Theory

133
Dow

Technical Analysis
Vipul's (BFM INTRODUCTION:
132
51
MODULE - l : Dow Theory isinamed atter Charies H Dow, who is
considered
MAJOR THEORIES IN s the father of Technical Analysis. Dow Theory is very basic and
the

than 100 years old but still

remains the
TECHNICAL ANALYSIS more
foundation of
fechnical Analysis.

Charles H Dow (1851-1902), however, neither

wrote a book
Chapter 5 rpublished his complete theory on the market, but several

owers and associates have published work based on his theory

followers and a

om 255 Wall Street Journal editorials written by him. These

Dow Theory from

ditorials reflected his belief on stock market behaviour.

edin

5.1 Introduction
PRINCIPLES OF DOW THEORY:
of Dow Theory
5.2
5.2 Principles
The Dow Theory is made up of six basic principles:
5.3 Significance of Dow Theory
5.4 Problems with Dow Theory 1 Principle: The stock market discounts all information.
5.5 Exercise
2nd Principle: The stock market has three trends.
3od Principle: Primary trend has three phases.

4th Principle: Stock market indexes must confirm each other

5th Principle: volume must confirm the trend.

6th Principle: Trend Remains Intact Until and Unless Clear
Reversal Signals Occur.
Information:
First Principle: The Stock Market Discounts All
The tirst principle of Dow Theory suggests that stock price
of all
represents sum totai of hopes, fears and expectation
all be
It suggests stock market discounts
information.
participants.
134 Vipnd' Technical Analysis (BFM pow Theory

135
it interest rate movement, macroeconomic data, central has
ank
decision, future earnin announcement by the company etc.
The
only information which stock market does not discount is nah
calamities like tsunami, earthquake, cyclone etc. (which
are becs
est
described as the Act of God). The stock market is barometer of tthe
economy and takes trend ahead of changes in real economy.

Second Principle: The Stock Market Have Three Trends:

Primary Trend-Rising
Dow Theory says stock market is made up of three trends.
(1) Primary Trend. Figure 1) illustrates that each successive
top that is D, F, and H
are higher than
previous tops and each successive bottom that is E
(2) Secondary trend.
and G are higher than previous bottoms, hence
(3) Minor Trend. primary trend is
considered uptrend arnd trend is aonsidered as rising trend.
Dow Theorysays primary trend is the main trend and trader (Figure 2) shows an example of primary down trend.
should trade in direction of this trend. It says primary trend is
trader's best friend which would never ditch trader in this volatile
stock market. If prices are making higher tops and
higher bottoms,
the primary trend is considered up (bullish). If the prices are

making lower tops and lower bottoms, then the primary trend
considered down (bearish). The primary trend is the largest trend
lasting for more than a year.

Figure 1 shows an example of primary up trend. Primary Trend-Falling

(Figure 2) illustrates that each successive bottom that is D, F,

and H are lower than previous bottoms and each successive top
that is E and G are lower than previous tops, hence primary trend

is considered down and is considered falling

Dow secondary trends are found within the
Theory says

trend is rising and

phmary trend i.e. corrections when primary
136 Vipd's Technical.
Analysis((BFM) Dow
Theory

Pullback when falling. More

primary trend is precisely second. ThirdPrinciple Pri
rend is the move
ondary Primary Trend Have 137
against the direction ot the primary trend Three Phases:
The Dow Theory says
Secondary Trendie. F primary trend have
have three phases:
Correction (1) Accumulation Phase

(2) Participation Phase.

Primary Trend Rising
(3) Distribution Phase

The Dow Theor

ory says that the
of
by inte!
buying by
a accumulation phase is made
intelligent investor who thinks up
economic
cts econ
and expects stock
recovery and long term is undervalued
emerges,
environment is totallyly growth.
owth. When
When the
trend
new the
majority of
w ofir investors are against pessimistic and
me believes
this time believes that equities and above all
nobody at
G market could
rally from here. This isis
Secondary Trend i.e. pil back becaus accumulation
al1se accumulatic
phase comesafter a
in the
market and significant down
everything appears at its worst. move

