Think Pattern
Below we will go through several pattern examples. The objective is to
learn to think in terms of pattern position and what a market must do to
confirm or invalidate a particular pattern structure. Every potential pattern
position cannot be illustrated, but if you keep the basic pattern concepts
and guidelines in mind, you will be able to identify the potential pattern
position for most market situations.
Here is a quick review of what we are trying to accomplish with pattern
analysis.
The Three Pattern Questions
1. What is the most probable pattern position? Why? The answer to
this question may only be “impulsive” or “corrective.” The answer
may also be, “don’t know.”
2. What market activity will confirm the assumed pattern position?
What is the pattern guideline that is relevant?
3. What market activity will invalidate the assumed pattern position?
What is the pattern guideline that is relevant?
The Three Important Pattern Considerations
1. Be quick to admit when there is no discernable or relevant
pattern! Do not force an Elliott Wave count when there is no
count that meets the guidelines or a clearly defined five or three
wave structure.
2. If there is no discernable wave count, does the pattern appear
to be in an impulse or corrective structure?
3. As new data is made, the market will continually confirm or
invalidate the pattern position assumption. Trade the market,
not the forecast. Be quick to change your assumption of the
pattern position if the market activity invalidates the current
assumption.
What’s Next?
If a five-wave trend is complete as shown below, what is the minimum
pattern we should expect?
Regardless of how this five-wave pattern fits into the larger degree
pattern position, at least a three wave decline should be expected. The
minimum expectation is for a three-wave ABC correction. This may not
unfold but if pattern is to be useful, we must begun with a high-probability
assumption and let the market confirm or invalidate that assumption.
If this five-wave trend completed a larger degree five-wave trend, a
five-wave decline may follow but the minimum expectation would still be a
three-wave.
We always assume a correction will be a three-wave, ABC even
though it may take many shapes.
Trend or Counter-Trend?
What should we anticipate after the low in mid-March below – a countertrend
rally or an impulse trend eventually to a new high?
There is not enough data to give a high-probability answer. The decline
shown above is clearly an impulse trend. The position of that impulse
trend within the larger degree trend will help determine what next to
expect.
If the decline is a W.1, A or 3, we would expect a counter-trend rally
(W.2 or B or 4) followed by the continuation of the bear trend to a new low.
If the decline is a W.C, we would expect a continuation of the bull trend
to a new high.
If the decline is a W.5, we would expect a larger degree counter-trend
rally. The first rally would typically subdivide into five-waves since a W.A is
typically five-waves.
Whether the rally is a trend or a counter-trend, we would anticipate at
least a three-wave rally (ABC or 123). The position within the larger
degree trend will help to determine what to ultimately expect.
Read next >>> Count Backwards
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