5. Corrective Waves
Markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend appears to prevent a correction from developing a full motive structure. This struggle between the two oppositely trending degrees generally makes corrective waves less clearly identifiable than motive waves, which always flow with comparative ease in the direction of the one larger trend.
As another result of this conflict between trends, corrective waves are quite a bit more varied than motive waves. Further, they occasionally increase or decrease in complexity as they unfold so that what are technically subwaves of the same degree can by their complexity or time length appear to be of different degree. For all these reasons, it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us. As the terminations of corrective waves are less predictable than those for motive waves, the Elliott analyst must exercise more caution in his analysis when the market is in a meandering corrective mood than when prices are in a persistently motive trend.
The single most important rule that can be gleaned from a study of the various corrective patterns is that corrections are never fives. Only motive waves are fives. For this reason, an initial five-wave movement against the larger trend is never the end of a correction, only part of it.
Corrective processes come in two styles. Sharp corrections angle steeply against the larger trend. Sideways corrections, while always producing a net retracement of the preceding wave, typically contain a movement that carries back to or beyond its starting level, thus producing an overall sideways appearance.
Specific corrective patterns fall into four main categories:
Zigzags (5-3-5; includes three types: single, double, and triple);
Flats (3-3-5; includes three types: regular, expanded, and running);
Triangles (3-3-3-3-3; four types: three of the contracting variety (ascending, descending, and symmetrical) and one of the expanding variety (reverse symmetrical);
Double threes and triple threes (combined structures).
Zigzags
A single zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C. The subwave sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A, as illustrated in Figures 1-22 and 1-23.
In a bear market, a zigzag correction takes place in the opposite direction, as shown in Figures 1-24 and 1-25. For this reason, a zigzag in a bear market is often referred to as an inverted zigzag.
Occasionally zigzags will occur twice, or at most, three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening "three," producing what is called a double zigzag (see Figure 1-26) or triple zigzag. These formations are analogous to the extension of an impulse wave but are less common.
The correction in the Standard and Poor's 500 stock index from
January 1977 to March 1978 (see Figure 1-27) can be labeled as a double zigzag, as can the correction in the Dow from July to October 1975 (see Figure 1-28). Within impulses, second waves frequently sport zigzags, while fourth waves rarely do.
R.N. Elliott's original labeling of double and triple zigzags and double and triple threes (see later section) was a quick shorthand. He denoted the intervening movements as wave X, so that double corrections were labeled A-B-C-X-A-B-C. Unfortunately, this notation improperly indicated the degree of the actionary subwaves of each simple pattern. They were labeled as being only one degree less than the entire correction when in fact, they are two degrees smaller. We have eliminated this problem by introducing a useful notational device: labeling the successive actionary components of double and triple corrections as waves W, Y, and Z, so that the entire pattern is counted "W-X-Y (-X-Z)." The letter "W" now denotes the first corrective pattern in a double or triple correction, Y the second, and Z the third of a triple. Each subwave thereof (A, B or C, as well as D or E of a triangle — see later section) is now properly seen as two degrees smaller than the entire correction. Each wave X is a reactionary wave and thus always a corrective wave, typically another zigzag.
Flats (3-3-5)
A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1-29 and 1-30. Since the first actionary wave, wave A, lacks sufficient downward force to unfold into a full five waves as it does in a zigzag, the B wave reaction, not surprisingly, seems to inherit this lack of countertrend pressure and terminates near the start of wave A. Wave C, in turn, generally terminates just slightly beyond the end of wave A rather than significantly beyond as in zigzags.
In a bear market, the pattern is the same but inverted, as shown in Figures 1-31 and 1-32.
Flat corrections usually retrace less of preceding impulse waves than do zigzags. They participate in periods involving a strong larger trend and thus virtually always precede or follow extensions. The more powerful the underlying trend, the briefer the flat tends to be. Within impulses, fourth waves frequently sport flats, while second waves do so less commonly.
What might be called "double flats" do occur. However, Elliott categorized such formations as "double threes,"
The word "flat" is used as a catchall name for any A-B-C correction that subdivides into a 3-3-5. In Elliott literature, however, three types of 3-3-5 corrections have been identified by differences in their overall shape. In a regular flat correction, wave B terminates about at the level of the beginning of wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 1-29 through 1-32. Far more common, however, is the variety called an expanded flat, which contains a price extreme beyond that of the preceding impulse wave. Elliott called this variation an "irregular" flat, although the word is inappropriate as they are actually far more common than "regular" flats.
Expanded Flats
In expanded flats, wave B of the 3-3-5 pattern terminates beyond the starting level of wave A, and wave C ends more substantially beyond the ending level of wave A, as shown for bull markets in Figures 1-33 and 1-34 and bear markets in Figures 1-35 and 1-36. The formation in the DJIA from August to November 1973 was an expanded flat correction of this type in a bear market, or an "inverted expanded flat" (see Figure 1-37).
