| Elliott Waves Chart Patterns Motive Waves |
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| Thursday, March 2, 2006 |
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The Wave Principle is Ralph Nelson Elliott’s discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data for the Dow Jones Industrial Average (DJIA) as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature. From this discovery, he developed a rational system of market analysis.
Under the Wave Principle, every market decision is both produced by meaningful information and produces meaningful information. Each transaction, while at once an effect, enters the fabric of the market and, by communicating transactional data to investors, joins the chain of causes of others’ behavior. This feedback loop is governed by man’s social nature, and since he has such a nature, the process generates forms. As the forms are repetitive, they have predictive value.
Elliott isolated thirteen “waves,” or patterns of directional movement, that recur in markets and are repetitive in form, but are not necessarily repetitive in time or amplitude. He named, defined and illustrated the patterns. He then described how these structures link together to form larger versions of the same patterns, how those in turn are the building blocks for patterns of the next larger size, and so on. His descriptions constitute a set of empirically derived rules and guidelines for interpreting market action. The patterns that naturally occur under the Wave Principle are described below.
The Five Wave Pattern
In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, as shown in Figure 1. The two interruptions are apparently a requisite for overall directional movement to occur.
Figure 1
At any time, the market may be identified as being somewhere in the basic five wave pattern at the largest degree of trend. Because the five wave pattern is the overriding form of market progress, all other patterns are subsumed by it.
IMPULSE
The most common motive wave is an impulse. In an impulse, wave 4 does not enter the territory of (i.e., “overlap”) wave 1. This rule holds for all non-leveraged cash basis markets. Futures markets, with their extreme leverage, can induce short term price extremes that would not occur in cash markets. Even so, overlapping is usually confined to daily and intraday price fluctuations and even then is extremely rare. In addition, the actionary subwaves (1, 3 and 5) of an impulse are themselves motive, and subwave 3 is specifically an impulse. Figures 2, 3 and 4 all depict impulses in the 1, 3, 5, A and C wave positions.
There are only a few simple rules for interpreting impulses properly. A rule is so called because it governs all waves to which it applies. Typical, yet not inevitable, characteristics of waves are called guidelines, which are discussed in an upcoming section. A rule should never be disregarded. In many years of practice with countless patterns, the authors have found but one instance above Subminuette degree when all other rules and guidelines combined to suggest that a rule was broken.
Figure 2
Figure 3
Figure 4
All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest:
Grand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette
Evening Update- Elliot Wave, COMPQ, CELG, GRMN, NBIX, TALX
Elliott Wave
Trending 123 focuses on trends, waves and patterns. There is no end all be all to either one of the above. I like to take the best teachings from each type of technical analysis and combine them into one teaching. I personally do not agree with everything in Elliott wave. What I prefer to do is simplify the analysis into something that easy.
Today I would like to cover Motive waves. What is a motive wave? Motive waves are impulse waves. Moves or waves are either impulsive or corrective. A lot of the stocks we are in, are in impulse waves. They are at 52 weeks highs therefore they cannot be in a correction because what is it correcting from?
NASDAQ Intraday update (COMPQ)- Daily chart
On the daily chart you can see that the COMPQ has broken out of the symmetrical triangle pattern to the upside. Today the COMPQ came close to new 52 week highs at 2316.93. As you can see the COMPQ has broken out of the triangle and is now pulling back towards the downtrend line. Indicators and oscillators are bullish. Expect a good day tomorrow.
Celgene Corp. (CELG) Daily chart
Celegene's daily chart shows that it has broken out of it's ascending triangle pattern. It is now up 20% from our entry, and I have raised the target to $45.00. Patterns measure distance. Waves measure the speed of the move by telling us if it is corrective or impulsive. Now CELG is in a motive wave up within the ascending triangle. Within the ascending triangle you can see these smaller ABC corrections every time you have patterns you will have triangles and geometric shapes, they are all part of a correction or a coiling consolidation of your motive impulse wave whether it be up or down. When a stock like CELG, is at all time highs it is then in a impulse wave up. Since there is no resistance above in CELG, it cannot be in a correction because what is it correcting from?
Garmin Ltd. (GRMN) - Daily chart
The daily chart of GRMN illustrates that has it broken out of it's ascending triangle. Today GRMN is up 4.35% at new 52 week highs at $72.70. A key ingredient to all time high stocks cranking, are the shorts who view higher prices as bearish. Looking at the chart you can see all those little yellow ABC's within the triangle. Most of the moves in the market occur in waves of 3. ABC's always occur in threes. With this stock breaking out it will eventually get a back test, that will be the short term trader's opportunity to buy it back.
Neurocrine Biosciences, Inc. (NBIX) - Daily chart
The daily chart shows that NBIX, has broken out of the ascending triangle. It pulled back to test the breakout line and formed a bull flag and it is now back up at $69.15. Indicators and oscillators are bullish and the stochastics are flagging. I recommend you hold this stock, target is still a way off at $78.00. What I also want to point out on this chart is the knock down candle which back tested the ascending triangle line. These types of patterns sometimes get a knock down. Which short time traders can take advantage of. When the knock down occurs it has to occur in one day. In order for a knock down candle to occur you need the following: the stock needs to be parabolic, it occurs on a backtest. Then you want to buy that back test.
Talx Corp. (TALX)- Daily chart
The daily chart of TALX illustrates that it is an ascending triangle pattern. It has recently finished a wave 3 to 4 correction when it place the lows at $27.82. Indicators and oscillators are in a bullish trend reversal. TALX is up 7.05% and trading at $34.16. What I want to point out here, once you are finished with the ABC correction and there is stalling that is a good sign. When you are trending you are then in a motive wave, when you pull back you are then in an ABC correction.
The bottom line: There are two types of waves: Corrective and Impulsive.
The charts above show what impulsive waves look like, both up and down. Impulsive waves do not always mean up. When a stock is at all time lows you are in an impulse wave down. When a stock is at all time highs you are in an impulse wave up. When stocks are not at all time highs or lows it is then in a correction. The technician's job is to determine to what degree it is correcting from. Is it correcting off the highs or is it correcting off the lows? The patterns will tell us whether it is bullish of bearish and which way it is going to break. That is why we have waves, patterns and trends in technical analysis.
NASDAQ--3 STOCKS TRIGGERED "CEDC, MTH, WLT" ALL THREE ARE ALL TIME HIGH SHORT INTEREST IN EXPLOSIVE UPSIDE PATTERNS OR REVERSAL TO THE UPSIDE PATTERNS.
CELG--MADE ALL TIME HIGHS TODAY
A KEY INGREDIENT TO GET ALL TIME HIGH STOCKS "CRANKING" ARE SHORTS WHO VIEW HIGHER PRICES AS BEARISH, THESE TYPES OF PATTERNS SOMETIMES GET A "KNOCK DOWN".........AS MENTIONED ON THE WEEKEND UPDATE ON "NBIX" SHORT TERM TRADERS CAN TAKE ADVANTAGE OF THAT VOLATILITY
GRMN--MADE ALL TIME HIGHS TODAY
NBIX--MADE ALL TIME HIGHS TODAY
TALX----JUST UNDER ALL TIME HIGHS
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