elliott wave theory ubs formation
DESCRIPTION
Anatomy of Price ActionTRANSCRIPT
Elliott Wave Theory
Taso Anastasiou Director: FX/PM Global Technical Strategy GroupUBS Investment Bank
Phone : +44 (0)20 7567 6870E-Mail : [email protected]
3070446AL.ppt 1
Elliott Wave theory
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Market PsychologySECTION 1
3070446AL.ppt 3
Traders of my generation armed themselves with charts and computer-generated graphics that predicted future price direction. We sat day after day in front of these screens, mesmerised by blinking lights and ever-changing numbersin a deafening cacophony of information overload.With the possible exception of Elliott wave theory, an intellectual framework for understanding the course of social, political, and economic events was noticeably forgotten in favour of just making sure that one was part of the ever quickening process.
Paul Tudor Jones II, The alchemy of finance by George Soros
A Quotation
3070446AL.ppt 4
♦ The averages discount everything
♦ The market has three trends
♦Major trends have three phases
♦ The averages must confirm each other
♦ Volume must confirm the trend
♦A trend is assumed to be in effect until it gives definite signals that it has reversed
Dow Theory - Important Elements
3070446AL.ppt 5
Anatomy of Price Action
♦ Trend
♦ Consolidation
♦ Reversal
Market will always be in one of these 3 modes
S t r o n g d - t r e n d
C o n s o l id a t io n
W e a k r e s u m p t io n
W e a k t e s t
S t r o n g r e v e r s a l
C o n s o l id a t io n
S t r o n g r e s u m p t io n
C o n s o l id a t io n
W e a k r e s u m p t io n
W e a k t e s t
S t r o n gr e v e r s a l
surp
rise
but
�
surp
rise
bu
t �
3070446AL.ppt 6
Psychological Make up of a trend - Phase 1
♦ A trend is very difficult to detect at this stage
♦ Very few traders and investors will actually open positions inthis phase
♦ Economic news and cycles are generally still bad but improving
♦ No public participation
♦ Most traders will still be trying to sell into the rallies
1
3070446AL.ppt 7
♦ Market exceeds previous top trend is now identified
♦ Traders begin to buy as bearish sentiment fades
♦ Economic news generally improving
♦ Media starts to report a new bull phase
♦ Public begins to participate
♦ Traders are now buying the dips
♦ Is the most powerful phase of the three and most profits are generated in this phase
Phase 2
2
3070446AL.ppt 8
♦ Market once again exceeds previous top as trend is confirmed
♦ Fear of intervention makes traders wary
♦ Fundamental factors peaking
♦ Media still reporting positive news but now wondering how far we can go
♦ Increased public participation
♦ A few scares and profit taking causes concern stops are raised
♦ Blow off occurs as stops triggered
♦ Generally the weakest of the three phases
Phase 3
3
1
2
3
3070446AL.ppt 9
Awareness of market psychology and how it affects trading activity is essential for a greater understanding of the Elliott Wave Theory.
