change on the psychology mass) made a run that start slowly in some cases and takes a heavy run the III wave the wave gets the scene after a panic on a II wave and a negation of that panic (may be in the same period) then we have a run that start slowly but that gets strength during the road and kill the guys that are short (in bull market) and long (in bear market) first people that help the III waves are those that denied the I wave and sell (in this case I repeat) and have to cover in panic when the moves is getting huge after the first people cover and help the stock made a run we have good news and people thinking that know the stock have the enough strength to jumping then is the best part of the entire cycle because all the things help the stock made a powerful run another very common stuff on third waves is the exaggeration during III waves the cyclical indicators gets overbought (or oversold in bear markets) and made lost a lot of money to those people that close their minds During ii waves is very regular to watch good news (bull mkt) that help the road and fundamentals that gets better, an example of that is the positive preannouncements during bull market and negative during bear markets of course After that huge movement we have a little correction (in most of the cases little) llabeled a IV wav this wave is little and is very similar to the II wave in size On this wave the people that are from the start of the entire road start to take profits and start the selling but the mass are still quite bullish (on bull markets) and start pressing to the upside stocks then the corrective wave have a short period and should continue with another run those correction can be triangles in a lot of cases but well if i explain all the correction we can leave this place at 10PM After the IV wave we have a V wave that ends the entire run during (V) waves people get crazy and buy shares of any stuff no matter what thing they are buying the mass in those cases are quite sure that the market is going in that direction and thinks targets above the sky's during bull markets and bankruptcy's during bear markets expression like : "this thing can stop" are very normal on that kind of waves

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then we have a HUGE top and we have a an impulsive cycle complete then, we have a little pullback that all the people thinks is a "Buying opportunity" start like a little "profit taking" but have the enough strength to cross trendlines and give signals then those guys that miss the run gets to the party a little bit late and will be punished we have a correction but after days bargain hunters give a rebound to the market (or stock) that rebound (remind that we are now in a new trend to the downside) is very hard to trade and is devastating for the people because people thinks that the stock is going for new highs but we don't have that kind of high and we have a fail during (B) waves is very easy to watch an improvement on fundamentals but fundamentals no so good as we have then in any moment the "carnage" will start and a panic is ready to take the place this happen when a trendline on the B wave is crossed (in this case to the downside) and we have a sell-off with the same psychology of the III wave i mean C are very devastating and end with people assets very good for shorts that wins every day and the people are start to think that the market is not going to rebound never when the last of the "bulls" start to think something like that the panic gets bigger, the people gets crazy again and then we have a botton for the C in some cases a hammer is very good as the end of a C wave like in the V wave, during C waves people are quite sure that the trend is going to stay and when the acceleration is huge then we have a botton (in bull markets) and a top in bear markets. The entire cycle like you can see on the chart have cycles inside (Figure 3), then after the entire cycle is complete we have the start of a new one. Another thing that people have problems to understand is that the impulsives waves can go to the downside and all the picture can be used turned Now i will talk about the regular correction there you can see a very common zig zag and a doble zig zag there is a lot of cases for correction (flat, triangles, expanding triangles) but we don't have now the enough time to watch all of those. The ZIG ZAG (Figure 4) is the most known and is like i was saying a combination of ABC waves inside the A wave we have 5 fractals during the B wave 3 and 5 during the C, sometimes we have very weird

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Figure 3

Figure 4 pattern for C like expanding C's On the Doble Zig Zag example we have like the word says 2 zig zags with a pivot point this pivot point is lableed with a X this X wave have the personality of a B wave and have 3 waves inside is very common to watch that kind of

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patterns inflat corrections then the W and Y waves labeled are the 2 zig zags a lot of guys thinks that we have seen that think on the DJIA chart from highs well im not going to discuss that now because can take a lot of time

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Now im going to talk about the examples that i brought there you can see the figure 5 (first waves to the downside) chart we have there an example for a chart of yesterday Session you can see there how yesterday KRON (a Nasdaq stock that gets hammered) made a pattern of a 5 wave very good during the session as you can see on the chart when we have the (I) wave nobody believes that one hour later the stock will be punished after that we have a little and very weak correction (II) wave and the start of the selling in form of third wave that came up with a warning then we have the entire picture for a III news, powerful trend, indicators oversold (in this case oversold) and a huge volume after the stock made a peak we have a little pullback but at this moment all the people believes that the stock is going to go down and we have another wave (in 5 parts as you can see) giving's us the entire cycle in this case we don't have the classic "exponential" pattern but we have a good view of V waves and better yet, this example is fresh, is from the last session On the second example (Figure 6) we have another picture but in BEAS last week ago there you can see the same 5 waves structure but with an exponencial selloff in the middle of the third wave another time the volume and psychology are the same the only difference with the KRON case is that here we don't have the enough strength to meet new lows and the recovery

