Applying Technical Analysis Elliot Waves
Applying Technical Analysis Elliot Waves
GET Applying Technical Analysis
Applying Technical
Analysis
Updated Feb 99
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GET Applying Technical Analysis
TRADING TECHNIQUES, INC.
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Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance
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to those shown. All investments and trades carry risks.
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GET Applying Technical Analysis
Technical Table Of Contents
Elliott Wave Technique ................................................................................................ T-5
Impulse Patterns ....................................................................................................................... T-6
Indicator To Provide Elliott Wave Counts ............................................................................. T-9
Elliott Oscillator: Step-By-Step Illustration ....................................................... T-11
Minimum Pull Back Required............................................................................................... T-15
Maximum Oscillator Pull Back ............................................................................................. T-16
Using The Elliott Oscillator in Wave Three ......................................................................... T-17
Using The Elliott Oscillator in Wave Four ........................................................................... T-18
Using The Elliott Oscillator in Wave Five ............................................................................ T-19
Oscillator Breakout Bands ..................................................................................................... T-20
Adding PTI (Profit Taking Index)......................................................................... T-21
Adding Wave Four Channels ............................................................................... T-23
Profit Taking Index & Wave 4 Channels............................................................. T-24
Adding Displaced Moving Average (DMA) ........................................................ T-25
Elliott Wave Rules & Guidelines .......................................................................... T-26
Elliott Wave Corrections ....................................................................................... T-27
Alternation Rule ..................................................................................................................... T-31
Wave Measurements & Ratios ............................................................................. T-32
Ratios For Wave Three .......................................................................................................... T-34
Ratios For Wave Four ............................................................................................................ T-34
Ratios For Wave Five ............................................................................................................. T-35
Elliott Channels For Top Of A Wave Five............................................................................ T-36
Statistical Analysis of Wave Two Ratios ............................................................................... T-37
Statistical Analysis of Wave Three Ratios ............................................................................ T-38
Statistical Analysis of Wave Four Ratios.............................................................................. T-40
Elliott / Fibonacci Ratios ........................................................................................................ T-42
Elliott / Fibonacci Ratios For Wave 5 ................................................................................... T-43
Rules: Type 1 Trade .................................................................................................... T-44
Rules: Type 2 Trade .................................................................................................... T-45
Examples Of Type One & Type two Trades ......................................................................... T-46
Type One Buy Setup ............................................................................................................... T-47
Type Two Buy .......................................................................................................................... T-48
Type Two Sell Setup................................................................................................................ T-49
Forecasting A Double Top ...................................................................................................... T-50
Fifth Wave Failure Setup ....................................................................................................... T-51
Power of 60 Minute Charts ........................................................................................ T-65
Cross-Referencing to Weekly Data ........................................................................... T-80
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GET Applying Technical Analysis
Alternatives In Elliott Wave Analysis ....................................................................... T-84
Locallized Elliott Wave Counts: ............................................................................................ T-84
Alternate Counts ..................................................................................................................... T-84
Alternate 3 (Long Term) ....................................................................................................... T-85
Alternate 2 (Short Term)....................................................................................................... T-86
Alternate 1 (Aggressive) ........................................................................................................ T-87
Gann Techniques ........................................................................................................ T-90
Gann Angles And Lines ......................................................................................................... T-91
Using Gann Angles With Elliott Waves ................................................................................ T-95
Optimized Gann Angles ......................................................................................................... T-97
Gann Box Analysis ................................................................................................................. T-98
Regression Trend Channels .................................................................................... T-105
T.J.’s Web Levels ...................................................................................................... T-107
Fibonacci Time Clusters........................................................................................... T-112
Fibonacci Extension Price Clusters .................................................................................... T-115
Fibonacci Retracement Price Clusters .............................................................................. T-117
Andrews Median Lines............................................................................................. T-120
Extended Parallel Lines ....................................................................................................... T-123
Extended Parallel Lines ....................................................................................................... T-124
Combining Median Lines With Wave 3 ............................................................................. T-127
Automatic Regression Trend Channels .................................................................. T-129
Expert Trend Locator - XTL ................................................................................... T-132
Designated Use For XTL ............................................................................................................ T-135
Settings For XTL: ...................................................................................................................... T-135
Taking Profits: ............................................................................................................................ T-139
Trade Continuation: ................................................................................................................... T-140
Guidelines for Trade Continuation ........................................................................................... T-141
Using Different Settings for XTL .............................................................................................. T-142
MOB (Make or Break) ............................................................................................. T-147
Bias Reversal ............................................................................................................. T-156
Elliott Wave Trigger ................................................................................................. T-158
T.J’s Ellipse................................................................................................................ T-160
Ellipse Projection (Shadow): ............................................................................................... T-163
The Joseph Trend Iindex (JTI) ................................................................................ T-167
How Can JTI Be Used .......................................................................................................... T-172
Cycles ......................................................................................................................... T-173
Trade Pofile .............................................................................................................. T-176
Applying Technical Analysis Index ...........................................................................T179
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GET Applying Technical Analysis
Elliott Wave Technique
The Practical Approach— In Conjunction With GET
Elliott Wave is a collection of
complex techniques. About
60% of these techniques are
clear and easy to use. The
other 40% are difficult to
identify, especially for the
beginner. The practical and
conservative approach is to
use the 60% that are clear.
