In Elliott Wave analysis, it's critical to distinguish whether we are in a 3 or 5 wave pattern. Here, Fibonacci calculations of extensions and retracements, based upon Phi (The Golden Ratio), are essential. A standard Wave 1 will extend to the .382 or .618 extension of the entire move. It then pulls back in a Wave 2, generally to the .500 or .618 retracement level of the Wave 1. It is then followed by a 3rd wave that subdivides, and this is where an Elliottician makes the distinction between an impulsive 5-wave move or a 3-wave corrective move. This is something Avi lovingly calls "Fibonacci Pinball." Ultimately, the way that we know that a movement within the market is going to be a 5-wave move as opposed to a 3-wave move happens during the potential Wave 3.
Strong, trending price move consisting of 5 waves. Waves 1,3 and 5 are impulsive, or motive waves, and move in the direction of the trend. They subdivide into a 5-wave structure, which are designated by numbers. Waves 2 and 4 are corrective -- moving counter to the trend -- and subdivide into 3 waves, which are designated by letters. Some basic rules: Wave 2 never retraces beyond the start of Wave 1; Wave 3 cannot be the shortest of the three impulse waves; Wave 4 does not overlap with the price territory of Wave 1; and Waves 2 and 4 tend to alternate in form. (A sharp move in Wave 2, for example, will suggest a mild move in Wave 4.) Also, sub-waves should exhibit Fibonacci relationships.
These are counter-trend 3 wave structures (labeled A, B, and C) that only retrace a portion of its preceding motive wave. They are more variable than a motive wave, and often do not show the strength that its preceding motive wave had. Corrective waves are often very hard to label while they are playing out, especially in the early stages of them and are often not clear until they are almost over. Wave 2's typically are Zigzags or Flats (VERY rarely triangles), more likely to be a deep, fast correction Wave 4's are the most complex and often shallow flatter corrections (triangles are more likely in 4th waves and B waves).
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