start a little bit early this is a very regular chart on the nasdaq noons in this days. After day i set another example (Figure 7) but in this case with CHKP last week ago (as you can see i was trying to find closely examples) there you can see a run in five parts very easy to watch at the start of the session with an interesting squeeze (after a gap of course) and with a diagonal ending on the (V) wave the charts look a little bit little on the slide but may be you can see how a trendline is cut after the V wave giving us a good entry point The A wave is very important to watch on that kind of charts and how to trade it After that A that ends nears 21,5 (a Fibonacci level) we have a flat market in a B wave- In B waves is very common this kind of pictures i mean flat markets or triangles. I know that im talking about the EWT in a very compact way but if i explain all the things that we have to explain we don't have the enough time well, lets get into the next chart Figure 8 (cycle and pullback) is a good example of a good recovery after V waves this case if for GNSS the last week ago there you can see how we have a 5 waves (with the internals waves labeled) and a huge panic on the V wave with bears very happy then a little run that starts as a rebound a correction and a bigger move in form of a C. I explain on the yellow lines that in those cases is very hard to define if we are in a new cycle (to the upside) or we are just inside the correction (ABC) and 20,5 is going to be crossed closely this is a very important dilemma that we have during the trading and is

Figure 5

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Figure 6

Figure 7 very hard to define when we are on a new trend or when does not the Fibonacci retracements can help in this matter in the case that we broke the 0.618 level of the prior retracement there is very huge chances that we are in a new uptrend of course that in this kind of cases we have to watch the most biggest cycle because like you know a cycle is inside another

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one and may be we are standing in a biggest move after that example (Figure 9) i labeled "entire cycle example". A chart of IKN, a NYSE company very little that is a good example for the elliot theory there you can see how an entire cycle of 5 impulsives 3 correctives waves can be explained by

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Figure 8

Figure 9 the stock himself there you can see also the personality of each wave example: The time that the II wave takes and that make more that one investor thinks that the stock sucks before the run you can see the exaggeration of the III wave with the indica-

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tor overbought and the panic during the A and C wave but more clear during the C wave is a picture that we can keep it like a "book" example. After that i set a "zig zag" example in this case with a "ISIS" (Figure 10) chart of the last year as you can see on the chart

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Figure 10

Figure 11 we have a little (I) wave and a zig zag formation is going to take the place before the huge run when the company fly on that gap

can cross the (I) wave for a little margin but in those case the B is very quick and the C starts soon. The gap and the formation later can show that we are in a III

the charts looks like a good example and can show how in some cases the B wave

On the zig zag II example we have NBTY on the spotlight (Figure 11).

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In this nyse chart show us an entire cycle (very good example) and a very good ABC, look on the chart how the personality of each wave is represented very good

1,618 * extension of the first wave

the A as a pullback a little bit longer a B wave as a rebound that doesn't have enough strength and the last panic in a C wave format with a gap included and the cross of a head and shoulders formation there, then ou can see how the head and shoulders formation fits very well with the 3-4-5-a-b-c pattern i mean when we have a head and shoulders formation like this is very regular that the first shoulder is part of the 3-4 on the cycle the head is the 5 and A and the other shoulder is the B and C waves you can see that a lot of times i have a lot of examples but i just added on because we have just one hour.

on those cases we have to add it to the pivot point is a little bit late another day i can give examples for that in the IV wave the best Fibonacci are 0,236 or 0.382 of retracement of the prior move and during V waves we have to take 1,618 * extension of the first wave 1 * extension of the first wave adding to the pivot point (in this case the end of the IV wave) (A) waves are 0,382 and 0.236 of the entire prior cycle the most accurate B waves are 0,618 of the retracement of A and C are 1 or 1,618 the extension of A adding that to the pivot point in this case the end of B

2,618 * extension of the first wave or 4,236 * extension of the first wave

Im a fan of the elliot wave theory and i know that what i was explain today is just a little part of the theory i feel a little bad because i know that a lot of topics have been Avoided today but we can talk about it another day the triangles, the fibonacci´s retracements, the complex corrections and how to use Elliot to trading as well more examples and different points of view can be covered another day without any problem.

Well, i have a question that says: ¿what fibonaccis are better to use?

Well that depends on the case if we are in a second wave the best fibo's that we have to take are 0,382 and 0.618 as the retracement of the entire move on the Wave I During the Wave 3 we have to calculate the extension taking the point of start ot the (III) wave as pivot and the fibo's are

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Another question is: What time frame do you typically look at?

Well that depends if im watching daily i start with the "all data" and then im going with zoom inside the picture step by step because if key to watch the entire move first, then we now where we are standing during intraday trading i take the chart of 5 or 15 minutes of the last 20/30 minutes first to know where we are and then i get inside the 1- minute chart. well, i hope that answer all the question and well its all for today i hope all of you enjoy the session and well i know some topics should be covered another day. bye and take care.

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