🔸2.3 Wave Equality
Last updated
Last updated
One of the guidelines of the Wave Principle is that two of the motive waves in a five-wave sequence will tend toward equality in time and magnitude. This is generally true of the two non-extended waves when one wave is an extension, and it is especially true if the third wave is the extension. If perfect equality is lacking, a .618 multiple is the next likely relationship (see Chapters 3 and 4).
When waves are larger than the Intermediate degree, the price relationships usually must be stated in percentage terms. Thus, within the entire extended Cycle wave advance from 1942 to 1966, we find that Primary wave ① travelled 120 points, a gain of 129%, in 49 months, while Primary wave ⑤ travelled 438 points, a gain of 80% (.618 times the 129% gain), in 40 months (see Figure 5-5), far different from the 324% gain of the third Primary wave, which lasted 126 months.
When waves are of Intermediate degree or below, the price equality can usually be stated in arithmetic terms, since the percentage lengths will also be nearly equivalent. Thus, in the year-end rally of 1976, we find that wave 1 travelled 35.24 points in 47 market hours while wave 5 travelled 34.40 points in 47 market hours. The guideline of equality is often extremely accurate.
A. Hamilton Bolton always kept an "hourly close" chart, i.e., one showing the end-of-hour prices, as do the authors. Elliott himself certainly followed the same practice, since in The Wave Principle, he presents an hourly chart of stock prices from February 23 to March 31, 1938. Every Elliott wave practitioner, or anyone interested in the Wave Principle, will find it instructive and useful to plot the hourly fluctuations of the DJIA, which are published by The Wall Street Journal and Barron’s. It is a simple task that requires only a few minutes of work a week. Bar charts are fine but can be misleading by revealing fluctuations that occur near the time changes for each bar but not those that occur within the time for the bar. Actual print figures must be used on all plots. The so-called "opening" and "theoretical intraday" figures published for the Dow averages are statistical inventions that do not reflect the averages at any particular moment. Respectively, these figures represent a sum of the opening prices, which can occur at different times, and of the daily highs or lows of each individual stock in the average regardless of the time of day, each extreme occurs.
The foremost aim of wave classification is to determine where prices are in the stock market’s progression. This exercise is easy as long as the wave counts are clear, as in fast-moving, emotional markets, particularly in impulse waves, when minor movements generally unfold in an uncomplicated manner. In these cases, short term charting is necessary to view all subdivisions. However, in lethargic or choppy markets, particularly in corrections, wave structures are more likely to be complex and slow to develop. In these cases, a longer-term chart often effectively condenses the action into a form that clarifies the pattern in progress. With a proper reading of the Wave Principle, there are times when a sideways trend can be forecasted (for instance, for a fourth wave when wave two is a zigzag). Even when anticipated, though, complexity and lethargy are two of the most frustrating occurrences for the analyst. Nevertheless, they are part of the reality of the market and must be taken into account. The authors highly recommend that during such periods you take some time off from the market to enjoy the profits made during the rapidly unfolding impulse waves. You can’t "wish" the market into action; it isn’t listening. When the market rests, do the same.
The correct method for tracking the stock market is to use semilogarithmic chart paper since the market’s history is sensibly related only on a percentage basis. The investor is concerned with percentage gain or loss, not the number of points travelled in a market average. For instance, ten points in the DJIA in 1980 meant a one percent move. In the early 1920s, ten points meant a ten percent move, quite a bit more important. For ease of charting, however, we suggest using a semilog scale only for long-term plots, where the difference is especially noticeable. The arithmetic scale is quite acceptable for tracking hourly waves since a 40 point rally with the DJIA at 800 is not much different in percentage terms from a 40-point rally with the DJIA at 900. Thus, channelling techniques work acceptably well on an arithmetic scale with shorter-term moves.
Elliott noted that a parallel trend channel typically marks the upper and lower boundaries of an impulse wave, often with dramatic precision. You should draw one as early as possible to assist in determining wave targets and provide clues to the future development of trends.
The initial channelling technique for an impulse requires at least three reference points. When wave three ends, connect the points labelled 1 and 3, then draw a parallel line touching the point labelled 2, as shown in Figure 2-8. This construction provides an estimated boundary for wave four. (In most cases, third waves travel far enough that the starting point is excluded from the final channel’s touch points.)