When the analysis is not
clear, why not find another
market which is conforming to an Elliott Wave pattern that is easier
to identify?
From years of fighting this battle, I have come up with the following
practical approach to using Elliott Wave principles in trading.
The whole theory of Elliott Wave can be classified into two parts: (a)
impulse pattern and (b) corrective pattern. We will discuss the
impulse pattern and how to use the Elliott Oscillator to identify these
impulse patterns. We will then discuss some general rules and guide-
lines followed by numerous examples.
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GET Applying Technical Analysis
Impulse Patterns
The impulse pattern consists of five waves. The five waves can be in either direction, up
or down. Some examples are shown below.
Upward Wave 5 Wave 2 Downward
Impulse Wave 3 Impulse
Action Action
Wave 1
Wave 4 Wave 4
Wave 1
Wave 2 Wave 3 Wave 5
The first wave is usually a weak rally with only a small percentage of the traders partici-
pating. Once Wave 1 is over, they sell the market on Wave 2. The sell off in Wave 2 is
very vicious. Wave 2 will finally end without making new lows and the market will start
to turn around for another rally.
Vicious selling
1 in Wave Two
2 Wave Two will not
make new lows
The initial stages of the Wave 3 rally is slow and it finally makes it to the top of the pre-
vious rally (the top of Wave 1). At this time, there are a lot of stops above the top of
Wave 1.
Traders are not convinced of the upward
trend and are using this rally to add more 1 STOPS
shorts. For their analysis to be correct, the Top of Wave One
market should not take the top of the pre-
vious rally. Wave Three in
2 initial stages
Therefore, a large amount of stops are
placed above the top of Wave 1.
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GET Applying Technical Analysis
The Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1
high is exceeded, the stops are taken out. Depending on the amount of stops, gaps are left
open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out,
the Wave 3 rally has caught the attention of traders.
Wave Three
in progress
Gap of Wave Three
1 STOPS
Top of Wave One
2
The next sequence of events are as follows: Traders who were initially long from the
bottom finally have something to cheer about. They might even decide to add positions.
The traders who were stopped out (after being upset for a while) decide the trend is up
and they decide to buy into the rally. All this sudden interest fuels the Wave 3 rally.
This is the time when the majority of the
traders have decided that the trend is up. Traders 3
buying
Finally, all the buying frenzy dies down,
Wave 3 comes to a halt. Stops In general,
taken a majority
Profit taking now begins to set in. Trad- of traders
1 out
ers who were long from the lows de- decide and
agree that
cide to take profits. They have a good
the trend
trade and start to protect profits. is up.
2
This causes a pullback in the prices
and is called Wave 4. Wave 2 was a
vicious sell-off, Wave 4 is an orderly
profit taking decline.
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GET Applying Technical Analysis
While profit taking is in progress, the majority of traders are still convinced the trend is
up. They were either late in getting in on this rally, or they have been on the sideline.
They consider this profit taking decline as an excellent place to buy-in and get even.
On the end of Wave 4, more
buying sets in and the prices Profit
3
start to rally again. taking
decline
Vicious
4
sell-off
1
2
The Wave 5 rally lacks the huge enthusiasm and strength found in the Wave 3 rally. The
Wave 5 advance is caused by a small group of traders.
While the prices make a new high above the top of Wave 3, the rate of power, or
strength, inside the Wave 5 advance is very small when compared to the Wave 3 advance.
Finally, when this lackluster buying
interest dies out, the market tops 5
out and enters a new phase.
3
Rally with Price makes
great strength new highs.
4 However,
strength in
1 rally is weaker
in comparison
to the third
wave rally.