The Basics�Building on Dow theorySECTION 2
3070446AL.ppt 11
♦ Elliott isolated 13 waves, or price patterns of directional movement that recur in markets and are repetitive in their form
♦ His descriptions constitute a set of empirically derived rules and guidelines for interpreting market action
♦ First we must look at the basic structure or the fivewave pattern
The Building Blocks
3070446AL.ppt 12
♦ Any major movement will unfold in a pattern of five waves and in turn will be corrected by a pattern of three waves going in the opposite direction
♦ The five wave movement can be split into two distinctive segments
� the numbered phase� the lettered Phase
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4a
b
c
5
The basic five wave structure
3070446AL.ppt 13
♦ The Trend phase is known as the impulse
♦ This the numbered phase
♦ An impulsive segment (1-5) is itself constructed as a series of five waves of which 1�3�5 are impulses of a minor degree
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4a
b
c
5Impulsive segment
The impulse
3070446AL.ppt 14
The impulsive segment
1
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4a
b
c
5Impulsive segment
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4a
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c
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b
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4a
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c
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5Zoomed in
Phase
3070446AL.ppt 15
♦ Trends move in a series of peaks and troughs
♦ The lettered phase is known as the corrective segment and is always counted in threes, a�b�c
♦ Wave 2 corrects Wave 1
♦ Wave 4 corrects Wave 3
♦ a�b�c corrects Waves 1 to 5
1
2
3
4a
b
c
5Correction
The corrective phase
3070446AL.ppt 16
♦ Your start point should always be a significant highor low
♦ Start point is labelled 0, the impulse segment in this phase is labelled 1 and is corrected by the lettered phase labelled 2
In Practice
0
1
2
3070446AL.ppt 17
1
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5
Summary of wave structure
3070446AL.ppt 18
Waves 1�3�5 are impulses moving in the direction of the trend
Summary of wave structure (continued)
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5
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5
a
b
c
3070446AL.ppt 19
1
2
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5
Waves 2�4 are counter trend movements
Summary of wave structure (continued)
3070446AL.ppt 20
3
5
2
1
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5
a
b
c
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a
b
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a
b
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The complete structure
Summary of wave structure (continued)
3070446AL.ppt 21
USD/CAD
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c
a
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2
Impulsive waves 1�3�5 SECTION 3
3070446AL.ppt 23
♦ There are three basic ground rules used when defining an impulsive phase
♦ The first inviolable rule is that from your start point at 0 (major high or low) Wave 2 must never move below the start of Wave 1 at 0
1
2
00
Rule 1
3070446AL.ppt 24
♦ Wave 3 can never be the shortest wave in the impulse
♦ This doesn�t mean that it is necessarily the longest
♦ In the example the alternative count provides the clue as Wave 3 is probably extending
1
2
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4
5Incorrect count
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2
i
ii
iiiAlternative count
Rule 2
3070446AL.ppt 25
♦ Wave 4 should not overlap Wave 1
♦ There are two exceptions to this rule:♦ Wave 1 can be a leading
diagonal triangle and price action can overlap (wedge)
♦ Wave 5 can be an ending diagonal triangle where price action overlaps (wedge)
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5
Rule 3
3070446AL.ppt 26
♦ An extension can only occur in one of the impulse waves 1�3�5. Most extensions will actually occur in the 3rd wave. Extensions may also occur in the extending wave itself
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5
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v
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5
a
b
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Impulse waves�the extension
3070446AL.ppt 27
Grand super cycle
0 1 2 3 4 5 A B C Super cycle
0 I II III IV V A B C Cycle
Primary
Intermediate
Minor0 1 2 3 4 5 a b c
Minute0 i ii iii iv v a b c
Sub-minuette0. i. ii. iii. iv. v. a. b. c.
