Which Method Can Traders Use to Confirm an Elliott Wave Count?

Which Method Can Traders Use to Confirm an Elliott Wave Count?
Jeffrey Kennedy has developed a theory that guides his analysis
March 8, 2012

By Elliott Wave International

When you are watching a pattern develop on a chart, how can you be sure that your wave count is correct? The Elliott Wave Principle offers rules and guidelines that you can use to add confidence to your wave count.

Elliott Wave International's Senior Analyst Jeffrey Kennedy spent years designing his own technique to improve his accuracy. He came up with the Jeffrey Kennedy Channeling Technique, which he uses to confirm his wave counts. The following excerpt from Jeffrey's Trader's Classroom lessons, a regular feature of his Futures Junctures Service, offers an overview of his method.

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My theory is simple: Five waves break down into three channels, and three waves need only one. The price movement in and out of these channels confirms each Elliott wave.

Base Channel

Figure 61 shows three separate five-wave patterns with three different channels drawn: the base channel, the acceleration channel and the deceleration channel.

 The base channel contains the origin of wave one, the end of wave two and the extreme of wave one (Figure 61A). Of the three channels, the base channel is most important, because it defines the trend. As long as prices stay within the base channel, we can safely consider the price action corrective. Over the years, I've discovered that most corrective wave patterns stay within one price channel (Figure 62). Only after prices have moved through the upper or lower boundary lines of this channel is an impulsive wave count suitable, which brings us to the acceleration channel.

Acceleration Channel

The acceleration channel encompasses wave three. Use the extreme of wave one, the most recent high and the bottom of wave two to draw this channel (Figure 61B). As wave three develops, you�ll need to redraw the acceleration channel to accommodate new highs.
Once prices break through the lower boundary line of the acceleration channel, we have confirmation that wave three is over and that wave four is unfolding. I have noticed that wave four will often end near the upper boundary line of the base channel or moderately within the parallel lines. If prices break through the lower boundary line of the base channel decisively, it means the trend is down, and you need to draw new channels.

Deceleration Channel

The deceleration channel contains wave four (Figure 61C). To draw the deceleration channel, simply connect the extremes of wave three and wave B with a trend line. Take a parallel of this line, and place it on the extreme of wave A. As I mentioned before, price action that stays within one price channel is often corrective. When prices break through the upper boundary line of this channel, you can expect a fifth-wave rally next.

In a nutshell, prices need to break out of the base channel to confirm the trend. Movement out of the acceleration channel confirms that wave four is in force, and penetration of the deceleration channel lines signals that wave five is under way.

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14 Critical Lessons Every Trader Should Know Since 1999, Jeffrey Kennedy has produced dozens of Trader's Classroom lessons exclusively for his subscribers. Now you can get "the best of the best" in these 14 lessons that offer the most critical information every trader should know. Find out why traders fail, the three phases of a trader's education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more! Don't miss your chance to improve your trading. Download your FREE 45-page eBook today!

R.N. Elliott Discovered the Wave Principle Over 70 Years Ago

R.N. Elliott Discovered the Wave Principle Over 70 Years Ago
This is your opportunity to learn the method that has stood the test of time 
March 2, 2012

By Elliott Wave International

In the 1930s, Ralph N. Elliott discovered that stock market prices tend to move in recurring patterns. He defined these patterns (or "waves") and explained how they combine to create larger versions of themselves. He called his discovery the Wave Principle.

After much research into R.N. Elliott's work, A.J. Frost and Robert Prechter published the 1978 text Elliott Wave Principle. This lesson captures a flavor of Elliott's fascinating approach to market analysis.

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: "motive waves," and "corrective waves." Motive waves are composed of five sub-waves and move in the same direction as the trend of the next larger size. A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size. As the picture below shows, these two patterns form similar structures of larger sizes, or "degrees," as R.N. Elliott, the discoverer of the Wave Principle, called them.

The above pattern begins with waves 1, 2, 3, 4 and 5 that together form wave (1) -- a five-wave, motive structure that tells us that the trend at the next larger degree is also upward. If you were reading this in real-time, and the rest of the pattern was not visible, it would also warn you to watch for a three-wave correction.

Corrective wave (2) in the chart above is followed by waves (3), (4), and (5), to complete an impulsive sequence one degree larger labeled 1 (circled). This is followed by a three-wave correction of the same degree: wave 2 (circled) with subwaves (A)-(B)-(C). One way to think about corrective waves is that, because they move against the next larger trend, they lack the strength to unfold into a full five-wave move.

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Learn the Elliott Wave Principle -- Free If you're interested in learning Elliott wave analysis, but haven't yet gotten a copy of the book Elliott Wave Principle: Key to Market Behavior, check out EWI's online edition. Even if you already have the book, the online edition is a handy way to look something up when you don't have your book nearby. Learn the method that successful investors have used for decades.

European Money Shuffle

Team - he's a link to a video with a very interesting explanation of the money shuffling going on in Europe.


http://www.youtube.com/watch?v=V5z0rQRdsiE


Enjoy!!