2
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GET Applying Technical Analysis
Indicator To Provide Elliott Wave Counts
The examples of five wave impulse patterns shown on the previous page are very clear and
definitive. However, the markets are not that easy all the time. It becomes almost impossible and
very subjective to identify Waves 3 and 5 from looking at price charts alone. The price chart
fails to show the various strengths of the waves. The following illustration is used to discuss this
concept. Two drivers left the same town at the same time in different vehicles. Driver A drove
within speed limits all the way, while Driver B exceeded the speed limit .
DRIVER A —
ALWAYS WITHIN SPEED LIMIT
DRIVER B —
TOOK A
DIFFERENT ROUTE;
EXCEEDED THE
SPEED LIMIT.
Both drivers took the same amount of time and traveled the same distance. However, the two
drivers used different strategies to arrive at their destination. While Driver A proceeded at a
normal speed, Driver B drove like a bat-out-of-Hades, so to speak. An observer at the other
end would be unable to tell the difference between the two drivers driving patterns. To a
casual observer, both left the same time and arrived at the same time. This is the same
problem we face when we try to distinguish between Waves 3 and 5. Wave 5 makes new
highs; a trader looking at price charts may not be able to tell the difference between a
Wave 3 or Wave 5. However, the internal price pattern of Wave 3 is much stronger in compari-
son to that of Wave 5. Therefore, we need to use an internal strength measuring indicator to tell
the difference.
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GET Applying Technical Analysis
Indicator To Provide Elliott Wave Counts
To keep tab of the Elliott Wave logic, we require an indicator that measures the rate of
price change in one wave against the rate of price change in another wave. Standard
indicators fail to perform this comparison. They merely compare price against price and
fail to compare the rate of price action. After years of research, the Elliott Oscillator
was developed. The idea of the oscillator is described below.
An Elliott Oscillator is basically calculated
Wave Three Rate of price
from finding the difference between two
increase is
moving averages. If we were to use a small
much faster
moving average and a large moving average,
the difference between the two will show
the rate of increase in prices.
Small moving aver-
age representing
The small moving average represents the Difference current prices
current price action, while the larger moving is large in
Wave 3
average represents the overall price action.
When the prices are gapping up inside a
Wave 3 the current prices are surging; the Large moving average
difference between the small and large mov- representing
ing averages is great and produces a large price actions
oscillator value.
However, in a Wave 5 the cur-
rent prices are not moving up at
a fast rate and, therefore, the Wave Five
difference between the small
and large moving averages is
minimal. This produces a Rate of price increase is slow
smaller oscillator value.
The analogy is similar to the Difference is very
two drivers. small in Wave 5
Wave 3 is like Driver B who
accelerates beyond speed lim-
its and has a higher rate of
speed, while Wave 5 has a
slow, dragging price action.
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GET Applying Technical Analysis
Elliott Oscillator: Step-By-Step Illustration —
We will use the same chart for illustration. When the prices rally above the top of Wave
1, the Elliott Oscillator is making new highs. Notice also the gapping action. The current
rally is labeled Wave 3.
Finally, the buying subsides in Wave 3. Traders begin to take profits. However, the gen-
eral public is eagerly waiting for a neutral area to buy into this market. When the Elliott
Oscillator pulls back to the zero level, or slightly below, the market is entering a neutral
area.
Sample Price Bar Chart 5
3
1 Prices making
4 new highs, but
no lasting strength
2
Small and Large Moving Average
Small MA
represents
Current prices
current
moving with slower
price
rate shows wave
five
Larger MA represents overall price
Current prices moving up rapidly
shows wave three
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GET Applying Technical Analysis
Once Wave 4 is over, buying comes in from traders who missed the entire Wave 3 rally.
The prices move to new highs. However, the rally does not have the fast rate of price
increase that was seen in Wave 3. This difference in the rate of price is picked up by the
oscillator and can be easily identified. MORAL OF THE STORY: Always let the Elliott
Oscillator track Elliott Wave counts.
Sample Price Bar Chart 5
3
1 Prices making
4 new highs, but
no lasting strength
2
Small and Large Moving Average
Small MA
represents
Current prices
current
price ø moving with slower
rate shows Wave
õ Five
Larger MA represents overall price
Current prices moving up rapidly
shows Wave Three
The Elliott Wave Oscillator
Prices making new
Majority accepting the trend
ø
highs without strength
ø
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GET Applying Technical Analysis
Identifying a five wave impulse
Five Wave Impulse (up) using the Elliott Oscillator,
(UP) 3
which is part of the software.
