Elliott Wave Principle
Elementary Concepts, Wave Patterns, and Practice Exercises
Constance Brown, CMT
Chapter 2 offers you a basic start with the Elliott Wave
Principle. The quizzes have been removed and the last
section of the chapter on Termination and Leading Diagonal
Triangles. If you would like to learn more please visit
Amazon or your local book store. Hint: The hardcopy is
recommended by other readers.
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2012 by Constance Brown. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication
Brown, Constance M.
Mastering elliott wave principle : elementary concepts,
wave patterns, and practice exercises / Constance Brown.
Chapter 2: The Elliott Patterns That Describe Trending
Now we begin to discuss the individual puzzle pieces that
the 14 Elliott Wave Principle patterns.
Every market move can be described using just these
puzzle pieces. You will be given a cheat sheet with all
the patterns in Chapter 4 to use as flash cards at your
computer or to help with the study quizzes in this book.
People struggle with stick drawing representations of
patterns. They seem to understand until they are given
a bar chart. Then it all looks different to them and a
blank stare appears on their face. I have seen this occur
so often that I plan to try a different approach. Do not
get hung up with memorization of the components like 5-3-5.
That will come later. What I want you to learn is the
feel of a specific pattern. That way you will recognize
it more easily in different chart scenarios and when market
character changes. If we look at patterns in many different
ways, it is my goal to help you gain a better foundation
so we can build upon these correct basics in the higher
It is of paramount importance you truly understand that
price swings and Elliott Waves are not the same thing.
Everyone begins with counting price swings since these
are the easiest to understand, but the final result is
disastrous. Why? You learn to ignore the internal components
of a price swing and overlook the rules.
Impulse Waves Create Market
Trends Figure 2.1
A Five-Wave Pattern Source: Aerodynamic Investments Inc.,
Impulse waves are strong trending price moves. Figure
2.1 is a weekly chart of a stock displaying a strong bullish
trend. I have drawn three boxes. The boxes help to focus
this discussion in several ways. The first wave up in
the larger rally develops throughout the first box. We
label waves when they are finished at the end of the wave.
Not in the middle. Not somewhere near the side of the
wave, but by being as precise as possible we label a wave
just above the price high or under the price low that
completes the wave. It is not always possible, but close
enough will never do at any time with this analytic methodology.
There is a lot to learn. Be patient with yourself. It
takes time and practice. One of the problems for people
is when they have to switch between different chart styles.
Patterns easily identified in line charts do not transfer
with the same confidence as working with bar charts. Therefore
this chapter has lots of examples to get you on the right
Figure 2.1 shows the data at the top right corner of
box 1 ends wave 1 up. Notice the shape of this box. It
is close to square in shape. The internals within box
1 can be subdivided into a smaller unit of five waves.
In fact, box 1 must subdivide in such a manner to create
an impulse wave that will build the larger trend. As this
is your first chart, we'll stay focused for the moment
on the larger trend through the chart.
After box 1 is complete there is a correction that interrupts
the forward and upward movement of the trend. The counter-trend
move is not inside a box.
We then see the start of the next leg up from where the
correction ends. The top of the box is marked wave 3.
The box is a rectangle that is narrow and tall. Wave 3
wasted little time to travel a distance greater than was
gained within box 1. The height and width of the boxes
make for an easy comparison between waves 1 and 3.
The internal building blocks within box 3 can also be
subdivided into a subset of five smaller waves. Again,
it is worth stating it must breakdown into five-waves
in order for the box to be a complete unit that can be
identified as wave 3.
From the top of wave 3 we see an immediate corrective
decline. The bottom of the correction is marked wave 4.
A third impulse wave then begins creating the last box
containing wave 5. Once again, the internals in box 5
must subdivide into its own complete unit of five waves.
The last box containing subdivisions of five waves is
the toughest for a beginner. Wait until we have discussed
a few more illustrations.
What you need to know from this chart is that the larger
picture of a strong bullish trend is created from five
waves. Waves 1, 3, and 5, or in this figure boxes 1, 3,
and 5, are all examples of impulse waves. They build from
each other and contribute to the larger trend. When interruptions
occur to the trending market, there are two intervals
of corrective waves. They move in the opposite direction
of the larger trend. They also have a few rules to follow
to allow them to stay within the same family of trending
waves. Notice the bottom of the fourth wave. It starts
the rally that defines wave 5 up. The end of the fourth
wave is not allowed to decline so far down that it enters
the range of the first box. When there is an overlap we
immediately know something important about the trend that
is forming. That will be discussed later in Figures 2.5
Figure 2.2 Targets in the
Previous Fourth Wave
Source: Aerodynamic Investments
It is impossible to discuss impulse waves alone without
some mention of the structures that connect them. When
one impulse wave ends, where does the correction go to
that follows? Is there any consistency to where the counter-trend
move will target? Yes, there is a general guideline you
can consider because it happens so often.