Minuette0 1 2 3 4 5 a b c
0 I II III IV V a b c Micro
0 i ii iii iv v a b c Sub-micro
Labelling the cycles
1 2 3 4 A B C50
(0)(I) (2) (3) (4) (5) (a) (b) (c)
1 2 3 4 A B C50
3070446AL.ppt 28
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Extensions
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5
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3
7
0101092L.ppt 29
Example of an extension
A
C
B
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5
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iv1
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3
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1
5
3070446AL.ppt 30
In Practice - GBP/USD
3070446AL.ppt 31
In Practice - GBP/USD
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3070446AL.ppt 32
In Practice - GBP/USD
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a
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b
c
3070446AL.ppt 33
In Practice - GBP/USD
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3070446AL.ppt 34
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An ending diagonal triangle is counted as a five wave up but sub-dividesinto threes
♦ Diagonal triangles are formed by two converging lines, in its usual form. This pattern occurs in fifth wave positions
♦ The only exception to the overlap rule between Wave 1�4 can occur in a diagonal
♦ A diagonal can also be located in the C wave positions. As in a rising wedge this is to be considered a termination pattern
The ending diagonal triangle
3070446AL.ppt 35
Ending diagonal triangles
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0101092L.ppt 36
Ending diagonal triangles
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5
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5
3070446AL.ppt 37
♦ In normal circumstances this pattern would be referred to as a rising wedge and is a bearish pattern as it is assumed that the pattern will break the support
♦ The target on the break would suggest a re-test of the base
♦ This pattern is only found in Wave 1 or A
♦ All other rules applye.g. Wave 3 is not the shortest and 2 doesn�t break below the start point then you must buy the dip as it will turn out to be a bullish pattern
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Leading diagonal triangles
3070446AL.ppt 38
♦ As Wave 5 is the weakest part of the trend it sometimes has a tendency to fail early, creating what we traditionally call a double top
♦ The Internal wave structure must still count up in five
3
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5
The failed fifth wave
3
0101092L.ppt 39
Failed fifth waves & leading diagonal
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5
3070446AL.ppt 40
Incorrect counting as Wave (5) would only count up in 3
Failed fifth waves (continued)
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60
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80
90
100
1991 1992 1993 1994 1995
3070446AL.ppt 41
Correct count where (I) is a leading diagonal triangle, (III) has extended and (V) has failed
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90
100
Failed fifth waves (continued)
(I)
(II)
(III)
(IV)
(V)
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a
b
c
a
b
c
1
2
3
1
3
4
91.224
2
1991 1992 1993 1994 1995
3070446AL.ppt 42
The Trap...
3070446AL.ppt 43
Successful Trend Definition Is Essential
♦Analysis and therefore positioning must be biased in the direction of the prevailing trend
3070446AL.ppt 44
Trend Definition Is Essential
3070446AL.ppt 45
Ground Rules
♦ You can quantify trends and market positioning by biasing your position base in the direction of the underlying trend
Corrective waves a�b�cSECTION 4
3070446AL.ppt 47
♦ We have seen that movements against the trend are known as corrective waves, sometimes referred to as consolidations or lettered phase
♦ Identifying and fitting corrections into particular patterns in advance is very difficult
♦ The complexity of corrective waves can increase or decrease without warning
Corrective waves
3070446AL.ppt 48
♦ Zig-Zag 5�3�5 includes three variations single, double and triple
♦ Flats 3�3�5 includes 3 variations, regular, expanded, running
♦ Triangles 3�3�3�3�3 four types, ascending, descending, contracting, expanding
♦ Double and triple threes (combined structures)
The three corrective wave typesCorrective waves fall into four categories
3070446AL.ppt 49
Bear market correction
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Bull market correction
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b
Zig-Zags 5�3�5
3070446AL.ppt 50
♦ Zig-Zags have a 5�3�5 wave structure
♦ These formations are usually found in Wave 2 position
♦ It would be fair to assume that they would also occur after Wave 5 as a traditional head and shoulders reversal patternis formed
♦ Wave C of the Zig-Zag will typically extend the same distance as Wave A
Zig-Zag corrections
0101092L.ppt 51
Example of a Zig-Zag correction
A
B
C
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5
5
4
3
2
1
A = C
3070446AL.ppt 52
Bull market correction Bear market correction
a
b
c
a
b
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Flat corrections 3�3�5
0101092L.ppt 53
Example of a flat correction
A
B
C
a
b
c
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v
2
5
4i
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iii
iv
3
3070446AL.ppt 54
Bull market correction Bear market correction
a
b
c
a
b
c
Irregular flats 3�3�5
3070446AL.ppt 55
♦ Flats are counted as 3�3�5
♦ There are standard flats which are typically ranges
♦ There are irregular flats where the B wave exceeds the high, but can only be counted as a 3-wave affair
♦ Last but not least there are running flats
♦ Flat corrections are typically found in fourth and B wave positions and tend to have lower retracement values
Flats 3�3�5
3070446AL.ppt 56
Bull market correction
Bear market correction
a
b
c
d
e
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b
c
d
e
Triangles 3�3�3�3�3
♦ Five waves � a / b / c / d / e
♦ Each wave subdivides into 3-waves
♦ Each wave tends to be related to a preceding wave by the 0.618 ratio.