is the beginning of the new bull market

Practically this
Primary Trend Failling
participation phase is characterized by
The
improving
undamentals, rising corporate profits and improving
public
sentiment. More and more trader participates in the market,
sending prices higher. This is the longest phase of the
primary
Dow Theory says that secondary trend consists of short term trend during which largest price movement takes place. This is the
price movements which is known as minor trends. The minor best phase for the technical trader.
trend is generally the corrective move within a secondary trend, The distribution phase is characterized by too much optimism,
more precisely moves against the direction of the secondary trend.
robust fundamental and above all nobody at this tinme believes
The Dow Theory says minor trends are unimportant and needs no that market could decline. The general public now feels
attention. If too much focus is placed on minor trends, it can lead comfortable buying more and more in the market. It is during this
to total loss of capital as trader gets trapped in short term market
phase that those investors who bought during accumulation phase
volatility. begin to sell in anticipation of a decline in the market. This is time
 pe
heary
38 vipl' Technical alysis (BFM 139
ndustrial Index is not
when Technical Analyst should look for reversal in the trens sustainable as
long as
Index is not
to
rising
Transportation
nitiate sell s1de position in the stock market.
in these two
he divergence indexes is a
Fourth Principle: Stock Market Indexes Must Confirm Eac
ach
tb) waming signal.
Other Under
Dow Theory, a reversal from a bull market to bear
i c e versa is not
ice
Charles Dow believed that stock market as a whole
arket o r v .
signalled until and unless both indexes
reflecte mar
, Industrial Index and Transportation Index confirm the same.
the overall business condition of the country. In other
words
stock market as a whole is a
benchmark indicator to measure the In simple words, if one index is confirming a new primary
economic condition of the
country. Dow tirst used basis of his but another index remains in a primary downtrend, then
theory
uptrernd
to create two indexes namely: clear trend
there is
no
i) Dow Jones Industrial Index and
(i) Dow
sith Principle: Volume Must Confim the Trend:
Jones Rail Index (now Transportation Index). that trend should be confirmed the
Dow Theory says by
Dow created these two indexes because those volume should increase in the direction of the
days U.S. was a wolume. It says
growing industrial nation and urban centres and primary trend i.e.
centres were
production
apart. Factories have to transport their
urban centres goods to If primary trend is down, then volume should increase
by rail road. Hence these two indexes covered two with the market decline.
major economic
segments i.e. Industrial and transportation.
with
Dow felt these If primary trend is up, then volume should increase
two indexes would reflect true
condition within the
business the market rally.
economy. According to Dow:
(a) Rise in these two indicator to confirm
indexes reflects that overall Basically volume is used as a secondary
condition of business is confirmed by volume, one
the is the price trend and once the trend
economy good. The basic
behind this is that if concept should always remain in the
direction of the trend.
production is increasing then
transportation of goods to customer should and Unless Clear
also increase Sixth Principle: Trend Remains Intact Until
i.e.
performance of
companies transporting goods to Reversal Signals Occur
consumer should
improve. According to Dow Theory, two As we are dealing in stock market
which is controlled by
averages should move in the same direction fast borders to reap the
and rising very flows across
money and money
Hence stock prices do
not move
benefit, wherever available.
 p o wh e o r