There are now two gray boxes in Figure 2.2. This is the
same chart data I used to highlight impulse waves 1, 3,
and 5. Now waves 2 and 4 are in small gray boxes. The
labels for waves 2 and 4 are at the bottom of their boxes
because we mark their endings only.
The price high marked the end of the completed picture
of a five-wave rally. Notice the decline that followed.
The very last swing down falls into a box that overlaps
the y-axis on the right side. Look to the left and compare
the shaded box that became wave 4 down to the clear box
on the price axis on the right. The decline from the market
high to the low has entered the far right box drawn to
simulate the location of wave 4 on the left. When you
complete five waves the correction often targets the vicinity
of the previous fourth wave (of one lesser degree). It
just identifies a target range. Look to the left of wave
4. There is a clear box within the developing move to
its left that became wave 3 up. The clear box is the smaller
fourth wave within the developing five-wave unit that
defined the building blocks within wave 3.
A similar reaction develops for the correction that becomes
wave 2. The gray box that contains wave 2 falls into the
range boxed in within the first rally. The clear box contains
a small fourth wave that helped to develop the unit we
called wave 1. Wave 2 found support and bottomed in the
general range of a previous fourth wave. Are there more
accurate ways to identify the target? Yes. I favor Fibonacci
analysis as one method. The steps I follow create target
zones where multiple Fibonacci ratios cluster together.
But I know the most likely target zone will fall within
the range of a previous fourth wave when the larger trend
is incomplete. Therefore understanding that markets track
to the range of a previous fourth wave is added guidance
for any price projection method you favor.
Figure 2.3 Subdividing Internal
Source: Aerodynamic Investments
Inc., Trading Seminar
The last discussion put great weight on the internal
composition of impulse waves. They must subdivide into
their own five-wave patterns. In Figure 2.3 you will begin
to see how smaller internal structures form. The chart
is weekly data of a real market that will remain unidentified.
It does not matter if the chart was a bar chart with semi-annual
data or 60-minute data. However, the difference is how
many more opportunities you have to examine the internals
with greater detail. To drop down in time horizon is like
rotating a new eyepiece and lens of higher magnification
on a microscope. People who see someone change time horizons
may not understand that you are not looking for something
different to support your opinion that is subjective.
When the waves are magnified and studied in a shorter
time interval it offers a way to examine the patterns
to ensure they meet a very stringent series of tests.
Should an internal pattern fail any one of the tests;
the box method I used to show a completed five-wave structure
could not be drawn.
Figure 2.3 shows the first box contains the wave 1.
Then follows the correction called wave 2. Wave 3 is a
complete five-wave pattern that just happened to form
exceptionally clear and distinctive subdivisions. Within
the box containing wave 3 are three additional gray boxes.
Each gray box can itself be subdivided into a complete
five-wave pattern that could stand alone as an ideal example.
The middle gray box ends a third wave because there is
a gray box on either side of it. But I could have taken
the middle gray box and subdivided it further for you.
The middle gray box has a clear pattern of five waves
within it as well. There is no question impulse waves
have repeating fractal properties.
How to Label a Specific Price Pivot
The substructure within a larger pattern, like the gray
boxes drawn within wave 3 of Figure 2.3, is the internal
building blocks of the bigger picture. If the big picture
has reserved the numbers 1, 2, 3, 4, and 5 to map the
developing five-wave pattern, how do you name the other
pivots without repeating the same numbers? As an example,
the first box in Figure 2.3 was identified as wave 1 when
it was completed. I cannot use 1 again without causing
confusion. To keep all these building blocks identified
correctly each subset will need a unique name.
We do not repeat the numbers 1, 2, 3, 4, and 5 again.
We use lower case roman numerals: i, ii, iii, iv, and
v. But if I just referenced wave iii when describing Figure
2.3, you would not know whether I was looking at a wave
iii within the first box, or wave iii in the second box
that shows the completion of wave 3. So we write these
smaller puzzle pieces in a way that you know what building
block is forming and the unit it is contributing to within
the bigger picture. It is like using a line to identify
the street, city, state, and country within a postal address.
