The Elliott Wave Theory states that markets follow a repetitive rhythm consisting of a five-wave advance (decline) and a three-wave decline (advance), completing an eight-wave cycle. Of the five waves in the advancing (declining) portion of the cycle, waves 1, 3, 5 are rising (falling) waves, called impulse waves. Waves 2 and 4 move against the uptrend (downtrend) and are called corrective waves, because they correct waves 1 and 3. After the five-wave numbered advance (decline) is complete, a three-wave correction begins. The three corrective waves are identified by the letters A, B, C.
The Tom Joseph Elliott Wave study also plots the minor pivots, as well as a Profit Taking Index (PTI). The PTI compares Buying/Selling momentum in Wave three with the Buying/Selling momentum in Wave four. If the PTI in greater than 35, the market exhibits a greater tendency to initiate a fifth wave or a 2nd attempt phase. Conversely, if the Profit Taking Index is less than 35, the market generally fails to initiate a fifth wave or 2nd attempt phase.
Additionally, the study tries to project, through Fibonacci analysis, the range and timing of each of the next waves.
When a wave 4 is in progress, CQG will display 3 channels. Elliott wave theory, as interpreted in the Tom Joseph studies, postulates that if the wave four retracement holds above Channel 1, the odds are greater than 80% that a strong wave five rally will occur. If the wave four retracement holds above the second channel, the odds for a strong wave five rally drop to 60%. If the wave four retracement breaks the third channel, the odds of a new high in wave 5 are very low. If this does happen, the theory holds that the rally will be a slow and tedious process.
For further information on Elliott Wave Theory, consult Elliott Wave Principle by A.J. Frost and Robert Pretcher.
Elliott Wave Parameters
•Bar Count: The number of bars to be examined.
•Update: How often the study is updated in minutes.
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