140 Vipl'Technical Analysis (BFM tutes major part of

onstita the 141
smoothly in a single line. It is sometimes up and sometimes
es down, es its face and at the
dhanges
same
economy today. Economic cycle
creating zig zag formation. Basically Dow Theory suggests time new
ests that nicture
Also wave theory
theory sed come into
one should never assume reversal of the trend until and
unl
unles
nless participat
icipate
suggests that every timetors
majorly to take the market new
clear reversal signals are there and one should always
een in 1998-1999, one
tradein the 998-1999, sided rally to new high. Wesectors
have
direction of the primary trend. cks. In
fn thi
rally in Nifty led
none ot
this rally by
buy confir
waited for buy
industrial stock technology
participated
confirmation from Industrial and if one
and
ndexes,
5.3 SIGNIFICANCE OF DOW THEORY: then one must have
missed the classic transportation
echnology stocks. bull run of
Dow Theory has given birth to the concept of
higher to
higher bottom formation & lower top - lower bottom
formation
on,
which is the basic foundation of Technical Analysis. This
helps EXERCISE
lps .5
investors to improve their understanding on the market and
to Match the Columns:
d)
capture correct trend so that
they could succeed in their Column A
investment / trading decisions. Dow theory is widely followed Column B'
by
of Dow
a) First principle of Dow theory (9 2nd Principle theory
many technical professionals as the first step of research. Many
theories are framed on the basis of Dow theory. )Reversal confirmation (1) Charles Dow
(c) Father of technical analysis (i) Stock market discounts all
information
(d) The stock market as three (v) Trend reversal
5.4 PROBLEMS WITH DoW THEORY:
trends (Nov. 18)
As per Dow theory, a trend is considered reverse when
security [Ans.: (a) (); (») (o; (©) (): (0) 0
makes a significant move in a particular direction. Uptrend would S t a t e whether the following statements are True or False:
reverse when stock make lower lower bottom
prices top (a) Primary and minor trend are in the same direction.
formation and downtrend would reverse when stock
prices make (b) DJIA and DJTA needs to confirm each other, as per theory
higher top higher bottom formation. Due to this conservative (c) Volume confirmation in Dow Theory is least important.
nature of trend reversal, one may miss the large gain. (d) Dow Theory introduced by John Bollinger. (Nov. 18)
Charles Dow propounded this theory on two indexes, namely [Ans.: (a) True: (b) True: (c} False: (d) False]
Industrial and Transportation, which is not major part of the (3) Explain Dow theory.
economy today. Technology and financial services ie. banking 4) Highlight basic principles of Dow theory
142 Vipul's Technical Analysis Theory
BFM)
)Explain significance and problems with Dow theory. T 143
(6) Write short notes on:
(a) 1st Principle of Dow Theory Chapter 6
(b) 2nd Principle of Dow Theory.
(c) 3rd Principle of Dow Theory.
(d) Any three principles of Dow Theory. (Nov. 18)
Elliott Theory
(e) 4th Principle of Dow
Theory
6.1 Introduction
6.2 Fundamental Concept
6.3 Fractal
6.4 Elliott Wave Rules
6.5 Elliott Wave Guidelines
6.6 Fibonacci Series
6.7 Fibonacci Retracement
6.8 Some More Patterns in Eliott Wave
6.9 Few More Patterns in Elliott
Wave
6.10 Exercise
 vtpul's Technikal Analsis (8 E l o t t Theory
INTRODUCTION:
Wave
t,3ad 8 are impueive wavee Wave 145
Fliott Wave theory isdeveloped by Raiph Nelson Elliot (1 eand4are coreclvewav
Wave
148) and successtully being used by market
(1871 Wave 3
Wave
is participants to
analyse stoxh market to forecast market trends. Wave 1
Wave4
Wave
Elliot Wave theory is based on the hypothesis that stock
prio
rices Wave 4
move between optimism and pessimism of all
mark market Wave3
participants' psychology and wide swings in the participant Wave2 Wae2and
Wave 1,3and4are correctve wavee
4 qve Impsive waves
psychology makes stock prices move in certain patterns/ trends EMot Wave-Baslc 8 Wave Sequance Wave
(When marketa are rleing Elot WaveBesic8
Wave Sequence
(When markets declinng)
wWave 1, 3 and 5 are known
6.2 FUNDAMENTAL CONCEPT:
in the
as
impulsive waves as they are
ving
V direction of the
main trend. Wave 2 and 4 are
Elliott wave theory suggests that prices move in trends. Those Lnown as corective waves, as
they are
moving against the
trends can be classified as: direction of the main trend.
1)Dominant wave(5waves). Characteristic of Dominant trend (when markets are rising):
(2 Corrective wave (3 waves). Every has a characteristic
wave
which one needs to
6.2.1 DOMINANT WAVE: understand, in order to find the correct beginning of the count.
Dominant wave consists of 5 waves. These 5 waves can be Wave 1: Wave 1 is usually a weak rally with only small number
either up or down. When five waves' direction is up, then of traders participating in the market. This is because fundamental
advancing waves are known as impulsive waves and declining news is still negative and above all, previous trend which was
waves are known as corrective waves. Similarly, when tive waves declining is still considered strong to be in force.
direction is down, then declining waves are known as impulsive Wave 2: Wave 2 is a sell off once wave 1 is over and this sell off
waves and advancing waves are known as corrective waves is very vicious (sharp). Market participants, who are on bearish
side, gain confidence that the down trend is still intact. But wave 2
never extends beyond the starting point of wave 1. Wave 2 finally
ends without lows and prices turm for another
making new
positive rally. This is the time when bears feel confused about the
presence of down rally.
 Vipul's Technicai Analysis (BFM Wave
4: Finally, wave 3
ends
theJower levels, takes out part profittraders, who
as
146 were long from
Wave1 2
orrection
lesser vi olume than asically, wave 4 is a clear
on
o n

