Although different in that their angle of trend is sharper than the sideways trend of combinations, double and triple zigzags can be characterized as non-horizontal combinations, as Elliott seemed to suggest in Nature's Law. However, double and triple threes are different from double and triple zigzags, not only in their angle but in their goal. In a double or triple zigzag, the first zigzag is rarely large enough to constitute an adequate price correction of the preceding wave. The doubling or tripling of the initial form is typically necessary to create an adequately sized price retracement. In a combination, however, the first simple pattern often constitutes an adequate price correction. The doubling or tripling appears to occur mainly to extend the duration of the corrective process after price targets have been substantially met. Sometimes additional time is needed to reach a channel line or achieve a stronger kinship with the other correction in an impulse wave. As the consolidation continues, the attendant psychology and fundamentals extend their trends accordingly.
As this section makes clear, there is a qualitative difference between the number series 3 + 4 + 4 + 4, etc., and the series 5 + 4 + 4 + 4, etc. Notice that while impulse waves have a total count of 5, with extensions leading to 9, 13 or 17 waves, and so on, corrective waves have a count of 3, with combinations leading to 7 or 11 waves, and so on. Triangles appear to be an exception, although they can be counted as one would a triple three, totaling 11 waves. Thus, if an internal count is unclear, the analyst can sometimes reach a reasonable conclusion merely by counting waves. A count of 9, 13 or 17 with few overlaps, for instance, is likely motive, while a count of 7, 11 or 15 with numerous overlaps is likely corrective. The main exceptions are diagonal triangles of both types, which are hybrids of motive and corrective forces.
Orthodox Tops and Bottoms
Sometimes a pattern's end differs from the associated price extreme. In such cases, the end of the pattern is called the "orthodox" top or bottom in order to differentiate it from the actual price high or low that occurs intra-pattern. For example, in Figure 1-11, the end of wave 5 is the orthodox top despite the fact that wave 3 registered a higher price. In Figure 1-12, the end of wave 5 is the orthodox bottom. In Figures 1-33 and 1-34, the starting point of wave A is the orthodox top of the preceding bull market despite the higher high of wave B. In Figure 1-47, the end of wave Y is the orthodox bottom of the bear market even though the price low occurs at the end of wave W.
This concept is important primarily because a successful analysis always depends upon a proper labeling of the patterns. Assuming falsely that a particular price extreme is the correct starting point for wave labeling can throw analysis off for some time, while being aware of the requirements of wave form will keep you on track. Further, when applying forecasting concepts, the length and duration of a wave are typically determined by measuring from and projecting orthodox ending points.
4.2 Reconciling Function and Mode
In Lessons 2 and 3, we described the two functions waves may perform (action and reaction), as well as the two modes of structural development (motive and corrective) that they undergo. Now that we have reviewed all types of waves, we can summarize their labels as follows:
— The labels for actionary waves are 1, 3, 5, A, C, E, W, Y and Z.
— The labels for reactionary waves are 2, 4, B, D and X.
As stated earlier, all reactionary waves develop in corrective mode, and most actionary waves develop in motive mode. The preceding sections have described which actionary waves develop in corrective mode. They are:
— waves 1, 3 and 5 in an ending diagonal,
— wave A in a flat correction,
— waves A, C and E in a triangle,
— waves W and Y in double zigzags and double corrections,
— wave Z in triple zigzags and triple corrections.
Because the waves listed above are actionary in relative direction yet develop in corrective mode, we term them "actionary corrective" waves.
As far as we know, we have listed all wave formations that can occur in the price movement of the broad stock market averages. Under the Wave Principle, no other formations than those listed here will occur. Indeed, since the hourly readings are a nearly perfectly matched filter for detailing waves of Subminuette degree, the authors can find no examples of waves above the Subminuette degree that cannot be counted satisfactorily by the Elliott method. In fact, Elliott waves of much smaller degree than Subminuette are revealed by computer generated charts of minute-by-minute transactions. Even the few data points (transactions) per unit of time at this low a degree are enough to reflect accurately the Wave Principle of human behavior by recording the rapid shifts in psychology occurring in the "pits" and on the exchange floor. All rules and guidelines fundamentally apply to actual market mood, not its recording per se or lack thereof. Its clear manifestation requires free market pricing. When prices are fixed by government edict, such as those for gold and silver for half of the twentieth century, waves restricted by the edict are not allowed to register. When the available price record differs from what might have existed in a free market, rules and guidelines must be considered in that light. In the long run, of course, markets always win out over edicts, and edict enforcement is only possible if the mood of the market allows it. All rules and guidelines presented in this course presume that your price record is accurate. Now that we have presented the rules and rudiments of wave formation, we can move on to some of the guidelines for successful analysis under the Wave Principle.
4.3 The Guidelines of Alternation
The guidelines presented in prior sections are discussed and illustrated in the context of a bull market. Except where specifically excluded, they apply equally in bear markets, in which context the illustrations and implications would be inverted.
The guideline of alternation is very broad in its application and warns the analyst always to expect a difference in the next expression of a similar wave. Hamilton Bolton said,
The writer is not convinced that alternation is inevitable in types of waves in larger formations, but there are frequent enough cases to suggest that one should look for it rather than the contrary.
Although alternation does not say precisely what is going to happen, it gives valuable notice of what not to expect and is therefore useful to keep in mind when analyzing wave formations and assessing future possibilities. It primarily instructs the analyst not to assume, as most people tend to do, that because the last market cycle behaved in a certain manner, this one is sure to be the same. As "contrarians" never cease to point out, the day that most investors "catch on" to an apparent habit of the market is the day it will change to one completely different. However, Elliott went further in stating that, in fact, alternation was virtually a law of markets.