QUIZ: (Quizzes removed. Please see the
You are learning several things by using boxes. The boxes
force you to examine the internal structure of the box.
You are also learning more about balance and proportion.
If you are drawing boxes in one chart, it is unlikely
you will suddenly change to drawing massive or tiny boxes.
We will look at a complete table traditionally used to
label various degrees within a market. You only have three
now, but that is sufficient until we arrive at Chapter
3. I think it is more important to continue our discussion
about impulse waves.
Using Fewer Bars to Represent Complete
You are learning several things by using boxes. The boxes
force you to examine the internal structure and you have
learned that every five-wave move can further subdivide
waves 1, 3, and 5 into five smaller waves. When you look
at waves in different time horizons they can display more
or fewer bars because time expands and contracts. I have
discovered most new to the EWP will get his question wrong.
How many bars does it take to illustrate
a five-wave move?
Figure 2.4 Five-Wave
Source: Aerodynamic Investments
Inc., Seminars, TradeStation.
Figure 2.4 shows a 120-minute bar chart of the S&P 500.
Not only are the three impulse waves contained within
boxes (clear), but the corrective waves are in boxes as
well (gray). You need to study the internals of these
three impulse waves in the clear boxes. They all have
five-wave internals. The first box is the easiest. The
middle box for wave 3 will be difficult if you do not
realize the bars above the gray dot create a small five-wave
pattern to end wave 3. In other words, the fifth wave
subdivided into its own smaller pattern of five-waves.
If I went up in time horizon the entire five-wave move
might look like the right-hand insert that contains the
same gray dot. Some of the bars compress into the new
time horizon. It does not change the wave interpretation.
Now we need to be more formal with the
Elliott Wave Principle rules.
1. Wave 3 cannot be the shortest. That means if wave
3 and wave 1 are the same length, wave 5 would have to
be shorter than both. Wave 3 does not have to be the longest.
Somehow people twist this rule. Just don't make wave 3
the shortest in comparison to waves 1 and 5.
2. Wave 4 cannot retrace into the range of wave 1. There
is going to be an exception to this rule later, but it
is a pattern we have not discussed yet.
3. The Wave Principle has a guideline demonstrated in
Figure 2.4. Guidelines are observations that are often
repeatable. They do not create hard and fast rules, however.
When you look at the corrective waves in box 2 and 4,
one is about half the size of the other. This is the guideline
of alternation. If the wave in the second position takes
a long time to develop, the fourth wave will likely form
in less time. If the second wave is complex in appearance,
the fourth wave might just be very simple. The opposite
applies when the second wave is simple and/or takes little
time to develop. These alternating characteristics between
corrective waves can be exceedingly helpful. Neither of
the insets in the right margin of Figure 2.4 illustrates
the guideline of alternation.
Returning to Figure 2.4, look at the more detailed chart
with five boxes. All rules remain valid. Now look at the
upper insert on the right margin with a gray dot. Using
only five bars I can easily represent a fully qualified
five-wave swing. The gray dot ends wave 4 and it does
not enter the range travelled by wave 1. The fifth wave
in this bar chart is just a straight single line that
moves up from the gray dot. We know our rules so well
that impulse waves must subdivide into five waves that
we no longer have to be shown all the subdivisions. We
know they are impulse waves with five-wave internals because
the fourth wave does not fall into the range travelled
by the first wave and the third is not the shortest. So
with five bars I know there is a five-wave structure present.
Now look at the bottom insert in the margin of Figure
2.4. If I took the bar chart in the upper insert and changed
it from a weekly chart to a two-week chart, the lower
insert is how the data would appear. With just three simple
bars I can obtain a five-wave swing. The third wave is
not the shortest. There are three impulsive waves. There
are two corrective waves. Really, you may ask? Yes. The
third bar retraces a portion of the first bar. Therefore,
I know a second wave is present. The same can be said
for the fourth wave being present because the third bar
retraced a portion of the middle bar. I also know the
fourth wave did not retrace the third to such an extent
the range of the first bar was challenged. The middle
bar is not the shortest. These three bars exhibit all
the rules necessary to identify it as a complete five-wave
Knowing that these three figures in Figure 2.4 all represent
complete and legitimate five-wave patterns is critical
in developing your skills to interpret wave patterns in
any time horizon.
