Market Mirrors Trend Changes

8/3/2019 Market Mirrors Trend Changes

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COPYRIGHT 2010 ANANTH J ACHAYA www.appliedelliottwave.com

ANANTH J ACHARYA

www.appliedelliottwave.com

TREND CHANGES & CONTINUATIONTREND CHANGES & CONTINUATIONIN FINANCIAL MARKETSIN FINANCIAL MARKETS


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AN ELLIOTT WAVE APPROACH

An original solution to the oldest problem of the world Financial markets.

To my knowledge no person has so far explained this trend changing behavior of the

Financial Markets and I am presuming that this is the first time this is being presented to the

world.

SYNOPSIS

This study is aimed at finding patterns which indicate trend change from Up to Down and vice

versa in the World financial markets. The premise for the study has been my then 13 year old

daughter's observation (in December 2005) of how the markets appear to change the trend.

Her observation, while being very elementary and simplistic, appears to answer a question

puzzling the world for hundreds of years.

Over 500 charts of Stocks, Indices, Commodities and Forex, were analyzed in different time

frames. 1 Minute, 15 Minute, 1 Hour, Daily and weekly charts have been taken for the study

and the rule appears to hold true on all time-frames and across the different markets

examined. The only criterion has been that the markets be highly liquid, traded with very high

volumes and reflect mass participation.

It appears that the rule is satisfied each and every time, and across all the charts

analyzed, and across all time frames. There has never been once that the rule was

found to be incorrect.

RULES AND BASICS

The Wave Principle is Ralph Nelson Elliott's Discovery. Elliott discovered thirteen patterns of

directional movements or wave that occur in the markets and are repetitive in form. These

waves link together in specific ways to form larger structures of the same pattern, and they

link together again to form larger structures of the same pattens and so on.....

Elliott identified two modes of wave or pattern development. Motive and Corrective. Motive

waves have a five wave structure and corrective waves have a three wave structure or



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variations thereof.

THE ESSENTIAL DESIGN

The image above illustrates the essential design (Robert Prechter). Observe waves (1), (3),

(5), (A), and (C) are composed offive waves ormotive waves and waves (2), (4) and (B) are

three wave structures orcorrective waves.

While traditionally it is accepted that motive waves do not always point upwards and

corrective waves do not always point downwards, a very simple observation was missed for

decades.

My daughters observation was very simple and profound. She observed that after each five

wave motive pattern, there appeared a three wave pattern, which is followed by another five

wave pattern and so on........ till such a time that a five wave pattern is followed by another

five wave pattern, which is the only pattern when the market changes trend from up to down

and vice versa. In other words the market only changes trend when a 5 wave structure

is followed by another five wave structure.



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So by inference and logical conclusion, a three wave structure is a continuation pattern

and a five wave structure is a trend changing pattern. While this was the most elementary

observation, the truth of this observation gets highlighted and a verification that this indeed is

the case is startling. However before proper application of the rule an understanding of the

motive and corrective waves is paramount.

RN Elliott enumerated thirteen patterns, but for brevity and application we need to concern

ourselves with only eight patterns; Three patterns of motive Waves, and five patterns of

corrective waves as enumerated below.

MOTIVE WAVES

The three motive waves are 1. Leading Diagonal (LD) 2. Impulse (IM) and 3. Ending Diagonal

(LD)

1. LEADING DIAGONAL (LD): The Leading diagonal is composed of five waves which are in

itself internally composed of 5, 3, 5, 3, 5 waves respectively. The figure below illustrates the

Leading Diagonal

Note how each of the motive waves within the Leading Diagonal are also five wave structures

and the corrective waves to the motive waves are three wave structures. The Leading

Diagonal whenever it appears begins a larger wave within which it is nested. This rule is of

particular interest to us, as the motive wave immediately after a trend change is either a

Leading Diagonal or a Impulse (IM) explained next.



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2. IMPULSE (IM): The most common motive wave is an Impulse. In an impulse, wave 4 does

not enter into the territory of wave 1 and wave 3 is never the shortest of 1, 2, and 3. Note that

the motive waves within the impulse are also five wave structures and the corrective waves

are made up of three waves. Several other guidelines are also used based on the principlesof Elliott Wave Theory.

The above figure illustrates the a standard Impulse.

3. ENDING DIAGONAL (ED): The Ending Diagonal is also a motive wave, that occurs in the

fifth wave position when the earlier impuse wave has is swift and furious and longer than

expected. The figure below illustrates Ending Diagonal in the fifth wave position of a motive

wave.