Alternation Within Impulses
If wave two of an impulse is a sharp correction, expect wave four to be a sideways correction, and vice versa. Figure 2-1 shows the most characteristic breakdowns of impulse waves, both up and down, as suggested by the guideline of alternation. Sharp corrections never include a new price extreme, i.e., one that lies beyond the orthodox end of the preceding impulse wave. They are almost always zigzags (single, double or triple); occasionally they are double threes that begin with a zigzag. Sideways corrections include flats, triangles, and double and triple corrections. They usually include a new price extreme, i.e., one that lies beyond the orthodox end of the preceding impulse wave. In rare cases, a regular triangle (one that does not include a new price extreme) in the fourth wave position will take the place of a sharp correction and alternate with another type of sideways pattern in the second wave position. The idea of alternation within impulses can be summarized by saying that one of the two corrective processes will contain a move back to or beyond the end of the preceding impulse, and the other will not.
Diagonal triangles do not display alternation between subwaves 2 and 4. Typically they are both zigzags. Extensions are an expression of alternation, as the motive waves alternate their lengths. Typically the first is short, the third is extended, and the fifth is short again. Extensions, which normally occur in wave 3, sometimes occur in wave 1 or 5, another manifestation of alternation.
4.4 Alternation within Corrective Waves
If a large correction begins with a flat a-b-c construction for wave A, expect a zigzag a-b-c formation for wave B (see Figure 2-2), and vice versa (see Figure 2-3). With a moment's thought, it is obvious that this occurrence is sensible, since the first illustration reflects an upward bias in both subwaves while the second reflects a downward bias.
Quite often, if a large correction begins with a simple a-b-c zigzag for wave A, wave B will stretch out into a more intricately subdivided a-b-c zigzag to achieve a type of alternation, as in Figure 2-4. Sometimes wave C will be yet more complex, as in Figure 2-5. The reverse order of complexity is somewhat less common.
4.5 Forecasting Corrective Waves
Depth of Corrective Waves (Bear Market Limitations)
No market approach other than the Wave Principle gives as satisfactory an answer to the question, "How far down can a bear market be expected to go?" The primary guideline is that corrections, especially when they themselves are fourth waves, tend to register their maximum retracement within the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of its terminus.
Example #1: The 1929-1932 Bear Market
The chart of stock prices adjusted to constant dollars developed by the Foundation for the Study of Cycles shows a contracting triangle as wave (IV). Its lows bottom within the area of the previous fourth wave of Cycle degree, an expanding triangle (see chart below).
Example #2: The 1942 Bear Market Low
In this case, the Cycle degree bear market from 1937 to 1942 was a zigzag that terminated within the area of the fourth Primary wave of the bull market from 1932 to 1937 (see Figure 5-5).
Example #3: The 1962 Bear Market Low
The wave 4 plunge in 1962 brought the averages down to just above the 1956 high of the five-wave Primary sequence from 1949 to 1959. Ordinarily, the bear would have reached into the zone of wave (4), the fourth wave correction within wave 3. This narrow miss nevertheless illustrates why this guideline is not a rule. The preceding strong third wave extension and the shallow A wave and strong B wave within (4) indicated strength in the wave structure, which carried over into the moderate net depth of the correction (see Figure 5-5).
4.6 Wave Extensions
Example #4: The 1974 Bear Market Low
The final decline into 1974, ending the 1966-1974 Cycle degree wave IV correction of the entire wave III rise from 1942, brought the averages down to the area of the previous fourth wave of lesser degree (Primary wave ). Again, Figure 5-3 shows what happened
Our analysis of small degree wave sequences over the last twenty years further validates the proposition that the usual limitation of any bear market is the travel area of the preceding fourth wave of one lesser degree, particularly when the bear market in question is itself a fourth wave. However, in a clearly reasonable modification of the guideline, it is often the case that if the first wave in a sequence extends, the correction following the fifth wave will have as a typical limit the bottom of the second wave of lesser degree. For example, the decline into March 1978 in the DJIA bottomed exactly at the low of the second wave in March 1975, which followed an extended first wave off the December 1974 low.
On occasion, flat corrections or triangles, particularly those following extensions (see Example #3), will barely fail to reach into the fourth wave area. Zigzags, on occasion, will cut deeply and move down into the area of the second wave of lesser degree, although this almost exclusively occurs when the zigzags are themselves second waves. "Double bottoms" are sometimes formed in this manner.
Behavior Following Fifth Wave Extensions
The most important empirically derived rule that can be distilled from our observations of market behavior is that when the fifth wave of an advance is an extension, the ensuing correction will be sharp and find support at the level of the low of wave two of the extension. Sometimes the correction will end there, as illustrated in Figure 2-6. Although a limited number of real life examples exist, the precision with which "A" waves have reversed at the level of the low of wave two of the preceding fifth wave extension is remarkable. Figure 2-7 is an illustration involving an expanded flat correction.
Since the low of the second wave of an extension is commonly in or near the price territory of the immediately preceding fourth wave of one larger degree, this guideline implies behavior similar to that for the preceding guideline. It is notable for its precision, however. Additional value is provided by the fact that fifth wave extensions are typically followed by swift retracements. Their occurrence, then, is an advance warning of a dramatic reversal to a specific level, a powerful combination of knowledge. This guideline does not apply separately to fifth wave extensions of fifth wave extensions.