We have only discussed simple and extending five-wave
patterns up to this point. Now we need to move forward
to see how to determine if an extending five-wave pattern
is complete or not. Extending impulse waves are much harder
to work with than many think. It can be made much easier
when you know where to start your wave interpretation.
Working with Impulse Waves in Strong Trends
Figure 2.5 Extending Five-Wave
Source: Aerodynamic Investments
Inc., Seminars, TradeStation.
Figure 2.5 is a market decline in the S&P 500. Many people
have the misunderstanding that extending five-wave patterns
are much easier to label than corrective waves. This is
rarely the case. These moves that just keep going and
going can be very tricky. Experience has shown there are
a few unorthodox ways to handle these strong trends.
The first thing to do with them is to start your wave
interpretation in the middle of the strongest segment.
I can picture many expressions right now as I see the
shock often. Our objective is to stay in sync and develop
a sense of where we are within a bigger developing picture.
Our livelihood depends on being right more often than
wrong on the far right hand side of the chart. If we make
errors in the top left of the chart it is not as serious.
Begin looking at a chart to find the wave that is the
strongest within the move. In Figure 2.5 wave iii of 3
is the strongest. I am referencing the entire length of
the decline from the end of wave ii up to the end of wave
iii down. My first label was to put iii on the pivot low
of this move. We know impulse waves must contain five
waves. Wave iii completes five-wave into the pivot marked
wave ii. Wave ii is a correction. Next, find its counterpart
correction. The bounce off of wave iii is very clean and
direct with an ending we know is wave iv up.
It is very important to make this next consideration.
How do waves ii and waves iv compare in size? Consider
both distance travelled and time.
1. They both retrace to previous fourth waves of one
2. Wave ii takes about half the time that was needed
to complete wave iv.
3. Wave ii travels about a third of the way up that
wave iv travelled. But the distances travelled by waves
ii and iv are proportionally about the same relative to
the trending segment they are correcting. Another way
to say this is to study the length of point 2 to point
i. Then consider the length of point ii to point iii.
Now look at points ii and points iv. You study the space
under both points to the reversals at point i and point
4. Consider where waves ii and iv divide waves i and
wave iii. The top right insert in Figure 2.5 will help
5. Then consciously consider the space over the point
ii into 2. Also the space above point iv into point ii.
You simply consider the vertical height and do not give
any consideration to the slope of the decline. Now you
should be able to sense they are somewhat similar.
All of the patterns and substructures of the Elliott
Wave Principle require these ratio comparisons between
internal units. If you didn't know geometry beforehand,
you are learning it now. The areas of space above and
below the midlines are not far off when considering one
to the other. It doesn't have to be exact.
In my experience, engineers by training have the greatest
trouble with this. As odd as it may sound, if you are
having a hard time with this comparison it is time to
take remedial action! Sign up for an art class. Not just
any class. Start with still life. As you draw a Venetian
or Greek vase you suddenly have to take notice of what
is called positive and negative space. The positive space
is the silhouette form of the vase itself. The negative
space is the void of space behind the object. Our bars
of data are the positive space. The blank space inside
a box behind the data is the negative space. Learn to
We will not look at the shapes and proportional guidelines
between corrective waves until the next chapter. But we
could not escape a brief introduction to complete Figure
From the price high marked wave iv there is a five-wave
decline. So immediately label the price low as wave v.
I know we don't have wave i identified. It is going to
be harder and does not change the message of the price
low marked wave v.
QUIZ: (quiz removed, please see the published
Before we move away from Figure 2.5, there is a small
insert on the bottom left. The bullets mark the top and
bottom of a third wave within the wave (1) from the top
of the screen so you can see the subdivision more clearly.
The higher boxes drawn for waves (2) and wave 2 enclose
the exact same pattern. Remember the N. They are back.
These patterns are flats and the lower overlaps the higher
one. The lower one is smaller than the first one. When
you see a market creating mirror duplicates and getting
smaller, the market is coiling for one heck of a big move.
Because we started in the middle with the strongest segment,
we know how many waves are missing in the larger picture.
But what if we bounce into the range of wave iv and the
market has a complete meltdown that is even longer than
wave 3? You likely have a new midline for the move. Just
go with it. You were not wrong, as the work and wave interpretations
you made kept you on the right side of the market. That
is the whole point. We are trading market moves and not
being paid for gorgeous charts and beautiful labels.
