Basics Gorman Wave

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The Basics of theWave Principle

Presented by Wayne Gorman, Senior Tutorial Instructor

Elliott Wave International

P.O. Box 1618, Gainesville, GA 30503 USA

800-336-1618 or 770-536-0309

Fax 770-536-2514

www.elliottwave.com

2006 Elliott Wave International

The e-learning Series for Traders


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1.00 Introduction Ralph Nelson Elliotts Discovery

2.00 Motive Waves3.00 Corrective Waves

4.00 Rules

5.00 Guidelines6.00 Wave Personalities

7.00 Fibonacci Relationships

8.00 Summary

The Basics of the Wave Principle

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Financial Market Behavior Characteristics

Emotional (Unconscious)

Subjective

Impulsive

Ignorance and Uncertainty

Herding

Values Cannot Revert To Anything

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The Wave Principle

Financial Markets are Patterned

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Ralph Nelson Elliott

(1871 1948)

Crowd behavior trends and reverses in recognizable patterns,that he called waves.

These structures link together to form larger versions of thesame patterns and how those, in turn, become the buildingblocks for patterns of the next larger size and so on.

In 1938, he coined this phenomenon The Wave Principle. Natures Law The Secret of the Universe

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1.05


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1.07


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1.09


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A More Realistic Wave Depiction

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1 2 3

4 5 6

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65 7

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Mankinds progress (popularly measured by

stock market valuation) is not a straight line,

random or cyclical.

Growth and thereby social systems are moving in

a pattern consisting of five waves up and threewaves down.

This pattern reflects the alternation of growth and

non-growth or decline.

The Wave Principle

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Predict Market Direction

Identify turning Points

Provide Guidance for Entering and Exiting Positions

The Wave Principle

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2.00


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MOTIVE WAVES

Key Characteristics

Five-wave structures, numbered 1-5 In the direction of the main trend of one larger degree Wave 2 cannot retrace more than 100% of wave 1

Wave 3 can never be the shortest and is often thelongest

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MOTIVE WAVES

Five-Wave Structures

Impulse

1. Extensions

2. Truncations

Diagonal Triangles

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IMPULSE WAVES

Key Characteristics

Wave 4 never enters the price territory of wave 1. Actionary waves 1, 3 and 5 are motive waves. Wave 3 is always an impulse wave.

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2.08


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EXTENSIONS

Key Characteristics

Elongated impulse wave Appears in either wave 1, 3 or 5

Often seen in wave 3 for the stock market Often seen in wave 5 in commodities

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2.10


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2.11


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2.12


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2.13


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2.14


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TRUNCATIONS

Key Characteristics

Wave 5 does not exceed the end of wave 3 Contains necessary five subwaves

Often occurs after a strong third wave

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DIAGONAL TRIANGLES

Key Characteristics

Wave 4 almost always moves into the priceterritory of wave 1 Waves 1, 3 and 5 are composed of three

subwaves, not five

Found at termination points of larger pattern,indicating exhaustion of larger pattern

Normally has wedge shape within twoconverging lines

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Diagonal Triangles

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2.21


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SUMMARY

The Wave Principle = Graphic of Mass Psychology

Motive Waves = 5 Wave Structures, Main Trend of One Larger Degree

Types of Motive Waves = Impulse, Diagonal Triangle

Impulse:Waves 1, 3, 5 = 5 Impulse Subwaves

(Extensions, Truncations)

Wave 4 Price Territory of Wave 1

Diagonal Triangle: Waves 1, 3, 5 = 3 Subwaves

Wave 4 = Price Territory of Wave 1

Signal = Imminent Major Trend Reversal

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3.00


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Characteristics of Corrective Waves

Zigzag

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Flat

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Triangle

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Horizontal Triangles


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Horizontal Triangles

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Barrier Triangles

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Running Triangles

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3.11


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3.12

Ch t i ti f C ti W


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3.13


Combination

Combination


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3.14

Combination


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3.17

Corrective Waves Summary


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Corrective Waves Summary

A B C D E Shape Position

Zigzag 5 3 5 Sharp Wave 2

Flat 3 3 5 Sideways Wave 4

Triangle 3 3 3 3 3 Sideways Wave 4

Combination X wave Sideways Wave 4

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Rules


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Rules

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Rules


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Rules

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Rules


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This five-wave move

cannot be the start of

a new trend. It can bewave C of a

corrective pattern.

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Rules


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What might this be?

Significant Bottom

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Rules


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Wave 3 is never the shortest of

waves 1, 3 and 5. This could be

part of a wave 3 extension.

