In this and several subsequent articles, we will take a closer look at Elliott price figures, their varieties and rules, to which they submit, after which we move on to the principles of the formation of price patterns from monowaves and their compaction.
In the second part, I already briefly talked about impulses. Now consider them in more detail.
Remind you, what pulses are called figures, subject to the following rules:
- The figure consists of five adjacent segments, which are marked with numbers from 1 to 5 and satisfy the requirements of a trend or terminal price figure. I will note, that the price figure is considered a trend, whose price projections of waves 2 and 4 do not overlap, and terminal – figure, whose projections of waves 2 and 4 overlap. I will tell you more about this in the process of considering the overlap rule.
- Three of these segments should develop in the same direction.
- Second segment (wave) formed in the opposite direction with respect to the first, but does not reach the level of its starting point.
- The third segment should exceed the second in price length and cannot be the shortest among 1, 3 and 5 waves.
- The fifth segment is almost always longer than the fourth and can never be less than 38,2% the fourth. If its amplitude is between 38,2% up to 100% (not including) fourth wavelengths, then such a fifth segment is called failed.
Violation of at least one of them in almost all cases automatically «translates» potential impulses to the correction class.
Stretched wave rule
Stretched (the longest in sequence) the waves, which we also talked about in Williams theories (here) and prekter (here), are an exclusive feature of impulse price patterns. In other words, the presence or absence of a stretched wave allows you to separate the real impulse figures from their simulations, which are actually corrections.
The wave is called stretched, if it is the longest among the waves of the sequence, and its price length is at least 161,8% the amplitudes of the second group wavelength. If this rule is not respected, note the following rare exceptions:
- If the third wavelength, also the longest in the group, does not reach 161,8% first wave amplitudes, there is a small probability of the formation of a rare variant of the terminal impulse with a stretched third, which we will talk about below.
- If the longest is the first wave, but its length is a little less than 161,8% the amplitudes of the third wave and the second wave does not cross level 61,8%, counted from the point of completion of the first wave, then the probability of impulse formation remains.
The graph shows a five-wave pulse sequence, whose waves are successively marked by (1) before (5). The third wave is the longest, but at the same time its amplitude is slightly less than 161,8% wavelengths (1). Hence, in accordance with the exception of the extended wave rule, there is a small probability of the formation of a rare variant of the terminal impulse with a stretched third.
Rule of equality
In accordance with the just-considered Wavelength Rule, one of the waves of the impulsive figure should be much longer than the other two among the waves 1, 2 and 3. With respect to the other two waves, the opposite rule of equality works. That is, unstretched waves must be similar in price amplitude or satisfy some Fibonacci ratio (usually 61,8%). It is worth considering, that this rule may not work in terminal pulses or pulses with a stretched first.
Let’s turn to our example. In this graph above, I have compared wavelengths (1) and (5), since the third wave, seems to be, is stretched. As you see, the fifth wave is almost 100% lengths of the first, which means, equality rule works.
I already talked about this rule in the process of considering the wave of Precker’s theory (cm. here). In NeoWave theory, it sounds like this: when comparing «opposite» or «adjacent» waves of the same order of preference is their uniqueness and difference in the maximum number of parameters. But unlike the theories of Williams and Prekter, where attention is paid to price and time projections, as well as the complexity of the waves in NeoWave, much more factors are subject to comparison, in particular:
- price amplitude;
- wavelength (time extent, which Neely considers to be the determining factor);
- complexity (number of subwaves and monowaves, of which the investigated wave consists);
- pullback force (percentage of excess of previous wavelength, touching only 2 and 4 impulse waves);
- design (flat, zigzag waves).
In pulses, the rotation rule is primarily applied to waves 2 and 4, and in corrections – in relation to waves A and B.
We will see, does the wave rotation rule work (2) and (4), considered in the first example of a five-wave sequence. These waves are marked in green and pink in the graph above. As you see, they differ in amplitude and temporal extent. Moreover, the second wave has a more complex structure compared to the fourth. Also, the second wave should be attributed to flat figures, and the fourth, if she had a more complex structure – to zigzag.
Regarding the amount of kickbacks, then the second wave rolls back a little more than 38,2% lengths of the first.
The fourth wave rolls back a little less than 38,2% third length. On this basis, we see an almost complete coincidence. Nevertheless, on four other grounds, the rotation rule is respected.
The application of the overlap rule depends on the type of impulse in question. In terminal impulses, the price projections of waves 2 and 4 should partially overlap, but in trending – no. On this basis, these types of pulses are easiest to distinguish from each other.
In our case, the price projection of the waves (2) and (4) (green and pink areas) don’t overlap. And that means, we are dealing with an Elliott trend pattern.
To summarize the above, I note once again, what if the analyzed wave group satisfies all the mandatory rules from the basic, listed at the beginning of the article before the overlap rule, then it is probably an impulse, and if one of them does not satisfy, then with high probability we can talk about the formation of a corrective figure.
