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Wave Extensions Explained

 

 

An extension is a prolongation beyond the usual boundaries. It requires a dynamic force to push up or down the price-action beyond the regular price target. It is a unique event that extends either the time or magnitude (or both) of an ordinary event. Evidently, something changes; and new factors are in action. The Elliott Wave extensions are not different.

 

Image = "Graph that is depicting the third Elliott wave extensions" 

   

Elliott wave extensions factors


There are various factors that engender Elliott wave extensions.

Strong fundamentals or declining fundamentals are the primary causes of the Elliott wave extensions. For example, a company delivers above market expectation earnings results or an asset exceeds the analysts forecast during an impulse wave. Conversely, bearish wave extensions are mainly due worst than anticipated revenues. In this instance, a firm under-performs its sector or fails to meet the minimum market expectation.


The second element is the market sentiment. A market can become feverishly bullish or bearish. On those occasions, the first, third and fifth waves will extend. For example from 2007 and 2008, the stock market was feverishly bearish but became extremely bullish from 2009 to 2012. Indeed, bullish stocks in an impulse wave extend during 2009 and 2012. On the hands, those in bearish motives waves extends beyond the usual boundaries or key price targets from 2007 to 2008.


The third factor that causes waves extensions is the sector to which a stock or financial instrument belongs.

Indeed, components of a bullish or bearish sector are likely to widen during their motive wave if the sector is extremely bullish or bearish.   Author = George Beaulieu founder of 24elliottwaves.com

Consequently, a bearish trader will forcefully close his position when he or she is mistakenly trading a bearish individual security that belongs to a very bullish sector. Or a bullish trader may be trapped when he or she is buying a bullish stock that belongs to a bearish sector. It is compulsory that market participants apply the trading triangle in all their decision to avoid those unexpected changes.

A bearish stock that belongs to a strong sector can benefit from the industry and quickly become bullish and vice versa.

Undoubtedly, the strength or impotence of the industry will affect its components.

Occasionally, during the fifth bullish Elliott Wave, a trader will forecast the end of the bullish motive wave.

However, to the surprise of everyone, the fifth wave will extend due to the sector's strength. A similar wave extension is also possible during the fifth bearish wave if the sector is very bearish.


Another wave extensions factor is the influence of a market indicator or leader. For example Apple (NASDAQ-100 index leader) can easily cause another NASDAQ-100 component' first, third or fifth wave extensions when Apple stock becomes very bullish. Similarly, gold (a market indicator) may indirectly create the Australian-Dollar/USDollar currency pair's wave extensions.

By the same token, crude oil (a market indicator) can influence the Euro-Dollar's wave extensions.

 

 

 

Wave Extensions Theory


During a strong trend, either the first, third and fifth waves can extend. Quite often the third Elliott wave extends.

Sometimes, both the first and third waves extend if the asset becomes oversold during a bullish market. In this case, one will expect a standard fifth Elliott wave.  Furthermore, when the third wave exhibits wave extensions and is prolonged both in time and magnitude (beyond the 261.8% Fib extensions) the fifth wave will not extend.

In this case, if the first wave did not spread, there may be equality between the first and fifth waves.


The most predictable wave extension is the fifth wave extension. In a dynamic bullish environment, stocks or financial instruments with strong financials are susceptible to extend their fifth waves.


Know more about the fifth wave extension here.


External Elliott waves extensions factors


Those factors are less predictable, but one can handle them.

Case One

A stock or currency pair is at target price level during the fifth bullish wave. In reality, most traders will begin to sell the asset due to the technical analysis.  However, if buy orders are at a better resistance level above the target price, they will attract the price. That attraction will cause an Elliott wave extension.


Case Two

A commodity or a stock index reaches the target price at the end of the fifth bearish wave. Big sell orders are at the first support level below the target price. If the market fills those orders, there will be an extension.

Note the wave extensions, in this case, may be fast and volatile as the first bullish reversal traders are forced to close their trades. Indeed, their activities provide the fuel for the unexpected wave extensions.


Conclusion

The Elliott Wave extensions are fantastic price-actions that can cause significant losses as well as profit. They are easily predictable and go on during the motive waves. To be on the right side of the market, traders and investors ought to grasp the factors that cause wave extensions.

In most cases, financial market players ignore those factors and waste their time with the divergence trading signals before the extensions.  Certainly, one will be able to forecast and trade the wave extensions if one knows when, where and how they form.  The key is the understanding of wave extensions factors.

 

 

 

 

 

 

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