In a rare variation on the 3-3-5 pattern, which we call a running flat, wave B terminates well beyond the beginning of wave A as in an expanded flat, but wave C fails to travel its full distance, falling short of the level at which wave A ended, as in Figures 1-38 through 1-41. Apparently in this case, the forces in the direction of the larger trend are so powerful that the pattern becomes skewed in that direction. It is always important, but particularly when concluding that a running flat has taken place, that the internal subdivisions adhere to Elliott's rules. If the supposed B wave, for instance, breaks down into five waves rather than three, it is more likely the first wave up of the impulse of next higher degree. The power of adjacent impulse waves is important in recognizing running corrections, which tend to occur only in strong and fast markets. We must issue a warning, however. There are hardly any examples of this type of correction in the price record. Never label a correction prematurely this way, or you'll find yourself wrong nine times out of ten.
Triangles
Triangles appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles contain five overlapping waves that subdivide 3-3-3-3-3 and are labeled a-b-c-d-e. A triangle is delineated by connecting the termination points of waves a and c, and b and d. Wave e can undershoot or overshoot the a-c line, and in fact, our experience tells us that it happens more often than not.
There are two varieties of triangles: contracting and expanding. Within the contracting variety, there are three types: symmetrical, ascending, and descending, as illustrated in Figure 1-42. There are no variations on the rarer expanding triangle. It always appears as depicted in Figure 1-42, which is why Elliott termed it a "reverse symmetrical" triangle.
Figure 1-42 depicts contracting triangles as taking place within the area of preceding price action, in what may be termed regular triangles. However, it is extremely common for wave b of a contracting triangle to exceed the start of wave a in what may be termed a running triangle, as shown in Figure 1-43. Despite their sideways appearance, all triangles, including running triangles, effect a net retracement of the preceding wave at wave e's end.
Triangle Examples
There are several real life examples of triangles in the charts in this course. As you will notice, most of the subwaves in a triangle are zigzags, but sometimes one of the subwaves (usually wave c) is more complex than the others and can take the shape of a regular or expanded flat or multiple zigzag. In rare cases, one of the sub-waves (usually wave e) is itself a triangle, so that the entire pattern protracts into nine waves. Thus, triangles, like zigzags, occasionally display a development that is analogous to an extension. One example occurred in silver from 1973 through 1977 (see Figure 1-44).
Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, triangles nearly always occur in positions prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse, wave B in an A-B-C, or the final wave X in a double or triple zig-zag or combination. A triangle may also occur as the final actionary pattern in a corrective combination, although even then it always precedes the final actionary wave in the pattern of one larger degree than the corrective combination.
In the stock market, when a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle. Elliott used the word "thrust" in referring to this swift, short motive wave following a triangle. The thrust is usually an impulse but can be an ending diagonal. In powerful markets, there is no thrust, but instead a prolonged fifth wave. So if a fifth wave following a triangle pushes past a normal thrust measurement, it is signaling a likely protracted wave. Post-triangle advancing impulses in commodities at degrees above Intermediate are usually the longest wave in the sequence.
On the basis of our experience with triangles, as the example in Figure 3-15 illustrates, we propose that often the time at which the boundary lines of a contracting triangle reach an apex coincides exactly with a turning point in the market. Perhaps the frequency of this occurrence would justify its inclusion among the guidelines associated with the Wave Principle.
The term "horizontal" as applied to triangles refers to these corrective triangles in general, as opposed to the term "diagonal," . Thus, the terms "horizontal triangle" and "diagonal triangle" denote these specific forms under the Wave Principle. The simpler terms "triangle" and "wedge" may be substituted, but keep in mind that technical chart readers have long used these terms to communicate less specifically subdivided forms defined only by overall shape. Having separate terms can be useful.
Corrective Combinations
Double and Triple Threes
Elliott called sideways combinations of corrective patterns "double threes" and "triple threes." While a single three is any zigzag or flat, a triangle is an allowable final component of such combinations and in this context is called a "three." A double or triple three, then, is a combination of simpler types of corrections, including the various types of zigzags, flats and triangles. Their occurrence appears to be the flat correction's way of extending sideways action. As with double and triple zigzags, each simple corrective pattern is labeled W, Y and Z. The reactionary waves, labeled X, can take the shape of any corrective pattern but are most commonly zigzags.
Combinations of threes were labeled differently by Elliott at different times, although the illustrative pattern always took the shape of two or three juxtaposed flats, as shown in Figures 1-45 and 1-46. However, the component patterns more commonly alternate in form. For example, a flat followed by a triangle is a more typical type of double three, as illustrated in Figure 1-47.
A flat followed by a zigzag is another example, as shown in Figure 1-48. Naturally, since the figures in this section depict corrections in bull markets, they need only be inverted to observe them as upward corrections in bear markets.
For the most part, double threes and triple threes are horizontal in character. Elliott indicated that the entire formations could slant against the larger trend, although we have never found this to be the case. One reason is that there never appears to be more than one zigzag in a combination. Neither is there more than one triangle. Recall that triangles occurring alone precede the final movement of a larger trend. Combinations appear to recognize this character and sport triangles only as the final wave in a double or triple three.
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