� Wave d will be 0.618 of wave b
� Wave e will be 0.618 of wave c
♦ This correction is typically found in wave-4
3070446AL.ppt 57
Zig-Zag -x- Zig-Zag
Complex corrective forms (double threes) Zig-Zag
Bull market correction
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x
3070446AL.ppt 58
Zig-Zag -x- flat
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Complex corrective forms (double threes) Zig-Zag
Bull market correction
3070446AL.ppt 59
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b
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b
c
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x
Zig-Zag -x- triangle
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d
e
Complex corrective forms (double threes) Zig-Zag
Bull market correction
3070446AL.ppt 60
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b
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b
c
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Zig-Zag -x- irregular flat
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b
c
Complex corrective forms (double threes) Zig-Zag
Bull market correction
3070446AL.ppt 61
Flat -x- flat
a
b
c a
b
c
x
Complex corrective forms (double threes) flat
3070446AL.ppt 62
Flat -x- Zig-Zag
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b
c
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c ii
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vc
Complex corrective forms (double threes) flat
3070446AL.ppt 63
Flat -x- triangle
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b
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d
e
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b
c
x
Complex corrective forms (double threes) flat
3070446AL.ppt 64
Flat -x- irregular
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b
ca
b
c
x
Complex corrective forms (double threes) flat
3070446AL.ppt 65
b
Irregular -x- irregular
x
a
b
c
ac
Complex corrective forms (double threes)
3070446AL.ppt 66
Irregular flat -x- flat
x
a
b
ca
b
c
Complex corrective forms (double threes)
3070446AL.ppt 67
Irregular flat -x- Zig-Zag
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a
b
c
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v
a
b
c
i
ii
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va
b
c
Complex corrective forms (double threes)
3070446AL.ppt 68
Irregular flat -x- Zig-Zag
x
a
b
c
d
e
a
b
c
Complex corrective forms (double threes)
3070446AL.ppt 69
To date we have looked at standard corrective waves as well as double complex waves. There is a third type of complex correction which is called the complex triple three.
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v a
b
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e
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Zig-Zag Irregular flat Trianglex x
Complex corrective waves
0101092L.ppt 70
Examples of complex corrections
a
c
b
A
B
C
X
A
B
C
FLAT
1
a
c
b
A
B
c
2
i
ii
ZIG-ZAG
IRREGULAR FLAT
FLAT
A
C
B
ZIG-ZAG
A = C
The rule of alternationSECTION 5
3070446AL.ppt 72
♦ This rule is relatively simple as it states that no two corrective phases are similar
♦ If Wave 2 is a Zig-Zag then Wave 4 will probably be a flat ora triangle � typical scenario
♦ The rule also states that only one of the impulse waves will extend (and can itself extend)
♦ If two corrective phases are similar then one will differ in magnitude or length
The rule of alternation
3070446AL.ppt 73
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5
Alternation
0101092L.ppt 74
The rule of alternation
1
2
5
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3
a
b d
ec
b
a
c
TRIANGLE
FLAT
The depth of corrective wavesSECTION 6
3070446AL.ppt 76
The depth of corrective wavesNo market approach other than the Elliott Wave Theory gives a satisfactory answer to this question. The primary guideline is that corrections , especially when they themselves are fourth waves tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree which would also represent support (or resistance for a rising market).
