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101

1. Wave 1 begins atthe 1932 low of 41.22, peaking in 1937 atthehi of 194.40, again of 371.6Po.

2. A wave 2 retracement follows.

3. Wave 3 starts in 1942 at the low of 92.29 and ends in 1966 at the high of 995.15, a gain of 970.975Oo. Note that when you divide the first gain by the second gain, 371.616/970.975, you get the classic Fibonacci ratio 3827.

4. The fifth wave should then follow the same pattem. and gain 600.692" o. This taiget is found by solving for the value of wave 5, where

wave 1/wave 5 =wave 5wave 3 =.618

This gain of 600" is based on the low of 776.92, and gives a target price of 5,444. Traders are cautioned that the high volatility and unusual extension of the current move is likely to cause very specific taigets, such as this, to be violated by as much as 10°

Automating Elliotts Wave Analjsis

\iile analjsis believe that there is substantial value in Elliotts method, it has been considered too subjective and caimot be evaluated with the rigorous historic testing that has become popular. Recent years, however, have shown that a talented analjst and much more computer power can combine to produce programs that can come close to a true version of what was once the exclusive domain of human interpretation. Elliotts wave theory has not been immune to this technologj. 30

Murray Ruggiero has defined the trading opportunities for a basic Elliott wave pattem to be:

1. Enter wave 3 in the direction of the trend

2. Stay out of the maifcet during wave 4 (a retracement).

3. Enter wave 5 in the direction of the trend

4. Take the countertrend trade atthe top of wave 5.

\ien a wave sppears in rwo time frames, such as both daily and weekly charts, the likelihood of the success of this formation increases. This concept is well accepted throughout technical analjsis and can be found in many sections of this book, including Chapter 19 ("Multiple Time Frames"). Without confirmation of a pattem or trade, the risfc increases.

The fcey to automating Elliotts technique is the creation of the Elliott wave oscillator (EWO). A series of extensions and pullbacfcs can be found using the EWO, combined with a method of counting waves that locates the current price within the standard Elliott wave pattem. The following steps present the bull move only, although the downside is treated as just the reverse set of riUes.

1. Calculate the Ellrott wave oscrllator (EWO) as the difference between a 5-period and a 35-period srmple moving average, applied to the average of the high and low prices.

2. A new upward trend begins when the EWO makes a new high for a period, n, de termined by the user. This allows, for exanple, wave 3 to be identified when it goes



above the high of wave 1.

3. A new upward hend also begins when the current value of EWO is below zero (the 5-day average is below the 35-day average), and the hend is down (81 2), but the EWO has rallied by a percentage (called the higger) of the lowest oscillator value of the past n periods ( 1 owes t (EWO, n)). Then the hend is up if EWO is below zero, the previous hend value is down, and

This rule allows the nest wave to be found based on the retracement that comes between each wave.

4. To relate this to Elliott, we must know where prices are located in the five-wave sequence. For an uphend, this is done in the following order:

a. \ien the hend turns from down to up we assume it is the beginning of wave 3 and save the current values of EWO and price.

b. Continue to save the new high EWO value and new high price for wave 3. c. Wave 4 begins when EWO fails to zero.

d. If wave 4 is currently active and the price is a 5-period high and EWO := 0, then wave 5 begins. Save the highest EWO value and highest price of wave 5 whenever they occur.

e. if EWO in wave 5 becomes higher than the highest EWO value in wave 3, then we are atill in wave 3. Label the current wave 5 values to indicate wave 3, and continue as in wave 3 with stqa b.

f If the frend turns from up to down in wave 5, then this is a wave 3 down. Reset all values and look for a new wave 3 up when stqa a is satisfied.

5- The frading riUes needed are based on the values of n, the number of periods, and the frigger (the percentage retracement).

a.Buy on open when wave 3 is first identified, whether on a new n-period high or a reu-acement of the previous downtum (step a).

b. Buy on the open when wave 5 is first identified (stqa d)

c. Buy on the open when wave 5 turns into wave 3 (stq) c).

d. Close out any long position when EWO fails below zero.

With these riUes, a long position is taken during the strongest parts of wave 3 and wave 5. As a guideline for selecting both the period and the frigger values, a test of the Deutschemark for 20 years from 1976 through 1995 showed robust results for periods n from 50 to 140 and for rdracement trigger values of .70 or less.



ifuhctidn ewoi

ifird the elliott wave oscillator (eho)i

versi mearlo);

mean - (high + lowj / 2;

ewo = 0:

ir ©average(mean.35) 0 then ewo = ©averaae(mean,5) - ©average(near.35);

1 function ewtrendi

(find the trerd usirg ewoi

inputs; peri od(numeric), triggerinumeri (; vers: trend(oj, osc(d);

CSC = ewo;

if osc = ®highest(osc,periodj ard trend - 0 then trend - 1; if osc - ©lowestcosc, penodj ard trend - 0 then trend - 1: if ©lowestfosc,period) < 0 ard trend = 1 and

osc > -l*tr1gger*01owest(osc,period) then trend - 1; if ©highesttosc,period) > 0 and trend = 1 and

osc < -l*trigger*©highest(csc.period) then trend = 1; ewtrend = trend; (function ellidttwavel

(find the current wave using ewtpekd ard ewol inputs: period{nurneric), trigger(rumeric)

vars: eko), inean(d), osc(o), wave(o). hiosct-999t. hi o5c2( - 999), hi pri ce( - 999),

hiprice2{-999); CSC - ewo;

mean - (hign + lowj/z;

lis ttie current wave sequence up or down?! et = ewtrend<period.trigger);

(when the trend changes from down to up. label lt wave 3 and save the current o5i and price!

if et = 1 ard et[1D - -1 ard osc > 0 then begin hlosc = osc; (ilprlce = fT-ear: wave = 3; end;

llf wave 3 and the oscillator make new highs then save those valuesi if wave - 3 then begir

11 mean > hiprice then hipnce = mean;

if osc > hiosc ther hiosc = osc; (test for the beginning of wave 41

if osc <- 0 and et = 1 then wave = 4;

end;

(test for the beginning of wave 51

if wave - 4 and mean - @highest(mean,5) and osc >= 0 then begin wave = 5; hiosc2 = osc;



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