Rules of logic
Over the years of tireless research, Neely has developed the Rules of Logic, according to which any market activity should fit into the framework of specific behavior, determined by the consequences of the wave preceding it. They help predict market developments, and also are another test for error of judgment: if expected behavior is missing, then you should think about, that the current interpretation of market behavior is erroneous.
Two-step process for confirming impulse patterns
These rules of logic should be applied immediately after the completion of the impulse figure.
1. At the points of completion of waves 2 and 4, draw a trend line. If time period, 2-4 before the next wave intersects the trend line does not exceed the fifth wave duration, the first confirmation of the truth of the presence of the impulse figure should be considered confirmed. Otherwise, either the fourth wave is not yet completed, either wave 5 develops into a terminal figure, either the impulse configuration in question is incorrect.
2. Identify a stretched wave and, depending on this, use one of the following items:
First stretched wave. Wave, following the impulse with the stretched first, should reach the end of the fourth wave of momentum, and in some cases, and return to the price zone of wave 2. Wherein:
a. A pulse with a stretched first pulse may be the first or fifth wave of a higher-order pulse.
b. If the subsequent wave does not reach the price area of the second wave of momentum, then momentum, probably, is the third segment of a larger pulse.
c. If the subsequent wave crosses the final level of the second wave of momentum, then impulse is the final link of a larger impulse or corrective configuration.
Third stretched wave. Wave, following impulse with a stretched third, should reach the price area of the fourth wave and in most cases ends near its end. If the wavelength following the pulse is more than 61,8% completed pulse lengths, mean, it completes a higher order impulse wave.
Fifth stretched wave. Wave, following the impulse with a stretched heel, must be at least 61,8% the amplitudes of the fifth wave of the pulse, but it should be less than her, if the trend is still strong enough. In the case of equal wavelengths, following the impulse, and the fifth wave of momentum should talk about, that the impulse in question completes the larger price pattern. There are two possible options:
a. The fifth stretched figure is part of a larger stretched fifth impulse.
b. Pulse with a stretched heel is a wave C of a zigzag or a flat figure.
Fifth failed wave. A characteristic feature of this figure is shorter than the fourth fifth wave. Wave, following the impulse with a failed fifth, must reach the length of all this impulse. Moreover, before reaching the level of the initial point of this impulse, the market should not form new extremum points (maximum at bullish momentum and minimum at bearish). I will give a small example of the confirmation of a pulse figure.
I took the last chart as the basis for the analysis, where connected the points of completion of waves 2 and 4 with a pink trend line. In the graph above, an enlarged picture of this situation, to be better seen, that time period, passed before the intersection of the next wave of the indicated trend line does not exceed the duration of the fifth wave (t.e. the green square is obviously less than blue on the graph), hence, we confirmed the first rule of confirmation of pulsed waves.
Advanced logic rules
These rules Neely separates from the basic rules of logic, as they consider trend and terminal impulses separately.
Remind you, that the price chart is considered a trend impulse, whose price projections of waves 2 and 4 do not overlap. Wave, following the trend impulse, should not reach its entry level unless, when it is not the fifth wave of a larger impulse or correction wave C.
If the wave following such an impulse does not exceed 61,8% its length, then the trend impulse may be wave 1 or 3 of the larger Elliott pulse pattern or correction wave A.
If the rollback following the trend pulse exceeds 61,8% its length and at the same time is the first wave of a larger figure, then the second wave of this figure following it will be more complex and long in comparison with its predecessor and, probably, will be a correction with failed C.
If the completed impulse is the third wave of a larger figure, whose fourth wave is approximately 61,8% third wave amplitudes, in wave 5 of this figure we should expect a failed. Wherein:
- The fifth stretched pulse is expected, when wave 4 develops after a sharp and strong third wave of momentum, the length of which is not more than 261,8% wave amplitudes 1.
- The duration and complexity of wave 4 exceeds wave 2 and is 61,8% third wave amplitudes.
Pulse with a stretched third wave. If the wavelength following the pulse does not reach 61,8% its length, then he, probably, completes a wave of 1 or 3 larger scale figures.
Stretched Fifth Wave Impulse. The wave following the pulse should not reach the level of its starting point, except cases, when he completes the correction wave C, but this is rare enough.
The terminal impulse is called the figure, whose projections of waves 2 and 4 overlap. The wave following the terminal impulse should reach its initial level in time, not exceeding half the time period of its formation. Usually, she reaches the initial level in a quarter of this period of time.
Terminal impulses always complete a larger figure. In this case, the maximum or minimum point created by them should be held for at least two periods of time of pulse formation. In cases, when the terminal wave is the fifth segment of the impulse pattern, a larger pulsed pattern in most cases is completely rolled back.
In our example, we determine the type of impulse: trend or terminal. In the chart above we see, that wave, following an impulse with a stretched third wave (the end of the pulse is marked with a red circle) reaches the price area of the fourth wave and even ends near its end. Hence, the condition for the trend impulse is satisfied, which means that to determine the future figure all the properties of this type of impulse are applicable.
In this case, the wavelength following the pulse does not reach 61,8% its length. And that means, according to advanced rules he, probably, completes a wave of 1 or 3 larger scale figures.