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Rules


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What might this be?

Significant Bottom

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Rules


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Wave 4 does not overlap the price territory

of wave 1. This could be the start of a 3rdwave extension or an A-B-C correction.

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Guidelines


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Equality Alternation

Depth Channeling

Throw-Over Volume Post-Triangle Thrust

Measurement

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Guidelines


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Wave Equality

Two of the motive waves in a five-wavesequence will tend toward equality in time andmagnitude.

This is generally true of the two non-extendedwaves.

For example, if wave 3 is extended then waves1 and 5 will tend toward equality.

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Equality


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Equality


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5.03

Guidelines


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Alternation

Within Impulse Waves

If wave 2 is a sharp correction, expect wave 4to be a sideways correction, and vice versa. Sharp corrections never include a new price

extreme. Example: Zigzags

Sideways corrections usually include a newprice extreme. Examples: Flats, Triangles, and

Combinations Diagonal triangles do not display alternation in

subwaves 2 and 4.

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Alternation within Impulse Waves


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Guidelines


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Alternation

Within Corrective Waves

If a correction begins with a flat a-b-c structurefor wave A, then expect a zigzag a-b-c

structure for wave B, and vice versa.

If a large correction begins with a simple a-b-czigzag for wave A, wave B will stretch out into a

more complex a-b-c zigzag.

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Guidelines


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Alternation within Corrective Waves

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Guidelines


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Guidelines

D th f C ti W


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Depth of Corrective Waves

Corrections, especially when they are fourth

waves, tend to register their maximum

retracement within the span of travel of the

previous fourth wave of one lesser degree andmost commonly near its terminus.

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5.19

Guidelines

Channeling


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Channeling

A parallel trend channel typically marks the

upper and lower boundaries of impulse waves

and zigzag corrective waves.

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Guidelines

Channeling in Impulse Waves


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Channeling in Corrective Waves


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5.31

Guidelines

Throw-Over


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Throw-Over


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5.33

Guidelines Volume

Waves < Primary Degree


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Normally, 3rd wave volume > 5th wave volume

5th wave volume > 3rd wave volume = 5th wave extension

Waves > Primary Degree

Higher volume in 5th waves

All-time high volume at terminal points in bull markets

Volume often spikes briefly at the throw-over point of aparallel trend channel line or a diagonal triangle resistance

line. Volume contracts in corrective waves.

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Volume


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Post-Triangle Thrust Measurement


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5.38

Summary

Two motive waves in a five wave sequence willtend toward equality.


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tend toward equality.

If the second wave is sharp, then the fourth wave isusually sideways, and vice versa.

Corrective waves usually end in the span of theprevious fourth wave of one lesser degree.

Impulse waves tend to be bounded by a channelcomposed of two parallel lines.

A throw-over/throw-under occurs when wave 5terminates beyond the trend channel.

The post-triangle thrust measurement estimatesprice target for the next wave in the pattern of one

larger degree.

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Wave Personality


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6.00

Wave Personality


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6.01

Fibonacci Relationships In Financial Markets


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The Golden Ratio

PHI

.618 or 1.618

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Golden Ratio, PHI,


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7.01

Golden Ratio, PHI,


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Retracements


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7.04

Retracements


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7.05

Retracements


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7.06

Retracements


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Retracements


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Multiples in Impulse Waves


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Net of waves 1 through 3

times .382 = percent

movement of wave 5

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Multiples within Corrective Waves Zigzags


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Fibonacci Time Relationships


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Fibonacci Time Relationships


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Summary

The Fibonacci Ratio (), an irrational number approximating .618,known as the Golden Ratio, is found in nature, human biology,human thought, and aggregate human behavior such as the stock


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g , gg g

market.

The Wave Principle is a robust fractal governed by Fibonaccimathematics. Sharp wave corrections tend to retrace 61.8% or 50% of the

previous wave.

Sideways corrections tend to retrace 38.2% of the previous wave. Subdivisions of impulse waves tend to be related by Fibonacci

numbers .618, 1.0, 1.618 and 2.618.

Subdivisions of corrective waves tend to be related by Fibonaccinumbers .382, .618, 1.0 and 1.618.

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8.01

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4 5 6

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8.04

Rules


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Equality


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Throw-Over


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Volume


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Post-Triangle Thrust Measurement


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Fibonacci Relationships In Financial Markets


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The Golden Ratio

PHI

.618 or 1.618

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Retracements


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Elliott Wave International


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770-536-0309 or 800-336-1618

www.elliottwave.com

Basics Gorman Wave

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