How to define pattern position - Impulsive or corrective?
Once bonds traded below the 99’31 swing low, we could assume the
April 15 high completed some section of the trend. If we count backwards
from the April 15 high, there is a clear five-wave impulse from the March
28 low. The ABC from the March 19 high to the March 28 low meets all of
the guidelines for an ABC. Waves A and C are clearly impulsive as they
should be. Wave-B is an ABC itself.
What could bonds do to signal if the April 15 high is a Wave 3 or a
Wave C? A Wave-4 should not trade into the range of the W.1. If bonds
traded below 99’16, the potential W.1 high, we would assume April 15 is a
W.C high. If this were to occur, bonds may still trade to a new high but the
continued rally would have to be considered a complex correction, not an impulse trend. Waves overlap in corrections, not in impulse trends except
in a W.5 diagonal.
So far, we have not even considered if March 15 is a Wave-C or W.1:3
low. We have only considered the pattern possibilities of the data from the
March 15 low. If we were confident the March 15 low was a W.1:3, we
would consider the April 15 high had probably completed an ABC
correction (W.2:3) since bonds took out the probable W.4:C low.
Let’s add more data. The chart below is the 60-minute data through
this morning. I haven’t added any labels. What do you think is the
probable pattern position?
Should we now consider the rally from the March 15 low an impulse
trend or correction based solely on the pattern?
It is clearly an impulse trend. Bonds did not trade into the range of
Wave-1 and the rally from the April 18 low is clearly impulsive which
should be the Wave-5. The Wave-5 appears to have clearly subdivided
into five-waves which is typical of a Wave-5.
A trade below the W.4:5 low at 101’23 signals the W.5:5 high should
be complete.
What would we anticipated once the W.5 high is complete? At a
minimum, a correction that is greater in time and price than any of the
corrections within the five-wave trend.
Another important question would be – how does the five-wave
impulse trend from the March 15 low to the May high fit into the larger
pattern/trend position? We will consider that in the next tutorial.
For now, the most important lesson from a pattern perspective is we
have identified the most probable pattern and its alternative as the market
progressed and have used pattern to identify the signal that will indicate
the end of the trend. From a trading perspective, that is the critical
information.
Lessons Learned
The pattern position is not always clearly defined. Even when it is not, we
can usually identify the market activity that will confirm or invalidate a
potential position. We can also look to the larger or smaller degree to help
identify the probable position. It is important to be sure that each of the
sub-divisions of the pattern meet the basic Elliott Wave rules and
guidelines described in lesson one before we consider assume to have a
confident opinion of the pattern/trend position.
Read next >>> Practical Elliott Wave Trading Strategies Part 3
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