Technical Analysis―Elliott Wave Basics

Figure 1. Long-term Elliot Wave analysis posted in 2019 (courtesy: Elliott Wave Trader)

Elliott theorized that public sentiment and mass psychology move in 5 waves within a primary trend and 3 waves within a counter-trend:^[1] 

Once a 1-to-5 wave move in public sentiment has completed, then it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply the natural cycle within the human psyche, and not the operative effect of some form of "news."

 

Elliott Wave Analysis

In [1], Avi Gilburt describes Elliott Wave analysis succinctly in this way:

I have not found any other analysis methodology which provides an understanding of market context which exceeds that of Elliott Wave analysis. Moreover, Elliott Wave analysis does not provide any 100% guarantees. Rather, it provides us with probabilistic expectations based upon the market structure.

For its usefulness, Avi Gilburt further emphasize:

You see, the beauty of Elliott Wave analysis (as enhanced by our Fibonacci Pinball methodology) is not just the accuracy of identifying market turning points as well as precise targets. It is not just in its ability to outline where we are in the larger degree structures, and provide us with market context which is not available through any other methodology.

Finally, the goal of Elliott Wave analysis is to analyze sentiment, not participate in it!

Fibonacci Retracement Levels 

The Fibonacci ratios are derived from the Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, and so on. Here, each number is equal to the sum of the two preceding numbers. Fibonacci ratios are informed by mathematical relationships found in this formula. As a result, they produce the following ratios 23.6%, 38.2%, 50% 61.8%, 78.6%, 100%, and 161.8%.  

The key takeaways of Fibonacci Retracement Levels can be summarized as:^[10]

• Fibonacci retracement levels connect any two points that the trader views as relevant, typically a high point and a low point.
• The percentage levels provided are areas where the price could stall or reverse.
• The most commonly used ratios include 23.6%, 38.2%, 50%, 61.8%, and 78.6%.

These Fibonacci ratios and series have been controlling and limited the extent and duration of price trends, irrespective of wars, politics, production indices, the supply of money, general purchasing power, and other generally accepted methods of determining stock values.

Figure 2.  Labeling of self-similar fractal Elliott wave patterns (courtesy: [11])

Figure 3.  Elliott Wave—5 waves within a primary trend, and 3 waves within a corrective trend^[1]

Summary

If you watch video 1 (from 17:07 to 26:30), here are the gist of Elliott Wave analysis (as enhanced by Fibonacci Pinball methodology):

• There are 5 waves within a primary trend, and 3 waves within a corrective trend (see Figure 3)
• The 1st wave starts after a correction is completed
• 5 waves in an uptrend or downtrend looks exactly the same 
• 2nd and 4th waves take different shapes and sizes. Wave 2 pullback was fast and furious to the downside .  Wave 4 pullback will likely be meandering and take a long time.
• Rules of impulse waves^[12]
• Wave 2 may never move beyond the origin of wave 1 (i.e. retrace more than 100% of wave 1)
• Wave 4 may never enter the price territory of wave 1
• Wave 3 may never be the shortest wave
• Impulse waves always subdivide into 5 waves
• Waves 1, 3, and 5 are always 5 waves
• The percentage levels of Fibonacci ratios are areas where the price could stall (i.e., support level) or reverse (i.e., resistance level)
• But, Fibonacci retracement levels should not be relied on exclusively
• 3rd wave is the ideal wave to trade because it is the strongest and the most powerful of all waves
• Once we have waves i / ii in place, it makes trading the rest of waves iii / iv / v relatively easy to prognosticate in the impulse wave structure (referred to as Fibonacci Pinball by Avi)
• 3rd waves themselves have to be comprised of 5 sub-waves, which it helps us to determine how to trade this structure in relatively low risk manner
• Within wave iii (see Figure 3)
• Bottom → 1 normally reaches at 0.382 or 0.618 extension targets
• 1 → 2 normally pull back at 0.500 or 0.618 retracement levels
• 2 → 3 is the strongest move of all and usually reaches 1.000 or 1.236 extension targets 
• 3 → 4 is expected to pull back at 0.618 or 0.764 extension targets 
• If wave 3 reached 1.236 and the pullback broke below 0.764, this is an early indication that, about 70% of the time, the impulse wave up could ultimately fail.
• Ideal trading entry point is at label ii or label 2 within wave iii (see Figure 3)
• Ideal trading exit point is at label iii (e.g., 1.618 extension target)
• iii-iv wave pullback 
• After sub-wave 5 within wave iii reaches 1.382 or 1.618 extension targets, normally it would pullback to 1.000 level
• iv-v wave advance 
• Extension target would be either at 1.764 or 2.000 levels
• Self-similar fractal patterns
• In the direction of trend, waves i / iii / v are comprised of 5 sub-waves each and waves ii / iv are comprised  of 3 sub-waves each

Video 1.  How To Find The Major Turning Points In The Market (YouTube link)

References

1. How To Find The Major Turning Points In The Market with Avi Gilburt
2. Sentiment Speaks: How I Know If I Am Wrong About The Equity Market
3. https://seekingalpha.com/article/4198736-analysis-will-change-way-invest-forever-part-1
4. https://seekingalpha.com/article/4200678-analysis-will-change-way-invest-forever-part-2
5. https://seekingalpha.com/article/4202240-analysis-will-change-way-invest-forever-part-3
6. https://seekingalpha.com/article/4203856-analysis-will-change-way-invest-forever-part-4
7. https://seekingalpha.com/article/4210288-analysis-will-change-way-invest-forever-part-5
8. https://seekingalpha.com/article/4230400-analysis-will-change-way-invest-forever-part-6
9. This is Water
10. Fibonacci Retracement Levels Definition
11. Determining Wave Degree
12. Rules and Guidelines Applicable to All Motive and Corrective Waves