day or swing traders and investors. To answer pertinent questions such as:
a/ why the fourth Elliott wave should not overlap the first?
b/ why the second Elliott wave should not cancel the first?
c/ why the third Elliott wave should not be the shortest?
We aim to clarify these misunderstandings about the wave principle, and
Elliott wave principle: Interpretation
1/ The Elliott fourth wave should not overlap the first
If the fourth bullish Elliott wave overlaps the first, this shows that the bullish
momentum has significantly decreased. Really, as the third wave is underway,
it is essential that the bullish progress surpass the high of the first Elliott
wave. Undoubtedly, a corrective wave is oftentimes flat or shallow after a
powerful bullish or bearish third wave Elliott rise.
Hence, one would anticipate a depthless fourth wave after a vibrant third wave.
It is more critical for the fourth wave not to retrace further than 50% of each
third or even overlap the first Elliott wave. In reality, one can conclude that a
trend or motive wave fails if the fourth Elliott wave overlaps the first.
View the chart
2/ The second wave should not cancel the first wave
If the second bullish wave deletes the first, it implies that the first buyers do
not believe in the trend or prevailing financials may be depreciating. One may
as well deduct that core clients have settled their original positions or preceding
bearish traders are still trading.
View the chart
Image = Microsoft stock monthly chart
Image explanation: After a consolidation that lasted ten years
(2002-2012), Microsoft stock (MSFT) have started a new trend
in 2013. The first Elliott wave is the green line on the chart.
Indeed, if the trend is to continue, the second wave should not
cancel the first. The price must not fall to the 27.00 level
(green spot). Whenever it does, one will restart the wave
If the second wave removes the first Elliott wave, it becomes imperative for
medium and long term investors to examine the fundamentals together with
market environment. In these circumstances, one will restart the Elliott wave
Ultimately, it is quintessential for day or swing traders and investors to spot
that if the first wave extends ( a leading diagonal); the second Elliott wave
is likely to be a zigzag Elliott wave pattern that can retrace up to 78.2% of the
first wave. The deeper the second Elliott wave retraces the first; the less likely
is a strong third wave. It is, therefore, vital that the second wave does not erase
the first wave's gains.
3/ The third Elliott wave should not be the shortest.
In other words, the third Elliott wave should not be less than the first and fifth
Similarly to the first and fifth waves, the third Elliott wave is also a motive
wave therefore, it is extendable.
Note that (during a bullish trend or cycle) the first call to buy occurs at the
close of the secondary wave (after the asset exhibits the first higher low).
Naturally, buyers who acquire the asset at the completion of the second wave
will look forward to the asset rising at least to the limit where there is equality
with the first Elliott wave.
View the chart
Image = Amgen Inc. stock monthly chart
Image illustration: The third Elliott wave (green line) is evidently shorter
than the extended first wave (pink line). In this instance, it is clear that
the fifth wave ( underway or still to come) will be shorter than the third
(because the third Elliott wave should not be the shortest).
Moreover, the fifth Elliott wave will not reach the equality point
(red spot at 216.00) with the third wave.
Besides, a higher low after a higher high means a surge in bullish momentum.
However, if the asset fails to reach the same intensity as in the first Elliott wave
(length or magnitude of wave three is inferior to wave one), it signals a bullish
capitulation or a swell in bearish sentiment. To evade extra bearish demand or
sentiment, it is unavoidable that the third Elliott wave reaches or surpasses the
equality point between the first and third waves.
One should agree that if the third wave is shorter-lived than the first, bearish
dealers will set bearish orders. Nonetheless, it does not imply that the third
Elliott wave can not be smaller than the first.
Note that whenever there is no first Elliott wave extension, plus the third
wave is shorter than the first, there is a high probability that the fourth
Elliott wave will overlap the first Elliott wave due to the rush in the bearish
sentiment. The latter will conflict with the wave principle.
Here are various scenarios:
1/ first Elliott wave does extend, and the third wave is shorter than the first.
Evidently, the trend will proceed provided that the fundamentals are solid
also the fourth Elliott wave did not overlap the first.
In this instance, the next call to buy is the following higher low at the
conclusion of the fourth Elliott wave.
Indeed, the fact that the third wave is shorter than the first symbolizes that
there is less demand or enthusiasm to acquire the asset as there was at the
origin of the first wave.
Consequently, market participants who buy the asset at the end of the fourth
Elliott wave will set their initial target at the limit where there is equality to
the third wave. If the third wave were longer than the first, those buyers
would have set their target at the point of balance between the first and fifth
* Key factors that will influence the fifth wave
The market sentiment degenerates since the start of the first wave.
As a result, ( the current market sentiment that is less bullish than it was in
the first and third waves) the fifth wave will not overshoot the target price
(point of equality between the fifth and third wave). Therefore, the third
wave will not be the shortest wave.
Note that in this instance, the fifth Elliot wave can exclusively be either
less or equal to the third wave.
2/ There is equality between the first and third wave.
If the first Elliott wave is equivalent to third wave, then the first buyers at the
start of the first wave attain their minimum target at the apex of equality between
the first and third Elliott waves. Notice that bullish financial market players may
grow a little it more cautious at any time a financial asset fall short to reach the
usual conservative target. Consequently, in this case, there is no ground for
concern since the minimum target was reached.
For those reasons, the fifth wave is likely to touch or exceed the subsequent target
(point of equality between the first and fifth waves).
It is a common trading misconception to conclude that a financial security
will without fail equal or surpass a price target. It may or not.
The fifth Elliott wave, in this case, can be shorter, longer or equal to the
first wave. Consequently, the third wave will not be the tiniest wave as it
is equal to the first Elliot wave.
Warning: the fifth Elliott wave is apt to extend if neither the first and third
The first and the fifth wave tend towards equality if the third wave extends.
It makes sense, but it is more an interesting observation.
Generally, Elliott wave practitioners apply the length or magnitude of the first
wave as the scaling pole (to set price a target) throughout the motive wave.