Vicious s l df
in wave
wave 3. By
is clear about the now, every
a r t i c i p a n t

present strong up
ion comes in during this
participation c o m rally. So very less
f the market
phase. While profit taking is on,
Wee2 -Wave 2willnat maka
new iows najorityof
participants are convinced that trend is
Correction
is considered as
"buy on dips. There are two schoolsup
thoughts here to trade wave 4.
schools
the wave 3 is a
slow rally as markes One is to
Wave 3: The initial stage of buy on decline if one
about the rally. Bears are confused
ands
unde the
rstands the potential ahead for wave 5. The other
participants not convinced
are oe 4 to end and buy when
is to wait

on downfall as wave 2 didn't make new low and bulls are too in
for
w a v e

market rallies again.

confusion until the high of wave l is not
taken out. Practically lot Wae 3
the market and these get squared
of sell side positions are there in
sell side positions are Typicas Cleer Carection
off as and when markets rally and finally Wave 1
This is the time when top of
closed when top of wave 1 is crossed.
about the Wave 4
are convinced
wave 1 is crossed, market participants
and there is sudden buy side interest in the market and Wave 2
rally
fuel in the positive rally.
squaring off of shorts. Short covering add
powerful Wave 5: Wave 5 is the last wave of dominant trend.
Wave 3 is usually the largest and most wave of Although
dominant trend. prices make new high above wave 3 but volume is usually lesser
pric

Wave 3
han volume in wave 3. Being the last wave, smart money moves
tha
out of stock and relative strength of wave 5 is less than of wave 3.
Wave 3 when top d wave 1 is crossed
At this stage, market tops out. Media chaos is very strong
Wave1 Everyone is thinking of new highs and majority of the crowd is
still in the mood of buying on dips. But as the smart money is
Wae 3 irimd Stage
chasing momentum somewhere else, markets will likely top out.
Wae 2
 Vipul's Technical Analysis
148 FM) j o t t Theory

6.2.2 CORRECTIVE WAVE: B: Wave is

Wave

rally
rally
pullback in e fall. It
149

ye
A.
Small
which is in the
is a
entrancement of
Waye 5
Bull Run has
hat Bull
pling that direction of main trend
Wave 3 the fee again started. But
Volume is also very low gives
Prices make new high but volumne new high. prices fail to make
is lesser than volume
in wave 3 in the
ontirmatio
tion of a
selling opportunity. rally, which is a
Wave 1
C: Here, prices
Wave C:
Wave 4 again start
/V arnd it's in Wave C, that
picks u p and declining and volume also
Wave 2
likely to everyone realizes that market
decline is likely continue and hence
market
Characteristic of corrective trend (when markets are rising):
sde increases. By now, bull market participationon the
on the
confidence is lost.
sell

start
exitiny market and
participal have firm belief that
Corrective waves start after the rally of 5 waves. There are23 in the control of strong bear hands. market
is
corrective waves, two are in opposite direction of primary un
up
down waves. teristic of Dominant trend (when markets are
haracteristic

wave and one in opposite direction of corrective declining

Wave 1: Wave I 1s
usually
small correction with
a
Wave 5
only smal
mber Of traders participating in the market.
nur
This is because
Wave 3 ndamental news is still positive and above all previous trend
chich was rising is still considered to be strong in force.
A
Wave 1
Wave 2: Wave 2 is a strong rally once wave 1 is over. But wave

N Wave 2
Wave 4

Wave A anc C are Impulsive waves

Wave B is a correctve waves
2 never extends beyond the starting point of wave 1. Wave 2
finally ends without making new highs and prices starts declining

again.

Eliott Wave- Baslc 3 Wave Correction

(When markets are rising)

Wave 2
Wave A: Wave A is the beginning of a new bear market,
Wave 2 wilt not make new nigh
fundamental news is still positive and nobody is ready to accept
the fact that markets can decline and markets have topped out. Wave 1

Everyone is still convinced of buying on dips.

