Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full impulsive structure. The struggle between the two oppositely trending degrees generally makes corrective waves less clearly identifiable than impulsive waves, which always flow with comparative ease in the direction of the one larger trend. As another result of the conflict between trends, corrective waves are quite a bit more varied than impulsive waves.
Corrective patterns fall into four main categories:
Zigzags (5-3-5; includes three variations: single, double, triple);
Flats (3-3-5; includes three variations: regular, expanded, running);
Triangles (3-3-3-3-3; four types: ascending, descending, contracting, expanding);
Double threes and triple threes (combined structures).
ZIGZAGS (5-3-5)
A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C and subdividing 5-3-5. The top of wave B is noticeably lower than the start of wave A, as illustrated in Figures 11 and 12.
Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening "three" (labeled X), producing what is called a double zigzag (see Figure 13) or triple zigzag. The zigzags are labeled W and Y (and Z, if a triple).
Technical Analysis : ABC Corrections
Technical analysis is a simple tool that compliments fundamental analysis. Technical analysis give one the ability to distinguish the difference between bullish patterns versus bearish patterns. It also knowing the difference between an impulse wave or a corrective wave. Every pattern contains an A-B-C correction. A pattern consists of a counter trend correction to an impulse up or a counter trend correction to an impulse down. Every pattern creates a geometrical shape: ascending triangles, descending triangles, contracting, triangles expanding triangles, flags etc. A pattern/shape is always created by a correction within an impulse.
Today I want to discuss corrections. A correction pattern falls into four main categories: a zigzag, a flat, a triangle a double 3 or a triple 3. The most common type of correction is a a zigzag. A correction can also occur in the form of an irregular flat or failed topping pattern. The diagrams above illustrate the types of patterns. An irregular flat occurs when C is 2/3rds of the distance of A, and occurs in very bullish markets. A running correction occurs when C fails to take out A, and when B overshoots a number. For example a wave 3 has been put in and then you go to A and B is higher than 3 and C is lower than A.
How does Elliott wave apply to patterns and trend? Elliott wave measures speed by telling you whether it is an impulse or a correction. The trend always determines the direction of the move, be it up or down. The pattern will tell you the distance of the move. Geometrical shapes/patterns contain the A-B-C corrections that are always a counter trend correction in an impulse up or a counter trend correction in an impulse down. We are always in an impulse. Within an impulse lies a correction. That correction shows up in the form of a pattern. The trend will tell you which way the pattern will break. The structure of the wave will confirm it.
NASDAQ (COMPQ)- Daily Chart
On the daily chart you can see that the COMPQ has broken out of the symmetrical triangle pattern to the upside. The symmetrical triangle contains 2 A-B-C zigzag corrections. Both the A-B-C corrections in the triangle on the COMPQ occur in an impulse down. Please refer to the chart.
The Housing Index - Philadelphia (HGX) - Monthly chart
The Monthly chart of the HGX shows that it is a wave 3 to 4 pullback and is an A-B-C correction. The type of A-B-C shown here is an irregular flat / failed topping pattern because C is higher than A. Furthermore, the HGX is in a bullish outside reversal, and in a bullish trend reversal on all time frames (Monthly, weekly, Daily). The decline from the all time highs has only been 8.19%. Anything that drops 8.19% is not in a bear market because it has not dropped more than 10% -15%, which means a bear market. It is only a pullback off the highs. Even though the fundamentals for this sector are rotten, the chart s look bullish. Once we take out 272.50-273.00 we will have a full blown breakout. This is the next sector that I will be adding to the portfolio. I am still waiting on a fundamental or news driven catalyst.
Computer Hardware Index - GSTI (GHA) Daily Chart
The daily chart shows that the GHA is in an ascending triangle pattern. The chart shows two types of A-B-C corrections: an irregular flat and a zigzag. The first correction is an irregular flat because C is higher than A. The first A-B-C correction also happens to be a running correction because B is higher than 3. The symmetrical triangle pattern contains a typical zigzag A-B-C correction. Please refer to the chart.
S&P Midcap SPDRs (MDY)- Daily Chart
I am bringing this chart up because I want to point out that it is in a bullish trend. In addition, it is not always important to know each minute wave and subwave as long as the equity stays within it's channel. You can see that the MDY is trending up because it is holding it's uptrend channel nicely. It is trending. Furthermore it is in an impulse wave up because it is making new all time highs. You cannot be in a correction at all time highs because what would you be correcting from? Therefore, it is not really necessary to know the wave count. All you need to know is that it is in a bullish impulse move up. It is a bullish trend. When higher prices occur bullish divergence occurs. What erases bearish divergence? Higher prices. When patterns suggest higher prices as well, then the charts are in a bullish trend
Talx Corp. (TALX)
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 placed the lows at $27.82. The wave 3 to 4 contains an a typical A-B-C correction. I want to point out how you the pattern determines distance of this move. First you take the all time high price at $36.76 and then subtract the lows at $27.82. You get $8.94. Once the stock breaks out of the triangle at $36.76 you then add $8.94 to that breakout price to determine the price target of $45.70. Indicators and oscillators are in a bullish trend reversal which confirm the bullish pattern
Figure 11
Figure 12
Figure 13
A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 14 and 15. Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction seems to inherit this lack of countertrend pressure and, not surprisingly, terminates near the start of wave A. Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags.
Flat corrections usually retrace less of preceding impulse waves than do zigzags. They participate in periods involving a strong larger trend and thus virtually always precede or follow extensions. The more powerful the underlying trend, the briefer the flat tends to be. Within impulses, fourth waves frequently sport flats, while second waves rarely do.
Three types of 3-3-5 corrections have been identified by differences in their overall shape. In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 14 and 15. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown in Figures 16 and 17.
In a rare variation on the 3-3-5 pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended. There are hardly any examples of this type of correction in the price record.
Figure 14
Figure 15
Figure 16
Figure 17
NASDAQ
$HGX--LIKELY THE NEXT SECTOR TO GET ADDED AS FAR AS "SETUPS"
$GHA
MDY
TALX--REMEMBER TOMORROW IS THE CONFERENCE (COULD BE A NON-EVENT, THEY HAVE MORE THE WEEK AFTER)
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