If the fourth wave ends at a point not touching the parallel, you must reconstruct the channel in order to estimate the boundary for wave five. First, connect the ends of waves two and four. If waves one and three are normal, the upper parallel most accurately forecasts the end of wave five when drawn touching the peak of wave three, as in Figure 2-9. If wave three is abnormally strong, almost vertical, then a parallel drawn from its top may be too high. Experience has shown that a parallel to the baseline that touches the top of wave one is then more useful, as in our depiction of gold bullion from August 1976 to March 1977 (see Figure 6-12). In some cases, it may be useful to draw both potential upper boundary lines to alert you to be especially attentive to the wave count and volume characteristics at those levels and then take appropriate action as the wave count warrants.
Figure 2-8
Figure 2-9
Always remember that all degrees of trend are operating at the same time. Sometimes, for instance, a fifth wave of the Intermediate degree within a fifth wave of the Primary degree will end when it reaches the upper channel lines at both degrees simultaneously. Or sometimes a throw-over at Supercycle degree will terminate precisely when prices reach the upper line of the channel at Cycle degree.
Zigzag corrections often form channels with four touchpoints. One line connects the starting point of wave A and then the end of wave B; the other line touches the end of wave A and the end of wave C. Once the former line is established, a parallel line drawn from the end of wave A is an excellent tool for recognizing the exact end of the entire correction.
Within a parallel channel or the converging lines of a diagonal, if a fifth wave approaches its upper trendline on declining volume, it is an indication that the end of the wave will meet or fall short of it. If the volume is heavy as the fifth wave approaches its upper trendline, it indicates a possible penetration of the upper line, which Elliott called a "throw-over." Near the point of throw-over, a fourth wave of a small degree may trend sideways immediately below the parallel, allowing the fifth then to break it in a final burst of volume.
A throw-over is occasionally telegraphed by a preceding "throw-under," either by wave 4 or by wave two of 5, as suggested by the drawing shown in Figure 2-10, from Elliott’s book, The Wave Principle. A throw-over is confirmed by an immediate reversal back below the line. A throw-over can also occur, with the same characteristics, in a declining market. Elliott correctly warned that a throw-over at a large degree causes difficulty in identifying the waves of smaller degrees during the throw-over, as smaller degree channels are sometimes penetrated on the upside during the final fifth wave. Figures 1-17, 1-19 and 2-11 show real-life examples of throw-overs.
Figure 2-10
Elliott contended that the necessity of channelling on a semilog scale indicated the presence of inflation. To date, no student of the Wave Principle has questioned this assumption, which is demonstrably incorrect. Some of the differences apparent to Elliott may have been due to differences in the degree of waves that he was plotting, since the larger the degree, the more necessary a semilog scale usually becomes. On the other hand, the virtually perfect channels that were formed by the 1921-1929 market on the semilog scale (see Figure 2-11) and the 1932-1937 market on the arithmetic scale (see Figure 2-12) indicate that waves of the same degree will form the correct Elliott trend channel only when plotted selectively on the appropriate scale. On the arithmetic scale, the 1920s bull market accelerates beyond the upper boundary, while on the semilog scale, the 1930s bull market falls far short of the upper boundary.
Regarding Elliott’s contention concerning inflation, we note that the period of the 1920s actually accompanied mild deflation, as the Consumer Price Index declined an average of .5% per year, while the period from 1933 to 1937 was mildly inflationary, accompanying a rise in the CPI of 2.2% per year. This monetary background convinces us that inflation is not the reason behind the necessity for the use of the semilog scale. In fact, aside from this difference in channelling, these two waves of Cycle dimension are surprisingly similar: they create nearly the same multiples in price (six times and five times respectively), they both contain extended fifth waves, and the peak of the third wave is the same percentage gain above the bottom in each case. The essential difference between the two bull markets is the shape and time length of each individual subwave.
At most, we can state that the necessity for a semilog scale indicates a wave that is in the process of acceleration, for whatever mass psychological reasons. Given a single price objective and a specific length of time allotted, anyone can draw a satisfactory hypothetical Elliott wave channel from the same point of origin on both arithmetic and semilog scales by adjusting the slope of the 75 waves to fit. Thus, the question of whether to expect a parallel channel on arithmetic or semilog scale is still unresolved as far as developing a tenet on the subject. If the price development at any point does not fall neatly within two parallel lines on the scale you are using, switch to the other scale in order to observe the channel from the correct perspective. To stay on top of all developments, you should always use both.
