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Mastering Sharp Corrections
















Image = Sharp Correction Chart


The phenomenon of a sharp correction is unique in the financial markets. An Elliott wave sharp correction is often unexpected to many market participants especially at the top of a strong bullish trend.
Indeed, Elliott sharp corrections are volatile, deep in nature as many traders and investors precipitate to reach the exit door.

A financial market sharp correction can easily erase fifty percent of prior gain within a short period of time (within days).
Market sharp corrections can generate substantial losses or gains, and change the landscape of the financial markets.  For example, numerous hedge funds will be forced to close their positions if they accumulate large losses at the time of the sharp corrective wave. Also central banks may have to change their current monetary policy or review current policies.
Sharp corrections also generate social unrest when they affect pensions funds that are investing workers pensions in the financial markets.


Furthermore, sharp corrections also encourage
speculative trading or investing activities. For instance, if a stock or another bullish financial instrument sharply falls (in one go), many speculators often buy it as they expect a bounce before the second phase of the sharp correction.  Sometimes, those speculative buyers lose substantial amount of money because there was no bounce as expected, but the asset continued to decline without any support. Other times, those speculative buyers are well rewarded more than they expect as the market quickly correct the sharp distortion.
More cautious market participants often sell after the bounce as they expect the decline to continue.
It does not matter whether one is a more cautious or adventurous financial markets player, one is exposing oneself to an expensive risk any time one is dealing with an Elliott sharp correction.

The Evolution Of Elliott Sharp Corrections

Years ago, one can easily trade the sharp correction pattern because most market players were doing almost the same thing due to a common sharp correction pattern.
That pattern is ABC corrective pattern where the A and C components are sharp corrections and B component is a bounce. Consequently, after the initial sharp correction (A component), everyone goes in and buys the asset then the price bounces up to the sweet spot Fibonacci trading zone before sharply dropping one more time to form C component. As the second sharp move (C component) is in place, everyone will buy (buy and hold) the asset at the early stages of the new bullish trend. Obviously, the opposite is also true during the subsequent sharp corrections of the prior bearish trend.

Nowadays, that distinctive sharp correction pattern is becoming more complex than before. One is more likely to come across WXY Elliott wave where W is ABC (zigzag pattern with A and C being sharp corrections).
What is happening more and more is a complex correction after the initial ABC instead of the new trend. Therefore, one will usually find an Elliott wave cycle that is formed of a
trending phase plus a complex correction WXY pattern instead of the normal trending phase plus a regular ABC or zigzag Elliott wave pattern.

Sharpness Of Sharp Corrections

An Elliott sharp correction is sharp because it is fast, volatile and does not reveal its internal waves. In most cases, one can not isolate the internal waves of a sharp correction. An orderly sharp correction is subdivided into two phases A and C with the bounce or pull back ( B wave) in the middle. More volatile sharp corrections are vertical price moves without the bounce or pull-back in the middle. Sometimes, the bounce or pull back is a total (100%) Fibonacci retracement of the sharp correction. In other words, after the sharp correction, the price quickly recovers all prior losses. It goes down from point O to E and quickly rallies up from E to point O.

Hybrid Sharp Correction

What I like to call hybrid sharp corrections are the Elliott corrections that are formed of a sharp correction, bounce or rally and a normal C wave with distinctive internal waves. Another example of hybrid sharp correction regroups A wave that is a normal price move (usually with distinctive internal waves) plus a bounce or rally and the C wave sharp correction. Hybrid sharp corrections are zigzag corrections where either A or C waves are sharp corrections ( but not both A and C).

Causes Or Factors Of Sharp Corrections

The number one root cause of the most devastating sharp corrections is the financial market distortions.
I would recommend to those who are not ready to pay attention to what I am about to share to take a pause so they do not miss out.

The enemy of all market players is the market distortion. Indeed, the worst market distortions are those that built up bit by bit over the years when the market players disregard all precursors signs. During a distorted market, many financial instruments have inflated or depressed valuations. For example one may pay hundred dollars instead fifty for an asset price that has been inflated. On the other hand, a highly valuable portfolio may lose substantial value (depressed) for no fundamental reasons. In this instance, an asset of hundred dollars become fifty or less without a valid justification. Smart investors who identify those distortions can rack in immense profit. Indeed the market distortions that are prolonged (talking about the duration) will ultimately cause a sharp Elliott wave correction.

Apart from the market distortions, geopolitical events, natural catastrophes, crazy trading algorithms, unexpected bullish or bearish earning news, sudden central banks change of monetary policies, extensive market manipulations, boom and bust of major companies especially market leaders, financial markets uncertainties, acute fear or greed and high impact economic can cause sharp Elliott wave corrections.

Conclusion

Elliott wave traders are fluent in trading the four essential corrective wave patterns (flat, zigzag, ABCDE triangles and Elliott wave combinations). They are familiar with them, but most neglect the sharp correction price structures.
Truly, sharp corrections are unique because they can instantly turn a profitable trading or investing portfolio into a losing one.
For those reason, it is vital that one learns how to become fluent in trading Elliott wave sharp corrections. Though, they are risky or volatile, one can also harvest gigantic gains within days if one knows how to trade the different types of sharp corrections.