Motive waves subdivide into five waves with certain characteristics and always move in the same direction as the trend of one larger degree. They are straightforward and relatively easy to recognize and interpret.
Within motive waves, wave 2 never retraces more than 100% of wave 1, and wave 4 never retraces more than 100% of wave 3. Wave 3, moreover, always travels beyond the end of wave 1. The goal of a motive wave is to make progress, and these rules of formation assure that it will.
Elliott further discovered that in price terms, wave 3 is often the longest and never the shortest among the three actionary waves (1, 3 and 5) of a motive wave. As long as wave 3 undergoes a greater percentage movement than either wave 1 or 5, this rule is satisfied. It almost always holds on an arithmetic basis as well. There are two types of motive waves: impulses and diagonal triangles.
The most common motive wave is an impulse. In an impulse, wave 4 does not enter the territory of (i.e., "overlap") wave 1. This rule holds for all non-leveraged "cash" markets. Futures markets, with their extreme leverage, can induce short term price extremes that would not occur in cash markets. Even so, overlapping is usually confined to daily and intraday price fluctuations and even then is extremely rare. In addition, the actionary subwaves (1, 3 and 5) of an impulse are themselves motive, and subwave 3 is specifically an impulse. Figures 1-2, 1-3 and 1-4 all depict impulses in the 1, 3, 5, A and C wave positions.
As detailed in the preceding three paragraphs, there are only a few simple rules for interpreting impulses properly. A rule is so called because it governs all waves to which it applies. Typical, yet not inevitable, characteristics of waves are called guidelines. Guidelines of impulse formation, including extension, truncation, alternation, equality, channeling, personality and ratio relationships are discussed below and through Lesson 6 of this course. A rule should never be disregarded. In many years of practice with countless patterns, the authors have found but one instance above Subminuette degree when all other rules and guidelines combined to suggest that a rule was broken. Analysts who routinely break any of the rules detailed in this section are practicing some form of analysis other than that guided by the Wave Principle. These rules have great practical utility in correct counting, which we will explore further in discussing extensions.
Most impulses contain what Elliott called an extension. Extensions are elongated impulses with exaggerated subdivisions. The vast majority of impulse waves do contain an extension in one and only one of their three actionary subwaves. At times, the subdivisions of an extended wave are nearly the same amplitude and duration as the other four waves of the larger impulse, giving a total count of nine waves of similar size rather than the normal count of "five" for the sequence. In a nine-wave sequence, it is occasionally difficult to say which wave extended. However, it is usually irrelevant anyway, since under the Elliott system, a count of nine and a count of five have the same technical significance. The diagrams in Figure 1-5, illustrating extensions, will clarify this point.
The fact that extensions typically occur in only one actionary subwave provides a useful guide to the expected lengths of upcoming waves. For instance, if the first and third waves are of about equal length, the fifth wave will likely be a protracted surge. (In waves below Primary degree, a developing fifth wave extension will be confirmed by new high volume, as described in Lesson 6 under "Volume.") Conversely, if wave three extends, the fifth should be simply constructed and resemble wave one.
In the stock market, the most commonly extended wave is wave 3.This fact is of particular importance to real time wave interpretation when considered in conjunction with two of the rules of impulse waves: that wave 3 is never the shortest actionary wave, and that wave 4 may not overlap wave 1. To clarify, let us assume two situations involving an improper middle wave, as illustrated in Figures 1-6 and 1-7.
Figure 1-6 Figure 1-7 Figure 1-8
Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, "truncation," or "truncated fifth." A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in Figures 1-11 and 1-12. Truncation often occurs following an extensively strong third wave.
The U.S. stock market provides two examples of major degree truncated fifths since 1932. The first occurred in October 1962 at the time of the Cuban crisis (see Figure 1-13). It followed the crash that occurred as wave 3. The second occurred at year-end in 1976 (see Figure 1-14). It followed the soaring and broad wave (3) that took place from October 1975 to March 1976.
A diagonal is a motive pattern yet not an impulse, as it has two corrective characteristics. As with an impulse, no reactionary subwave fully retraces the preceding actionary subwave, and the third subwave is never the shortest. However, a diagonal is the only five-wave structure in the direction of the main trend within which wave four almost always moves into the price territory of (i.e., overlaps) wave one and within which all the waves are "threes," producing an overall count of 3-3-3-3-3. On rare occasions, a diagonal may end in a truncation, although in our experience such truncations occur only by the slimmest of margins. This pattern substitutes for an impulse at two specific locations in the wave structure.
An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times when the preceding move has gone "too far too fast," as Elliott put it. A very small percentage of ending diagonals appear in the C wave position of A-B-C formations. In double or triple threes (to be covered in Lesson 5), they appear only as the final "C" wave. In all cases, they are found at the termination points of larger patterns, indicating exhaustion of the larger movement.
Ending diagonals take a wedge shape within two converging lines, with each subwave, including waves 1, 3 and 5, subdividing into a "three," which is otherwise a corrective wave phenomenon. The ending diagonal is illustrated in Figures 1-15 and 1-16 and shown in its typical position in larger impulse waves.
Figure 1-15 Figure 1-16
We have found one case in which the pattern's boundary lines diverged, creating an expanding wedge rather than a contracting one. However, it is unsatisfying analytically in that its third wave was the shortest actionary wave, the entire formation was larger than normal, and another interpretation was possible, if not attractive. For these reasons, we do not include it as a valid variation.
Ending diagonals have occurred recently in Minor degree as in early 1978, in Minute degree as in February-March 1976, and in Subminuette degree as in June 1976. Figures 1-17 and 1-18 show two of these periods, illustrating one upward and one downward "real-life" formation. Figure 1-19 shows our real-life possible expanding diagonal. Notice that in each case, an important change of direction followed.
Although not so illustrated in Figures 1-15 and 1-16, fifth waves of diagonals often end in a "throw-over," i.e., a brief break of the trendline connecting the end points of waves one and three. Figures 1-17 and 1-19 show real life examples. While volume tends to diminish as a diagonal of small degree progresses, the pattern always ends with a spike of relatively high volume when a throw-over occurs. On rare occasions, the fifth subwave will fall short of its resistance trendline.
A rising diagonal is bearish and is usually followed by a sharp decline retracing at least back to the level where it began. A falling diagonal by the same token is bullish, usually giving rise to an upward thrust.
Fifth wave extensions, truncated fifths and ending diagonal all imply the same thing: dramatic reversal ahead. At some turning points, two of these phenomena have occurred together at different degrees, compounding the violence of the next move in the opposite direction.
2.6 Leading Diagonals
It has recently come to light that a diagonal occasionally appears in the wave 1 position of impulses and in the wave A position of zigzags. In the few examples we have, the subdivisions appear to be the same: 3-3-3-3-3, although in two cases, they can be labeled 5-3-5-3-5, so the jury is out on a strict definition. Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a series of first and second waves, as illustrated in Figure 1-8. A leading diagonal in the wave one position is typically followed by a deep retracement.
Figure 1-21 shows a real-life leading diagonal. We have recently observed that a leading diagonal can also take an expanding shape. This form appears to occur primarily at the start of declines in the stock market. These patterns were not originally discovered by R.N. Elliott but have appeared enough times and over a long enough period that the authors are convinced of their validity.