Orthodox Elliott wave was originally discovered by R. N. Elliott in 1930s. His original work mentioned that stock market does not move randomly but in systematic fashion that follows Fibonacci numbers and natural laws. This systematic movement in prices are in form of waves. Normally there are 5 step forward and 3 step backward resulting into a net progression which is valid for stock market as well. The concept cannot be just applied but one needs to understand the basic premise and certain rules to apply it objectively.


Any price movement as per basic Elliott wave is classified into Impulsive and corrective. There are various patterns within these broader heads. Impulsive waves need to follow three basic rules:  

1.  Wave 2 cannot retrace complete of wave 1

2.  Wave 3 cannot be the shortest of the directional waves 1,3 and 5

3.  Wave 4 cannot enter into territory of wave  1


The above 3 basic rules if followed then the price movement under consideration can be classified as a normal Impulse wave.


However, when the market structure is complex there is possibility that the movement can be counted in many different ways. This can result into subjectivity and the entire purpose of wave theory can be lost. To overcome this limitation Neo wave was developed that has more than 15 different rules to define a simple impulse pattern. Following are a few of them:

1.  Wave 2 cannot retrace more than 61.8% of wave 1

2.  Wave 3 cannot be the shortest of the directional waves 1,3 and 5

3.  Wave 4 cannot enter into territory of wave 2

4. There has to be atleast one extended wave which is going to be 1.618% of non extended wave. If there is no extension then the pattern under consideration is corrective

5. One of the directional waves should subdivide

6. Corrective waves should consume more time than the preceding impulsive wave

7.  Touch point rule: Out of 6 points not more than 4 points should lie on the channel

8.  

9.  …etc


The above shows only a few set of rules for an impulse pattern as defined by Neo wave. There are newly developed patterns as well which were never a part of original Elliott wave. To name a few are:

-   Diametric Pattern

-   Neutral Triangle

-   Extracting Triangle

-   3rd Extended Terminal with 5th Failure


These new patterns are equally important to understand because majority of the movement seen in the world equity markets are taking the forms of these patterns that were never covered in original work of R. N. Elliott


We take a step ahead and combine this complex study of Neo wave to that of Time cycles. It is not always that both the studies will be in sync but when they are indeed suggesting the same outcome that is the time that the trade setup is of very high accuracy and it just leaves only one probable outcome. These are the times when one can go all in with prudent risk and money management strategies which have the potential to give the best of the returns in shortest amount of time.


Below part of research was shown on 4th March 2016 monthly report when Nifty made a low near 6825 levels on Budget day:


Figure 2: Nifty Weekly Time cycle chart (shown on 4th March 2016 monthly research report)

Nifty,Elliott wave,Time Cycles


Figure 3: Nifty daily chart (shown on 4th March)

Nifty,Elliott wave,Time Cycles


The Diametric pattern as shown in Figure 3 highlights completion of wave g of (g) and the previous down leg is so far retraced back in faster time. This virtually confirms completion of the correction from 8340. ….We have published an interim update on 1st March as soon as 7100 level was broken and from there itself Nifty is up by more than 400 points in 3 days. For now it is better to keep using trailing stop method with levels mentioned in daily short term update to keep profits intact and also be a part of this big uptrend.


In a nutshell, there is high possibility that the trend might break above the channel resistance as well near the level of 7750 – 7800 and might cross above 8000 as there is change in market dynamics. Volume MA, Volume ROC also confirms this subtle shift which might not be visible to majority. The methods that worked previously during the downtrend of past one year might require tweaking and the surprises will be on upside. Looking at weekly Time cycle there is high possibility that we might not be able to cross above 8654 top in 2016 and there can be a higher low formation either in form of intermediate wave 2 or second standard correction. For now the trend is firmly positive as long as 7000 zone is protected and do not try to catch a top in this fast moving market.


The above gist simply shows the power of combining Neo wave with Time cycles. Nevertheless, we were keen on expecting an impulsive rise from 6825 but the entire rise came in form of overlapping pattern and so one need to keep measuring wave patterns against expected outcome.


References are taken from “The Financial Waves short term update” daily research report which covers Nifty, Bank Nifty and stocks on rotational basis and “The Financial Waves Monthly update” that shows medium to long term perspective on Nifty, INR Pairs, Global Markets, Gold, other commodities. For subscription options visit Pricing Page


Attend the most Advanced Technical analysis training on Application of Neo wave and Time cycles with practical charts for portfolio creation, stock selection and trade setups. This training will focus on the above methods along with lot of other studies which can be combined together to produce very high conviction trade setups. Register NOW as limited seats available. For more details Contact US or write to us at helpdesk@wavesstrategy.com or call us at +91 22 28831358 / +91 9920422202