150 Vipul's Technical Analysis.
halysis (BFM
EWlottT h e o r
Wave 3: The initial wave 3 1s a
stage of the slow deci
market participants are not convinced about the ecline as
.
Wwe 2
151
Practically lot of buy side positions are there in the
the marke
market decline
and
these get squared
off as and when markets declines and declines and finallu Wave1 Wave 4
buy side positions are closed when bottom of wave 1 is Cre
This is the time when bottom of wave 1 is crossed, m Typical Cear pul
arket back
participants are convinced about the decline and there is
is suca
sudden Wave 3
sell side interest in the market. Wave 3 is usually the largest Wave : Wave 5 is the
most powerful wave of dominant trend.
tand last wave of
prices make n e w
low below
the dominant trend.
Wave 2 e volume in wave 3. The wave 3but volume isAlthough
ser than volume
usually
adeclines
re and wave 5
finally markets lacks weakness found inin
ess found
Wave 3 Initial Stage
phase.
bottoms out and enter new
new
Bottom of Wave 1
Wave 1 Wave 2
Wave 3 when bottom of wave 1 is crossed
Wave 4
Wave 1
Wave 4: Finally wave 3 ends as traders who were short
from
the higher levels takes profit, hence profit taking starts. Prices make new low but
Basically Wave 3 weakness is less than wave 3
wave 4 is a
pull back on lesser volume than wave 3. While
clear
profit taking is on, majority of the market participants are
convinced that trend is down. There are two schools of
thoughts Wave 5
here to trade Wave 4. One is to sell on rally if one understands the
potential ahead for wave 5. The other is to wait for wave 4 to end
Characteristic of corrective trend (when markets are declining):
and sell when market declines again. Corrective waves start after the rally of 5 waves. There are 3
corrective waves, wo are in opposite direction of primary down
wave and one in opposite direction of corrective rally.
 Theory
152 Vipul' Technic
Analysis (BFN
ave theory is a
form of
attem
Wave
153
Wave A ac C are impuisive waves sed, it is
POSnise asier
Wave 2 Wave B is a correctivo waves
hand

