I have a feeling a lot of our chart trading readers are going to become very familiar with this blog over the years. In this Guest Post, DV34 has provided readers with a fantastic reference on chart correction patterns. It's complete with DV's own easy to follow diagrams. You are invited to keep a copy for your own reference. I have
By DV 34
One of the great benefits of trading the markets is that you are continuously learning, and something that is not often talked about outside of Elliott wave theory is corrective structures, even within communities that trade corrections themselves
While I do not trade Elliott wave in a pure sense and do not use wave and sub wave counts; I do find the structures useful to at least get a high level road map of where we may be in the larger picture.
As all traders know, a trend is a sequence of higher highs and higher lows for an uptrend, and lower highs and lower lows for a down trend. What I am going to show below are the simplified structures behind the ‘higher lows’ in an uptrend and ‘lower highs’ in a downtrend
To start I think it is best to show the basic Elliot wave 8 swing structure, I have sketched all of the diagrams myself to keep it simple
Elliot Wave - Complete 8 Wave Cycle (1; 2; 3; 4; 5 + ABC corrective move)
Complete 8 wave cycle
Click to Enlarge
This forms the basic overall structure of an impulsive trend with corrective swings along the way followed by an ABC corrective move.
The corrective moves are the parts shown in red, and also the dotted red (ABC) move which hints at the fact that markets are fractal, meaning they replicate themselves on different scales i.e. these structures can be found on 1min charts up to yearly charts, and this structure shown above could be just the wave 1 and 2 of the above!
Basic Zigzag Patterns (ABC/ABCD or simply 3 swing corrections)
These are the building blocks of harmonic patterns - the first diagram below is basically the Gartley pattern
Flat Corrective Patterns (Flat, "Running" Flat and "Irregular" respectively)
Flat corrective patterns
The irregular flat can lead onto other corrective structures such as expanding triangles and double/ triple threes as shown below
Triangular corrective patterns
Triangular corrective patterns
Double Three Patterns
(2x corrections noted 1&2, joined with one 3 wave swing between the basic structures)Double Three Patterns
Triple Three Patterns (3x corrections noted 1, 2 & 3; joined with 3 wave swings between the basic corrective patterns
Triple three patterns
Double and triple threes are very powerful patterns, correcting over significant amounts of time, usually they form the base of a sustained and powerful rally as they correct both time AND price. If you see one of these under the start of a move be careful trying to fade it!!
One of the most difficult patterns to trade in my experience is the irregular flat shown below, mainly because it violates the ‘trend’ (HH + HL) structures and also violate harmonic patterns that have wave C’s ending above or equal to point A
These types of patterns can easily morph into more complex corrections such as an expanding triangle or even more trying double or triple threes shown above
A good example of a macro ‘Irregular flat’ would be the 2000 tech boom high to the March 2009 GFC low in the Dow Jones Industrial Average or S&P500 indices, Irregular flats can be violent and shake out a lot of traders making it difficult to pinpoint the ‘V’ reversal near the bottom unless you use other methods or historical reference levelsIrregular flat patterns
In my next article I will try to demonstrate some of these corrective patterns on some very well-known markets using a simple zigzag indicator which simply draws lines between swing highs and lows (with no price bars) so you can see how these structures reflect themselves in current and historical markets
Hope this helps and all the best
- As a disclaimer and also an apology to elliott wave technicians there is a whole lot more to these structures in terms of internal structures, labelling and fibonacci relationships etc. For the purposes of this overview my focus has been on trying to keep it simple.