A Two-Bar Pattern that Points to Trade Setups

A Two-Bar Pattern that Points to Trade Setups

February 15, 2012

By Elliott Wave International

Some people like to get outside on the weekends, maybe playing tennis or working in the yard. Some people like to visit their friends or cook a big meal or go out to see a movie. And some people who are passionate about their work -- such as Elliott Wave International's futures analyst Jeffrey Kennedy -- like to stare at hundreds of price charts on their computer screen to find patterns that point to trade setups. We used to worry for his health but not anymore, because he's been doing it for years and he comes up with some neat stuff. A case in point is his discovery of a two-bar pattern that he named the Popgun. Find out more in this excerpt from the Club EWI eBook, How to Use Bar Patterns to Spot Trade Setups.

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The Popgun
I'm no doubt dating myself, but when I was a kid, I had a popgun -- the old-fashioned kind with a cork and string (no fake Star Wars light saber for me). You pulled the trigger, and the cork popped out of the barrel attached to a string. If you were like me, you immediately attached a longer string to improve the popgun's reach. Why the reminiscing? Because "Popgun" is the name of a bar pattern I would like to share with you this month. And it's the path of the cork (out and back) that made me think of the name for this pattern.

The Popgun is a two-bar pattern composed of an outside bar preceded by an inside bar. (Quick refresher course: An outside bar occurs when the range of a bar encompasses the previous bar and an inside bar is a price bar whose range is encompassed by the previous bar.) In Chart 1 (Coffee), I have circled two Popguns.

So what's so special about the Popgun? It introduces swift, tradable moves in price. More importantly, once the moves end, they are significantly retraced, just like the popgun cork going out and back. As you can see in Chart 2 [not shown], prices advance sharply following the Popgun, and then the move is significantly retraced. In Chart 3 [not shown], we see the same thing again but to the downside: prices fall dramatically after the Popgun, and then a sizable correction develops. 

How can we incorporate this bar pattern into our Elliott wave analysis? The best way is to understand where Popguns show up in the wave patterns. I have noticed that Popguns tend to occur prior to impulse waves -- waves one, three and five. But, remember, waves A and C of corrective wave patterns are also technically impulse waves. So Popguns can occur prior to those moves as well. 

As with all my work, I rely on a pattern only if it applies across all time frames and markets. To illustrate, I have included two charts of Sirius Satellite Radio (SIRI) that show this pattern works equally well on 60-minute and weekly charts. Notice that the Popgun on the 60-minute chart [not shown] preceded a small third wave advance. Now look at the weekly chart [not shown] to see what three Popguns introduced (from left to right), wave C of a flat correction, wave 5 of (3) and wave C of (4).

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Find out How to Use Bar Patterns to Spot Trade Setups In this comprehensive 15-page eBook, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately -- compelling proof of how it identified swift and sizable moves. Download the free, 15-page eBook today >>

Learn How to Apply Fibonacci Retracements to Your Trading

Learn How to Apply Fibonacci Retracements to Your Trading
EWI's new eBook helps you identify trading opportunities 
February 8, 2012

By Elliott Wave International

Elliott waves often correct in terms of Fibonacci ratios. The following article, adapted from the eBook How You Can Use Fibonacci to Improve Your Trading, explains what you can expect when a market begins a corrective phase. Learn how you can read the entire 14-page eBook below.

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Retracements -- Corrective Waves

If we look on the left side of this chart, we see a diagram of wave 1 followed by wave 2. It is common for second waves to retrace .618 of wave 1 -- thereby making a deep retracement. We will also be looking for .786. We might often see .5, 50%, but .618 is common. On the right side, fourth waves will commonly retrace a smaller percentage or .382 of wave 3. We might also see something like .236.

Examples

I have put the wave count on this chart of the S&P 500. We have waves 1, 2, 3, 4 and 5. Wave 2 is an expanded flat. Wave 4 is a zigzag. Let's look at the retracements that waves 2 and 4 make.

We see that wave 2 makes a deep retracement. It comes close to .618. Look at this Fibonacci table that I put up; notice that I put .382, .5, .618, and .786. .618 is 1087.75, and the S&P low is 1090.19.

We see that wave 4 makes a shallow retracement of wave 3. It goes just beyond the .382 retracement. .382 is 1169.1, and wave 4 actually bottoms at 1163.75.

In a nutshell, this is what we mean when we say that Elliott waves often correct in terms of Fibonacci ratios.

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Learn How You Can Use Fibonacci to Improve Your Trading If you'd like to learn more about Fibonacci and how to apply it to your trading strategy, download the entire 14-page free eBook, How You Can Use Fibonacci to Improve Your Trading. EWI Senior Tutorial Instructor Wayne Gorman explains: The Golden Spiral, the Golden Ratio, and the Golden Section How to use Fibonacci Ratios/Multiples in forecasting How to identify market targets and turning points in the markets you trade And more! See how easy it is to use Fibonacci in your trading. Download your free eBook today >>