The method of using boxes is valuable because it makes
it very clear how a market is developing internal building
blocks. I'd like to spend more time on this in Figure
Figure 2.6 Extending Five-Wave
Pattern Weekly Kuwait Stock Market
Source: Aerodynamic Investments
Inc., � 2011 Bloomberg L.P. All Rights Reserved.
Figure 2.6 is the weekly Kuwait Stock Market. This is
the first time you have worked with a line on close chart
style. Wave structure is no different using a line than
what you have seen in the prior charts. In fact, it sometimes
makes it easier to see the pattern developing.
Where do we start? At the middle, and we need to select
the strongest leg up within the rally. The strongest wave
is located and a horizontal line is drawn in the approximate
middle. The mid-line is market with an M to the right.
Either side of the line you will find two black boxes.
They mark the start and end of that wave. We know the
top of the box will be iii. The bottom of the box always
ends wave ii. We know the middle and the faint turns within
the range clearly define a five-wave structure. The second
and fourth waves are nothing more than a slight pause,
but that is all that is needed.
Two gray boxes are drawn, one below the black boxes and
one above the higher black box. The lower area is extended
to the left so you can see it tracks from the low of wave
2 to the end of wave i. Wave iii has an enclosed box.
The correction marking wave iv down falls back inside
the middle box. The swing that follows defines the higher
gray box. Could the two gray boxes and black create a
complete five-wave unit? Yes. But do not put wave v of
3 at the top of the higher gray box just yet. Under the
first gray box there are two clear boxes showing first
wave swings that must be offset with fifth waves into
the top to end the move. But when we look at the high
there is only one clear box into the high. It means a
decline and final rally is ahead. It will end the rally
from the bottom marked wave (2) and therefore end wave
3 up. A larger correction would then begin, but it will
only define wave 4 down. All the boxes in Figure 2.6 show
the building blocks for just wave (3).
If you take a measured move from the midline to the bottom
of the lower box, that measured move added to the midline
will end at the top of the higher gray box. The market
is moving in a mirror image above the midline as below.
This market displays a strong trend, but at this time
it was neither expanding nor contracting. If it had been
expanding, the height of the boxes above the midline would
be longer than those below the line. If the market was
developing waves over the midline that were contracting,
the height of these boxes would not be as high as those
under the midline. Contracting box heights warn a market
is weakening. Elongating boxes over the midline show the
market is becoming parabolic. The use of boxes will force
you to be aware of balance, symmetry, and proportion-all
good things to keep us on the right side of the market.
Figure 2.7 Extending Five-Wave
Investments Inc., Seminars, TradeStation.
You have one last chance to understand extending five-wave
patterns before I toss you out of the nest to take a test,
so study Figure 2.7 very closely.
Figure 2.7 gives you waves (1), (2), (3), and (4). The
common error made by many people is to jump down to the
bottom of the swing and write (5) under the lowest price
pivot. Wrong. How many waves must there be in wave (5)?
It must define 5 swings where the fourth wave does not
retrace into the first wave and wave three doesn't become
the shortest. There is only one swing that meets all these
rules. Wave (5) ends at the third pivot low from the bottom
of the chart. To the right is the same data. However,
I have pulled the bars apart that define the waves. The
last pattern into the bottom contains a three-wave swing
down to a low marked B. It is a middle leg of a corrective
pattern you will study in the next chapter.
In this example wave (5) becomes a pivot many find very
confusing. It is referred to as the orthodox low (or high
in a bull trend). It is the pivot that completes the five-wave
decline. However, the market tries to keep on going. Do
not try to stuff those extra swings into your impulse
wave. The data that forms below wave A begins to overlap.
There is a serious middle leg that overlaps the first
swing down from A. The entire move down from A to the
low cannot remain true to the rules of a developing five-wave
pattern. Something else is going on. It is a leg within
a corrective pattern. Oscillators will diverge and the
volume will be lower than the volume into the final bar
that offered capitulation at the end of wave (5). This
chart is the most important chart I can offer you to prove
price swings and Elliot Waves are not the same thing.
Let's see if you have it etched in stone before moving
QUIZ: (Quiz removed, please see the published
Termination Diagonal Triangles:
� (text removed, please see the published book. Thank
Please refer to Mastering
Elliott Wave Principle
Elementary Concepts, Wave
Patterns, and Practice Exercises
by Constance Brown