Extensions and Failures

Video Transcription:

Hello, traders. Welcome to the Elliot Wave Theory course, and the first module, Introduction to the Elliot Wave Theory. In this video, we’re going to discuss extensions and failures of the basic five-wave pattern of the Elliot Wave Principle.

Extensions and Failures

Now let’s start by talking about extensions. Most impulsive waves contain what Elliot called extensions. Extensions are elongated impulses found in impulsive waves for the five-wave pattern. This means that extensions are going to be found in Wave 1, 3, and 5. The subdivisions of an extended wave are nearly the same amplitude and ration of the other four waves of the overall pattern. This gives us a total count of nine waves in a basic five-wave pattern. Why? Because an extended wave has five waves in it. Then the rest of the five-wave pattern, which is four waves that are still about to form which gives us a total count of nine waves in a five-wave pattern.

Having an extended wave in the pattern and having a nine-wave pattern instead of a five-wave pattern is irrelevant because they have the same technical significance. This means that if we have a Wave 1 extended, or a third wave extension, or a fifth wave extension, it’s the same as having a five-wave pattern because the technical significance is the same, which means that we are going to… In a bull market, we are going to go long at the end of Wave 4 or Wave 2, or we are going to expect a correction at the end of Wave 5. It doesn’t matter if we have nine waves inside the pattern, because we already know that the extended wave has five waves inside of it.

Extensions and Failures Diagram Eilliot WAve Theory

So I’m going to show you a diagram in the next slide that’s going to make this much more clearer. The fact that extensions only occur in one of the three impulsive waves of the five-wave pattern provides useful information of the length of upcoming waves. And this is important. Let’s have another example, and let’s say that Wave 1 and 3 are about equal length. The fifth wave will probably be extended. And another example. If the third wave extends, the fifth wave should be about the same length of Wave 1 and so on. So you can see that by spotting or identifying which of the three impulsive waves is the extended one, it’s going to give you a lot of information about the pattern that we are working on.

Now this is what extension looks like. Here, we have a first wave extension. You can see that. We have a 1, 2, 3, 4, 5 movement that gives us the end of Wave 1. Then wave 2, 3, 4 and 5 to end the 5-wave pattern but we have a 9-wave inside the 5-wave pattern in a bull and in a bear market. Here, we have a third wave extension which is the same. We have the first wave, the second, then we have 1, 2, 3, 4, 5 waves inside the third, the fourth wave, and the fifth wave. The same goes with the bear market. And, here, we have a fifth wave extension. We have the first, the second, the third, the fourth, and 1, 2, 3, 4, 5, which gives us 9 counts inside a 5-wave pattern. And the same goes for the bear side of the market. And sometimes we can have extensions that are unidentified, which is a little bit more complicated and I would say a way off.

Remember that even with extensions on a five-wave pattern, all the rules still apply. Wave 3 cannot be the shortest one, and Wave 4 cannot overcome Wave 1, and Wave 2 can never correct more than 100% of Wave 1.

Now let’s talk about failures. Elliot used the word failure to describe a situation in which the fifth wave doesn’t move beyond the end of Wave 3. If we go back to this diagram, you can see that Wave 5 always goes beyond the end of Wave 3. A failure is when this doesn’t happen. Even if Wave 5 does not go beyond the end of Wave 3, the 5-wave pattern can still be verified if the fifth wave contains the necessary 5 sub waves.

Bullish market failure

Now here is a bull market failure. You can see that we have 1, 2, 3, 4, 5 waves for the Wave 1, 1, 2, 3 waves for the Wave 2, 1, 2, 3, 4, 5 waves for the third wave, 1, 2, 3 or an A-B-C corrective pattern for the fourth wave, which is counter-trend corrective wave. And then you can see that we have 1, 2, 3, 4, 5 waves inside Wave 5. And even though Wave 5 didn’t go beyond the top or the end of Wave 5, this is still a valid five-wave pattern, and we are due for a corrective A-B-C at the end of this wave. The same goes for a bear market failure when we have the necessary five-wave count inside of the failing fifth wave.

Now most likely you will not find a lot of failures in the market, but if you do, you have to remember that if you have the count correctly inside of Wave 5, it’s still a valid pattern and you can trade the reversal.


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