Following on from last week’s article we have a better appreciation for Elliott’s Wave analysis. Lets focus on the Waves 3,4 and 5 to get an idea of whether a trade may complete to Wave 5 or just become a failed Wave 4.
I want to focus on two “long” examples this week, as the market has been more bullish than bearish. However, in a “short” trade the same principles will hold true. The shares are BIL (Brambles) and RMD (Resmed). BIL has failed to move on from its Wave 4 base (known as a failed Wave 4) where RMD has shown a classic “Elliott Wave” completion to Wave 5.
Key determining criteria to take into account is the oscillator indicator combined with a trend channel. There are many channel tools that can be utilised, however and in these examples we will use the Standard Deviation Channel.
In the BIL example below we can see the Elliott Waves numbered 1 through to 5. The market has retraced back to 4, where we would expect a new base to form before the final rally in this cycle is attempted. At this point note how the price action is moving in relation to the channel. Ideally we would like to see movement to break out on the upside to confirm the view that Wave 5 will be formed. Note also the oscillator indicator and its position in relation to the zero axis. We are looking for the oscillator to retrace around 90% of the previous move but not to fall through zero as this shows that the trend may continue down, as it did in this example.
Chart 1
click chart for more detail Looking at RMD, this conforms to a classic Elliott cycle and completion. Wave 4 has formed a new base, the price action has moved quickly through the bands of the channel tool. Combine this with the oscillator indicator pulling up just past the zero axis, supports the view that Wave 5 will occur and the Elliott cycle will complete. This has been confirmed in the chart below.
Chart 2
click chart for more detail Building on the Elliott concepts can add some powerful tools to your trading. Understanding how the Waves can form is one thing, learning how to identify this particular occurrence is another. Like all things in the market, Elliott Theory provides a great deal of information and a course of study in its own right. I hope these brief explanations of some Elliott concepts will be of value to you in your trading
Until then good trading
Aaron Lynch