to
trade ecognition. Once pattern
rally with ta is
Wave 4 and stops in
Wave 1 fantastic
ut the fant
part of the
a v ess inside waves,
have inside Elliott Wave
1gests that the same fashion andtheory
of is
ory suggests that
that the
eo
t h e o r
irrespective of size of same style. The
Wave 3
wave
Subdivided
aves are into five
smaller
the wave, all
impulse
Wave 5
subdivided
waves are subdivid into three
smaller
waves and all
waves.
corrective
Elliott Wave- Basic 3 Wave Correction
ller degree
iar degree waves is
seen in smaller
The
pattern of the
ern of the
(When markets are declin ing) lliot Wave is known
Hence Ell degree timeframene too.
too.
Hen explained with
as
the
fractal in This nature. concept can
bebetter help of
Wave A: Wave A is the beginning of a new bull
market. following diagram.
11
fundamental news is still negative and nobody is ready to accept (5)
the fact that markets could rally. (8)
(3)
Wave B: Wave B is basically a small decline which gives the 5
feeling that decline has again started but prices fail to make new
(1) 5
low and typical volume characteristic here is that Volume in Wave 5 (A)
Bis lesser than Wave A.
(4) (C)
[2
Wave C: Here prices again start rising and volume also pick up
and it's in Wave C that everyone realizes that market rally is likely
(2)
to continue and hence market participation on the buy side
increases. It is clearly evident from the chart that small wave comprises of
large wave. Impulse within impuise are forming bigger impulse
and moving in the same fashion. This kind of price behaviour is
6.3 FRACTAL: fractal
very common in price movements and is known as
Elliott Wave theory suggests that stock prices move in clear behaviour.
trends. Those trends can be defined as five wave dominant trends
followed by three wave corrective trend. Hence it can be said that
these waves move in certain patterns and application of Elliott
154 Sott
The heory
Vipud's Technical Analysis (BFM
6.4 Guideline 1: When
ELLIOTT WAVE RULES: Wave 3 is
There are three basic rules of Elliott waves. These
| iin
equal t length to
This
Wave 1
wave, longe 155
must hold
good for the theory to be true. If
three rules
any of the rules is notot
This
rovides rget for end is also
of known as mostly wave 5 is
than Wave 3 and W e5. Even Rule ule ofof equality.
1onger than and Wa equairy.
could still bethough Wave 5 can
be
longer
helps in providingWave
met, then
re-counting of waves is advisable. but
3
Rule 1: Wave 2 cannot retrace more than 100% of Wave
1 at
least longer
than Wave
Wave
the rising market Wave 2 would not break bottom of Wave 1
1: ie. in Wave5.
conservative target
rget for end
endofof
and ine 2: The
uideline The form
similarly in declining market Wave 2 would not break of Wave
i e, if 2 and
top of Wave 2 is Wave 4
corrections
a l t e r n a t e
Wave 1. If Wave 2 retraces more
than 100% of Wave 1, then vicious rrections are
are
it would flat correction
be
and if
(sharp) sell of then Wave 4
means
something is wrong with the wave count and there is Wave 2 is flat
uld be vicious (sharp) sell
off. This correction thenen Wave
a
need for a wave
re-count. w
also is
alheration. known as 'Rule
'Rule ofof
Rule 2: Wave 3 is never the shortest: This means that Wave 3 is
always longer than other two waves i.e. Wave 1 or Wave 2.
..ideline 3: Three Wave
Gui
corective
Practically Wave 3 is longer than other two waves. If you find wave dominant pattem (1, 2, 3, 4, 5) endspattern (A, B, C) after five
of dominant trend. prior to end of Wave 4
wave shorter than other two waves, then it means
something is
wrong with the wave count and there is a need for a wave re- Wave 5
count. Wave 3 may end up Wave 3is iongest Hence Wave 5
being equal in length but never is equal in
length to Wave 1
shortest.
Wave 3
Rule 3: Wave 4 can never overlap Wave 1: This means that end
-
of wave 4 should not trade below the Weve 4 Fint correction in Wave 4
peak of wave 1. ABC correction ends prior
Wave 1
to bottom of Wave 4
Wave 2corecion was sharp
6.5 ELLIOTT WAVE GUIDELINES: Hence Wave 4 correction is fat
Vicious(Sherp) sell of in wave2
Wave 2
There are basically three
guidelines. The difference between
rules and guidelines is that it's necessary that rules should hold Elliott Wae Throe Guidelinas
(When marks re rising)
true all of the time but it's not
necessary that guidelines should
hold true all of the time, basically guideline hold true most of the
time.
 Wott Theory
156
Vipl' Technical Analysis (BFMI
Wave 3is longest. Hence Wave 5 Weve 6
is equal in
length to Wave 1 157
Wee 2to
ercs
Wave 3 W iss 4 co
Gharp correction in Wave2
Sharp correctan in Wave 4
- \c Wavs1 rn
1pd Ware4
Wave 4
Wave 1 ABC correcion ends prior
tobotton ofWave 4 Flat
Wan4
correctan in Wavs4
Wave 2 correction was lat
Hence Wave 4 correction is sharp
Wave 2 Flat correction in Wave2 Wave 3 is iongest. Hence Wave5
Wave3
is equal in
iengh to Wave1
Ellott Wave Three Guidelines Wave S
(When markets are rlsing) Eliott Wave-Thres Gudelines
(When markets are
DecRning)
Fiat correction in Wave 2
Wave 2
Wave 2 correction was flat. 66 FIBONAcCI SERIES:
Hence Wave 4 correction is sharp needs
One to understand the
importance of Fibonacci numbers
