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Impulses, Corrections, And An Explosive Rally For One Major Market
Today we are going back to the basics and reviewing the two modes of Elliott wave developement: the impulsive (or "motive") and corrective pattern. Learn to tell these two forms apart, and the rest is a "walk" in the technical "park."
Impulse: Travels in the same direction as the trend of one larger degree, and so encounters no "headwinds" during its developement. It is clean, clear, crisp and easy to identify. It always subdivides into five waves, all of which adhere to THREE main rules; they are:
- Wave 2 never moves beyond the start of wave 1
- Wave 3 is never the shortest among the three actionary waves (1, 3, and 5)
- Wave 4 never ends in the price territory of wave 1.
Correction: Travels against the trend of one larger degree, and so unfolds with a seeming struggle. They are generally choppy, complex, and harder to identify. While there are only two types of motive patterns (the impulse and diagonal triangle), there are 11 different variations of the corrective form.
To get a visual understanding of the two modes, Prechter and Frost's Elliott Wave Principle -- Key to Market Behavior provides this idealized drawing:
As for the final and most important difference between the two types of wave developement -- corrective patterns ARE contained by parallel trendlines, while impulse patterns bust through any such technically-drawn restraints.
Now that we have a handle on the two Elliott wave modes AND their corresponding values, let's take a look at the November 16 Daily Futures Junctures chart of a major commodity market. (some labels have been removed for this publication)
As you can see, prices have just performed two telling acts: Intermediate-degree wave (2) did not move beyond the start of wave (1). AND -- prices broke through the upside of a parallel trendline. BOTH of these signal the onset of an impulsive move. And not just any impulse: Intermediate wave (3) of one larger wave degree: Primary 3 (circled) -- a "third of a third."
In the world of Elliott wave analysis, a third-of-a-third wave is the Big Kahuna of all impulses. They are the most volatile points of strength in any wave sequence.