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Ending Diagonals are of particular interest to the study. As observed from The Essential

Design and The Complete Cycle, a motive wave lies on either side of the apex or the nadir at

each of the market turns. The ending motive wave can be either an Ending Diagonal or an

Impulse.

The motive wave preceding the apex or the Nadir can be either an Ending Diagonal or

an Impulse and is followed either by an Impulse of a leading Diagonal.

This throws up several successful trading and profit opportunities in the market as thrown up

by this study.

CORRECTIVE WAVES

The five corrective waves we need to concern ourselves with are 1. ZigZags (ZZ) 2.Double

ZigZags and Triple ZigZags (DZ & TZ) 3. Flats (FL) 4. Double and Triple Sideways (D3) and

5. Contracting Triangles (CT)

1. ZIGZAG (ZZ): A ZigZag is a three wave pattern, that is made up of a motive wave followed

by a corrective wave which is once again followed by another motive wave.



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The Zig Zag is one of the most common Elliott wave pattern seen in the market. At the very

basic level all three wave corrective patterns are made of ZigZags.

2. DOUBLE ZIGZAGS (DZ): Zigzags sometimes occur twice, or three times in succession,

and never more. In such cases each ZigZags is separated by a 'three wave corrective.

producing what is called a Double ZigZag or Triple ZigZag (TZ) The following figure illustrates

the Double ZigZag. Addition of another corrective and a ZigZag would make it a Triple ZigZag.

3. FLATS (FL) A Flat is another three wave correction and is the most common pattern after

the ZigZag. The first two waves of the Flat correction are correctives themselves and the third

wave is a motive wave. Thus the three waves of a Flat are 3-3-5.



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The figure above illustrates a common Flat. Variations do exist but it is not relevant to this

study.

4. DOUBLE SIDEWAYS (D3): Similar to Flats. The Double Sideways or (sometimes Triple

Sideways) is two (or sometimes three) corrective patterns strung together by with a joining

three wave pattern.

These are labeled W-X-Y(-XX-Z). All the patterns are corrective in nature. The following

pattern illustrates the Double Sideways pattern. Triple Sideways patterns are quite rare.

5. CONTRACTING TRIANGLE (CT): Triangles unfold in a sideways pattern as five waves and



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subdivide into 3-3-3-3-3. A temporary balance of forces causing a sideways movement thats

associated with decreasing volume and volatility.

A very simple observation here pertinent to our study is the simple differentiation between

Motive and corrective waves.

Motive waves move the farthest possible distance in the shortest possible time and within

them do not have many overlaps between waves 4 and 1. Corrective waves however labour

slowly and appear to cover the same price territory again and again producing numerous overlaps in the same price territory. Motive waves are mostly linear movements and correctives

are mostly a 'mess' and often difficult to count. A thumb rule is If you cannot count it, it is a

correction.

WAVE DEGREE

All waves may be categorized by relative size or degree. Every Elliott pattern is, in itself the

building block of a larger Elliott pattern, which again is a bding block of yet another larger

Elliott pattern and so on. Each subsequent larger Elliott pattern is called of one higher degree.

This five waves of one degree next within a motive pattern of one larger degree and these five

together form one wave of the larger degree and so on.



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The following picture ' The Complete Market Cycle' (Robert Prechter) illustrates this behavior

clearly and this afford us the best tool to identify market turns.

THE COMPLETE MARKET CYCLE

The figure above illustrates a complete market cycle and which also lays bare why simple

concept, which was instantly apparent to a 13 yr old child, eluded most of the Elliott wave

scholars for a long time.

Note how waves (1)(2)(3)(4)(5)(A)(B)(C) all end in motive waves and also begin with motive

waves. Also note how waves 1(circle) and 2(circle) also end in a motive and start in a motive.

While it appears that motive waves appear everywhere, every time a motive wave is followed

by a motive wave of the same degree, markets change trend, but only for that degree.



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Let us now move ahead to the real market charts and real market observation of this trend

changing and trend continuing pattern...........



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BIBLIOGRAPHY

1. The Elliott Wave Principle by Robert Prechter (www.elliottwave.com)

2. The Major works of R.N. Elliott by Robert Prechter. (www.elliottwave.com)

3. Practical Elliott Wave trading strategies by Robert Miner (www.dynamictraders.com)

4. Applying Elliott Wave Profitably by Stephen Poser (www.poserglobal.com)

http://www.elliottwave.com/http://www.elliottwave.com/http://www.dynamictraders.com/http://www.poserglobal.com/http://www.elliottwave.com/http://www.dynamictraders.com/http://www.poserglobal.com/http://www.elliottwave.com/

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Market Mirrors Trend Changes