in order to understand the internal
Wave 1 ABC correction ends prior waves relation. Fibonacci
to top of VWave 4
sequence is named after Leonardo
Wave 4 Pisano Bogollo (1170-1250), and
he lived in Italy. He found the
existence of series across the
Sharp correction in Wave 4
Wave 3 universe, including space to. The number series is found
by
Wave 3 is longest. Hence Wave 5
adding the previous two numbers. The previous number is then
is equal in length to Wave1
Wave 5 divided with the number. The results are then helpful to get
Eliot Wave Three Guidelines
percentage form of series.
(When markets are Declin ing)
Important percentages based on Fibonacci are:
14.6% 23.6% 38.2% 50% 61.8% 78.6% 88.6 100%
 o t tT h e o r y
158
Vipsu'Technical Analysis /BFM)
These percentages are present across the universe, rangin
SOME MORE
PATTERNS www 159
from distance between ing sIN
IN ELLIOTT WAV
planets to human body. Same ratios ar
are
TRUNCATION:
used to
identify the relation between waves. mpulse wave, a
In an impulse
terminate
beyond the end truncation
beyond of wave
occurs
3.
when wave 5 fails to
a 55 wave A
shown in truncated 5th wave
6.7 FIBONACCI RETRACEMENT: nfolds wave
asa
struchure wave still
s
hich
which is aa
sign of diagram. A truncated
truncated 55h
It's based on the numbers identified in Fibonacci
w her degree, is often exhaustion in the main trend
w a v e ,
sequence to
at next
define area of
support and resistance. It is created by taking two Ef preceded by an
at next
extreme points
(usually a major peak and trough) on a price chart
wave of the same degree. A
truncated exceptionally
5h wave is often
strong 3rd
strong
and then bya
5wift and sharp reversal. followed
dividing the vertical distance by key Fibonacci ratios of
23.6%, 38.2%, 50%, 61.8% and 100%. Once these levels are
identified, horizontal lines are drawn to indicate areas of support
or resistance at the
key Fibonacci levels before prices continue to
move in the
original direction. Practical application of Fibonacci
retracements would be clearer from Fibonacci relationship.
0.0%
100%
8-UPTREND N Bull Market Truncation
23.6%
38.2%
38.2% 50%
sO% - 61.8% 2 Beer Market Truncation
61.8%
23.6%
N
100% 0.0%
A- UPTREND
 Vipul's Technicol Analysit h
160
One trendlinee
Connects
the 161
MATu n and other rendlendliinnee ev Aton
5 d
conoects he paints of wV
4Wave
d4 Wa 5
can end eithe lerninaton poipoinrtstsdof
w
13 trendling
the
wave
on or
duhy bove ot
OVer. Aswit andmoves beyvoomie d thethat ttreendldlone,ine,
leda throw-over,
back to where shay revesa,
the
dlagomal wualy orng
Theteversal USsualy takes began and usualy ar
hal the ime that took the
anih ene from one-tthird hr too
Endling
diagnal om
Dlagona
na Bull Ending
Market Degon
(2 naBer
Mae
M
Here is the example of truncation on wekly charts of maruti.
ha leading diagona, waves 1,3, and 5ae al impule
waves
ral carective wavs in te hrm of igzas. Waves 2and 4are
682 DIAGONAL: aways igzagpatems. Akading diagonal can fom wave 1odan
wave and the irst wave which we call wave
The two types of diagonals are leading diagonal and ending impulse ofazigzag,
is
diagonal, with the ending diagonal being more comnon. WitinANsomaton exceptionalyrare.
an ending diagonal, sub waves 1, 234and 5 always tke Inthe diagram, ware () ia comtacting leding diagonal and
corrective-wave form, specihically either a single or muliple has the same struchural characteristics as the contracting ending
igzag Ending diagonas can form anly as ith waves ofimpuke diagonal. After a wave 1leading diagonal terminates, expect wave
waves and Cwaves of zigzags and tlats
lo retrace asignificantportionof wavel
Shareddiagram isa contracting ending diagonal. It's bounded
by hwo converging trendlines, which gives the diagonal awedge
162 Vlpwl'M Technlcal Anolysis (B/M
Leeding (6) Leding a gc o r r e c t i o
Diegonel Dlngonal 163
In a Bul In a Bo
Market
(3)
Merkot
A
zigzagis
a
sharp, thre wave
(2) is a
Wave A is always an corrective pattern, labelledd
im pul se leading or A
im pul
an impu
ways an
se endin gor
diagonal, and wave
(1)
(4)
5
fective wave, that
ecive wave, that s diagonal. Wave Bis
zigzag, flat, triangle or always
(1) a
refore, zigzag is known as 5-3-5
)
structure combination.
MGZAG
(3)
M
(5)
N
Bul Merket
Bo Merte
(4)
Ina zigzag, wave Bcan never go beyond the start of
wave C almost
wave A
and always g0es beyond the end of wave A. If
wave C does
Wave not go Deyond the end of wave
A, it is called a
truncated wave C.
Flat Correction:
Possible Ending diagonal formation on weekly charts of Axis bank
is the apt example from present market situation. Aflat is a sideways, three-wave corrective pattern, also labelled
ABC. Waves A and Bare always corrective waves, and wave C is
always a motive wave. Therefore, we call the flat a 3-3-5 structure.
6.8.3 CORRECTIVE PATTERNS:
In flats, waves A and Bare never triangles and rarely flats. Wave B
There are
mainly 3 types of corrective patterns as per Elliott USually retraces at least 90 percent of wave A.
theory. They are zigzag, flat and triangle.
In a regular flat, wave B ends at about the same level as the
beginning of wave A, and wave C ends slightly past the end of
wave A.
 Wott
neor