1
2
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4
5
The Fibonacci sequence and its applicationSECTION 7
3070446AL.ppt 78
♦ Ratio analysis has revealed a number of precise price relationships that occur often among waves. There are two categories of relationships: retracements and multiples
Retracements
♦ Fairly often, a correction retraces a Fibonacci percentage of the preceding wave
♦ Sharp corrections tend more often to retrace 61.8% or 50% of the previous wave, particularly when they occur as Wave 2 of an impulse wave, Wave B of a larger Zig-Zag, or Wave X in a multiple Zig-Zag
Ratio analysis
3070446AL.ppt 79
0
10024.6
38.2
50.0
61.8
76.4
100Typical of Wave 2 Typical of Wave 4
RetracementsTypical retracement levels
3070446AL.ppt 80
When Wave 3 has extended, waves 1�5 will tend towards equality (1.00) or a 0.618% relationship. All three impulse waves tend to be related by Fibonacci mathematics whether by equality, 1.618 or 2.618 whose inverses are 0.618 and 0.382
Impulse wave multiples
3070446AL.ppt 81
Impulse wave multiples (continued)
3rd wave extension 5th wave extension 1st wave extension
1
2
3
4
5
1
2
3
4
5
12
3
4
5
1.00
1.00
.382
.618
.618
.382
3070446AL.ppt 82
a
b
c
x
a
b
c
1.00
1.00
/. 618
/2.6
18
Double Zig-Zag
Corrective wave multiples
1.00
1.00
/6.1
8/1.
618
Zig-Zag
3070446AL.ppt 83
Flat Irregular flat
Corrective wave multiples (continued)
a
b
c
a
b
c
1.00
1.00
.618 1.618
3070446AL.ppt 84
Calculating targets
1
2
3 ?
Wav
e 3
= 1
.00/
1.61
8/2.
618
of
Wav
e 1
i
ii1
2
3
4
5 ?
Wav
e 5
can
be
equ
al t
o w
ave
10.
618
of
3 0r
.382
of
wav
es 1
an
d 3
0101092L.ppt 85
Fibonacci relationships
1
2
4
35
i
ii
iii v
iv
Wave 2 retraces just above the 61.8% level of wave-1
Wave 4 retraces just above the 38.2% level of wave-3
Failed 5th
3070446AL.ppt 86
Wave (II) retraces Wave (I) by 50%
Wave II retraces Wave I by 62%
Wave (III)and III retraces Wave (IV) and IV by 24%
Wave III is 2.62 multiplied from the length of wave I
Wave (V) is 1.00 multiplied by the length of wave (I)
(0)
(I)
(II)
(III)
(IV)
(V)
I
II
III
IV
V
Fibonacci relationships (continued)
1.9000
1.6000
1.5000
1.4500
1.4000
1.3500
1.6500
1.5500
May-96 Nov-96 Nov-97May-97May-96 Nov-96
tmta3 © DEM-USD Weekly Bar 06-Mar-95�28-Nov-97 [Zoomed] 1.8904 1.3455 1.7635 0.3685 0.0000V 2.980014 Copyright 1994-1997 Tradermade International Ltd.
1.7000
1.7500
1.8000
1.8500
1.3811
1.5489
1.6618
1.7207
1.8904
May-95 Nov-95
3070446AL.ppt 87
A word on momentum
1
2
3
4
5
♦ Divergence between price and momentum warns of technical weakness in a trend
♦ Divergence between price and momentum is typical during the 5th and final wave.
♦ One would also expect such a set-up to develop during wave-C
3070446AL.ppt 88
Fibonacci Relationships - S&P Cash
0.618 of wave 1 (1175)
1.00 of wave 1 (1246)
Potential for bearish divergence in momentum
1
2
3
4 ?
3070446AL.ppt 89
Fibonacci Relationships - S&P Cash
1
2
3
4
5
i
ii
iii
iv
v
3070446AL.ppt 90
Analyse
3070446AL.ppt 91
Analyse
3070446AL.ppt 92
Analyse
3070446AL.ppt 93
Analyse
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