In forming more complex corrections, the basic corrective patterns may, and often do, combine to extend the corrective process. Most common is a doubling of the pattern, and less frequently, a tripling. These result in the following types of combinations:
1. Double Zigzags and Triple Zigzags (self-explanatory)
2. Double-Three: The components of a double-three include...
Flats-Flat
Flat-Triangle
Zigzag-Flat
Zigzag-Triangle
3. Triple-Three: The components of a triple-three include...
Flat-Flat-Flat
Flat-Flat-Triangle
Zigzag-Flat-Triangle
Zigzag-Flat-Flat
To help clarify the labeling when these combinations occur, Frost and Prechter devised the labels W, X and Y to identify the main sections of a double combination, and W, X, Y and Z for triple combinations.
Rules of Wave LabelingCorrectly labeling waves is at the heart of wave analysis. Incorrect labeling can prove very costly to a trader, and so it is important to observe the rules of labeling. Elliott established three simple rules that, if not observed, will invalidate a wave count:
Wave 3 can never be the shortest impulse wave.
Wave 2 can never exceed the start of Wave 1.
Wave 4 can never overlap Wave 1 (i.e., cross into the same price area)
In addition to these rules, there are guidelines that aid in labeling waves. They are not as inviolate as the rules, and they help in telling you what to look out for. Three of these guidelines include:
Alternation: If Wave 2 is a sharp correction, expect Wave 4 to be a sideways correction. Conversely, if Wave 2 is sideways, expect Wave 4 to be sharp. More often than not, Wave 4 is sideways, subdividing as either a flat or triangle. In corrections, if Wave A is a simple structure, expect Wave B to be more complex. Wave C may or may not be more complex relative to A.
Depth of Correction: Generally, following impulse wave sequences where Wave 3 is the extended wave (the most common scenario) the subsequent Wave A correction should terminate in the area of Wave 4.
In cases where Wave 5 is the extended wave, either Wave A alone, or the entire correction, will be sharp, and bottom in the area of a Wave 2 of lesser degree. We see an example in the Dow chart above. Note that Primary Wave A terminates right at the area of Minor Wave 2. Wave C may bottom here as well, or just as often in either the Wave 4 area from where the extension began, or it can also erase the entire impulsive rise, as also seen in the above chart of the Dow.
Wave Relationships: Two of the non-extended impulse waves (generally waves 1 & 5) will tend to be equivalent in length and time of formation, or will be related by a Fibonacci ratio (more on that in the next section). Waves 2 & 4 are also similarly related, as are Waves A & C.
There are other guidelines identified by Elliott, Frost and Prechter, and it is important to note that all rules and guidelines operate at all wave degrees, whether intraday or over longer time-spans.
Wave Labels & DegreesSince
all waves subdivide into smaller waves, there is a hierarchy that is used to label wave movement that covers everything from broad expanses of time, to hourly market movement. Elliott developed a labeling method that was slightly revised by Frost and Prechter in their 1978 book. Most important are the wave degrees under study, which include, in descending order:
Grand Supercycle
Supercycle
Cycle
Primary
Minor
Minute
Minuette
Subminuette
At the top of the pyramid are the family of Cycle waves, which can take decades to complete. Primary and Intermediate waves cover shorter periods of years and months. Minor waves and lower reflect daily and intraday market action. In describing a wave pattern, an Elliottician might say, for example, "the S&P is tracing out a Minor Wave 5 down within an Intermediate Wave (A)." What this would tell the analyst is that the subwaves of Intermediate Wave (A) are about to complete their sequence, and that an Intermediate Wave (B) up (a good, tradable market rally) will begin once (A) bottoms. A series of price targets for a bottom will normally be included in the analysis. Which leads us to the next section in our guide...
Intermediate
By Itme
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