Viyul' Technical Analysis(BFM Varietlons of Eliott 165

164 WnveaTrangles
Trenge
REQULAR FLAT
Bull Market
ONTRAC Bear Merk
CTING (upper ine declining
iower line
rising)

A
D

MN A
C E w
E

B D

Bull Merke
Bear Merket RARRIER (outer line la, imer line sloping with
BD larger trend)
In expanded Flats, wave B goes beyond the start of wave A and
the wave Cend substantially beyond the end of wave

6.8.4 TRIANGLES:
A.

W A
C

B D
A triangle is a sideways corrective sub-waves
wave with
EXPANDING (upper line rising, Iower line declining)
D
of a triangle
labelled A-B-C-D-E. In most cases, all the sub-waves A
C
Therefore, we call the
are zigzag or multiple zigzag pattern.
one of their sub-waves
triangle as 33-3-3-3 structure. On occasion, A
C
take the form of another triangle, and that sub-wave is usually
wave E. Only one of these sub-waves can be complex, meaning
H1178.85 L11389.30 C11423.30

ptrung out dver time, and that sub-wave is normally wave C/D,or 61B11766.05)-
(il)

E.
2LLIOTT COUNTS
R002.3

There are 3 type_ of triangles: KUNAL RAMBHIA .

ContractingTriangle 1
337 10
a BartierTriangle
iiy Expanding Triangle 2

2
 E l o t t1neory

166 Vipul'sM Technical Analysis (BFM

Pattern in which prices fall in
167
a n
This is the present Possible Elliott count on monthly chart of Nifty. This ower tops and narrow lower narrow range, makin sharp
Explain Elliott wave theory.
bottoms.
is how Elliott has to be applied on charts. You can observe how aptly
nifty has achieved target by respecting every level and every rule. (5 W
characteristics of dominant wave
market.
during rising and falling
ain Eliot Wave
Exp
increasing)? (Nov. 18) theory-Dominant 5 Waves (When markets are
6.9 EXERCISE
(1) Match the Columns: (7)
Write characteristics of corrective wave during rising
market. and falling
Column 'B
Column 'A 8 ) Des escribe corrective patterns in Eliott
(a) Number of dominant waves () Corrective pattern pattern.
(9) Mention rules and guidelines of Elliott waves
Five
(b) Multiple waves under main wave.() short notes on:
Fractal nature (10) Write
c)Height of wave 3 and 5 are same (li) (a) Fibonacci ratios.
|(d) Diagonalformation (v) Ralph Nelson Eliot
(b) Truncation.
(e Zigzagformation (V) Truncation
(c) Diagonai pattern.
(0 ElliottWave Theory (Nov. 18) (v) Wedge formation
(d) Zigzag correction.
() Flat correction.
(2) State whether the following statements are True or False:
(a) Wave three in Elliott wave is generaly the largest wave. ( Triangle correction.
(b)Wave one, three and five are in the same direction.
(c) Corrective wave length can be predicted with Fibonacci ratios.
(d) Diagonal formation comes on third wave.
(e There cannot be multiple corrections under wave formation.
() In Elliot wave theory, corrective wave includes four waves.
(Nov. 18)
[Ans.: (a) True; (b) True; (c) True; (0) False; (e) False; (9 False)
(3) Write a word/ phrase for the given statement:
(a) Rising waves in uptrend are known as?
(b) Nature of market, speaking about waves inside waves.
(c) Pattern having formation in the form of 3-3-3-3-3.