Strength 5
in rally ö Divergence
Elliott
Oscillator
pulls back
to zero
÷
5
3
õ
New
highs New
with Phase
4 less
strength
õ
Labeled as
õ Rally Wave Four
with strength because
1 labeled oscillator
as Wave pulled back
Three to zero
2
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GET Applying Technical Analysis
Identifying a five wave
Five Wave Impulse (DOWN) impulse (down) using the
Elliott Oscillator, which is
2 part of the software.
Labeled as
1 Wave Four
because
oscillator
pulled back
to zero
÷
Decline ö 4
with strength
New Phase
ø
New ö
3
lows
with less
strength
5
õ
Elliott
Oscillator
pulls back
to zero
Divergence
5
3
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GET Applying Technical Analysis
The Elliott Oscillator
Minimum Pull Back Required
Historically, 94% of all Wave 4 sequences that have ended in a Wave Five making a new
high or a new low, had the Elliott Oscillator pull back at least 90% from the Wave 3 peak.
90%
5
3
4
Elliott Oscillator
(not shown to any scale)
Divergence
0
Minimum
90% Pullback
Required
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GET Applying Technical Analysis
The Elliott Oscillator
Maximum Oscillator Pull Back
Just as it is important for the Oscillator to pull back to the zero line (or at least 90% of the
Wave 3 Oscillator as discussed on the previous page) it is just as important that the
Oscillator does NOT pull back more than 38% of the Wave 3 Oscillator on the other side
of the zero line.
90%
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38% of the Wave 3 Oscillator
5
3
4
Elliott Oscillator
(not shown to any scale)
Divergence
0
Minimum
90% Pullback
Required
Maximum Pull Back = 38%
of Wave 3 peak in the
Opposite Direction
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GET Applying Technical Analysis
Using The Elliott Oscillator in Wave Three
¤ When a market rallies with a strong Elliott Oscillator as in Chart A, the rally is
classified as a Wave Three.
Chart A Chart B
Wave 3 ö
Once Wave 3 is over,
profit taking sets in.
Strong Oscillator ö
Oscillator
Pullback to
ï Zero
¤ Once Wave Three is over, the market will pull back on a profit taking decline.
During the profit taking decline, the Elliott Oscillator should pull back to zero (as
shown in Chart B).
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GET Applying Technical Analysis
Using The Elliott Oscillator in Wave Four
¤ Once the Elliott Oscillator pulls back to zero, it signals the end of a potential Wave
Four profit taking decline as shown in Chart A.
Chart A Chart B
New Highs ð
ñ
New
Buying
ö
Profit Taking ö
Decline Over Profit Taking
Ended
Oscillator
Pullback to
Zero
ò
¤ New buying comes in and the market makes new highs (as shown in Chart B).
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GET Applying Technical Analysis
Using The Elliott Oscillator in Wave Five
¤ The market is making a new high with less strength in the Elliott Oscillator as shown in
Chart A.
Chart A Chart B
New High ð
When 5 Waves are com-
plete, the market changes ð
direction
With Good Oscillator
Divergence
ñ
Previous
Wave 4
Oscillator Low
Divergence
¤ This indicates that the current rally is a Wave Five and once the Fifth Wave is over, the
market should change direction.
¤ When the market changes direction after completing a Five Wave sequence, the previous
Wave Four will become the first target. In Chart B, the market changed direction and is
trying to test the previous Wave Four low near 3630.
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GET Applying Technical Analysis
OSCILLATOR BREAKOUT BANDS
A major task in using Elliott Wave Analysis is to identify Wave Three's accompanied with a strong Oscil-
lator. In the past we have done this by
visually comparing the size of the cur-
rent Oscillator with that of the past.
The Oscillator Break Out Bands pro-
vide an UP Band and a LOW Band.
Anytime the software labels a Wave
Three, the Oscillator needs to be
comfortably above the Break Out
Band. We recommend a setting of
80% for these bands.
The chart on the left is the Daily Swiss
Franc Dec 94 contract. Here the soft-
ware labels a Wave Three Rally and
this rally is accompanied by a strong
Oscillator that is breaking above the
Breakout Bands.
Therefore, this Wave Count can be
Oscillator above used for this market at this time. An-
Breakout Band. other example is shown below where
the Oscillator is above the Breakout
Band and confirms with the Elliott
Wave analysis.
Confirmed Wave Three in progress.
Oscillator above Breakout Band.
î
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