INVtRThD TRlANULfc

FIGURE 14-10 Compound correction waves.

forcement for continuing. Tlie critical period in the identification process is the fifUi wave. The failure of the fifUi wave to form indicates that the last correction of three waves will be retraced, in a bull maricet, an extension of the fifUi wave is often followed by a corrective three-wave function, in addition, the recognition of a five-wave sequence should be followed by further analjsis to determine whether that cycle was part of a more complex series. One of the difficulties in the method is the orientation of the current position to the wave formation; the multitude of primarj and secondarj waves makes some of the situations subjective until furUier developments clarifj the position. Anyone interested in the furUier complexities of wave formation should refer directly to Boltons work

Elliotts Use of the Fibonacci Series

The application of the Elliott Wave Theory was unique in its use of the Fibonacci series. Besides the natural phenomena mentioned earlier, the summation series has the mathematical properties that

The ratio erf any number to its successor {E,fF,,) approaches 6l8.

The ratio of any number to its previous element (f ,, approaches 1.618.

The ratio of 2IF, is 2.618.

The two ratios (Fi/F,t) x {F,i/f,) = .618 x 1.618 = 1

Elliott was also able to link cenain measurements of the Great PjTamid to the Fibonacci series and connea the number of dajs in the year as well as the geometric figure of a circle to his theory Both time and the circle will play a role in Elliott wave analjsis.

\iile Elliott used the lower end of the Fibonacci series to describe the pattems in the stock maifcet, it should be noted that there are increasingly larger gaps between successive entries as the series increases. To be consistent with the original principle, each gsp could be subdivided into another Fibonacci series in the same manner that the waves tafce on a complex formation. Harahus offers an altemate approach to filling these aces by use of Lucas numbers, formed in the same way as the Fibonacci summation beginning with (1, 3) and resiUting in (1, 3, 4, 7, 11, 18, 29, 47, 76, 123,199 ....). The two sets are combined, eliminating common numbers, to form (1, 2, 3, 4, 5, 7, 8, 13,18, 21, 29, 34, 47, 55, 76, 89, 12 3, 144, 199, 233, . . .). The Fibonacci numbers have been italicized since they will receive the most enphasis, whereas the Lucas numbers will serve as intermediate levels of less significance. The numbers themselves are applied to predict the length in days of a price move. A bull move that lasts for more than 34 dajs should meet major resistance or reverse on the 55th day or on the 89th day (considering Fibonacci numbers only). It is suggested that a penetration of the 89th day should permit the series to start again with the beginning of the series added to 89 (e.g 94, 96, 97,102,107,110,118,123,136 ), including the more important Lucas and Fibonacci

numbers from the original series. This effect is similar to the complex wave-within-a-wave motion.

The same numbers are used to express fcey levels in a frend reversal. For example, a bull move that carries prices up for about 47 dajs before a reversal should meet resistance at the price level on the 34th day. if that price does not stop the reversal, either the behavioral implications of the number series do not hold for this situation or prices are in a different part of the cycle.

With the introduction of Lucas numbers (Z), there are some additional key ratios. In the combined Fibonacci-Lucas series ( ), denote an element withy if it is the first element of the other series following entry i; Lj is the first Lucas number entry fodomng f, that is a Fibonacci number. This results in the ratiosf = .72, = .854, andf/f2iA.i - .382.

The important ratio of a Fibonacci number to its following entry can be represented by the ratio of successhre numbers (ly2,2/3,3/5,5/8,8/13,13/21,21/144,...). When expressed

in decimal, these ratios approach the number.618 in a convergent oscillating series (1.000, .500,.667,.625, .615, .619,. .). These ratios, the fcey Fibonacci-Lucas ratios, and the altemate entry ratios, represent the potential resistance levels (in terms of percentage) for price acjusbnents within a well-defined move. For exanple, a price advance of $ 1. 00 in silver to $5.00 mit correct 100°o, 50°o, or eio, to $4.00, $4.50, or $4.38, respectively, according to the most important ratios.

Trading Elliott

Elliott also fcnew that there was great variability in this adherence to waves and ratios. The appearance of the waves is not regular in either length or duration and should not be expected to continually increase as they develop, although the fifth wave is generally the longest. The waves must be identified by peafcs only. Elliott infroduced a channel into his theory to determine the direction of the wave being analyzed as well as to establish intermediate price objectives. Loofcing bacfc at the diagram of the basic wave, note the channel drawn touching the peafcs and bottoms of the bull move. For every two peafcs, a channel can be drawn that will serve as a frendline for price objectives. This same technique is covered in detail in a later section of Chapter 12. A break of the lower frendline in the bull move will serve to tell when a correction has begun.

The Elliott Wave Theory is very infricate and should not be attempted without carefiil shidy of the original material, but some riUes are presented here to help understand the nature of the method"

1. Identifj a main trend.

2. Determine the current status of the main trend by locating the major peaks and bottoms that will form the five key waves.

3. Look for three wave corrections and five wave subtrends or extensions.

4. Draw trendlines to determine the direction.

5. Measure the length of the waves in dajs to determine its adherence to the Fibonacci-Lucas sequence, measure the size of reactions as compared with FL ratios.

6. Watdi for reactions at points predicted by the FL sequence and correonding to the pattems described by the five-wave main hend and three-wave correction.

7. Use the ratios, day counts, and hendlines as predictive devices to select price objectives.

8. Use the hendlines to determine changes of direction.

As can be seen below, much of this sjstematic identification of waves has been done using a computer. The Supercycle

\ien the short-term pattems fail to fit the riUes, the bigger formations are likely to work. This approach applies to all chart analjsis, and Elliotts wave thecrj is not an exception. Shorter time periods include relatively more noise, which may be difficult to separate from the significant market movement. Robert Prechter, well known for his focus on Elliott, uses a sipercycle to describe the fifth wave of the prolonged bull move, which is still intact in 1997 (see Figure 14-12), apfrtjing Fibonacci ratios to forecast targets and explain the past moves. \ien using a charting tedmique, it is best to look for markets that, in some time frame, conform to the tjpe of pattems you are seeking. This is also true with Elliott, which requires that prices advance in proportion to the Fibonacci ratios. In the DJIA supercycle, shown in Figure 14-12,

9 Robert E iTechter, Jr, "Major se

11," Eutures ilJarcli 199(>)

FIGURE 14-12 Price relationships in sipercjcle (Vj.

1932 1942 1952 1962 1972 1982 TMs Chart includes Ihe 1982 Vmhodox" end-al-pattern low.

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