MASTERING ELLIOTT WAVE PRINCIPLE Since1996,BloombergPresshaspublishedbooksforfinancialprofessionals on investing, economics, and policy affecting investors. Titles are written by leading practitioners and authorities, and have been translated into more than 20 languages. TheBloombergFinancialSeriesprovidesbothcorereferenceknowledge and actionable information for financial professionals. The books are written by experts familiar with the work flows, challenges, and demands of investment professionals who trade the markets, manage money, and analyze investments in their capacity of growing and protecting wealth, hedging risk, and generating revenue. Fora listofavailable titles,pleasevisitourWebsiteat www.wiley.com/ go/bloombergpress. Books by Constance Brown Aerodynamic Trading (1996) All About Technical Analysis (2002) The Illustrated Guide to Technical Analysis Signals and Phrases (2004, e-book only) Technical Analysis Demystified: A Self-Teaching Guide (2007) Breakthroughs in Technical Analysis: New Thinking from the World’s Top Minds (2007, Edited by David Keller) Fibonacci Analysis (2008) Technical Analysis for the Trading Professional 2nd Edition (2011) MasteringElliottWavePrinciple:ElementaryConcepts,WavePatterns, and Practice Exercises (2012) Advanced Elliott Wave Analysis: Complex Patterns, Intermarket Relationships, and Global Cash Flow Analysis (to come) MASTERING ELLIOTT WAVE PRINCIPLE Elementary Concepts, Wave Patterns, and Practice Exercises Constance Brown Copyrightr2012byConstanceBrown.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. 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Figure5.7rRobertR.Prechter,Jr. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidethe UnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmay notbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteat www.wiley.com. LibraryofCongressCataloging-in-PublicationData: Brown,ConstanceM. Masteringelliottwaveprinciple:elementaryconcepts,wavepatterns,andpracticeexercises/ ConstanceBrown. p. cm.—(Bloombergfinancialseries) Includesindex. ISBN978-0-470-92353-5(cloth);978-1-118-23515-7(ebk);978-1-118-22130-3(ebk); 978-1-118-25977-1(ebk) 1. Elliottwaveprinciple. 2. Speculation. 3. Stocks. I. Title. HG6041.B7482012 332.63u2042—dc23 2011046138 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 An ocean traveler has even more vividly the impression that the ocean is made of waves than that it is made of water. —Sir Arthur Stanley Eddington in a lecture at the University of Edinburgh, March 1927 Contents Acknowledgments xi Introduction xiii Why this Teaching Approach is Different xiii Elliott Waves and Market Swings Are Not the Same xvi Are Attributes of Balance and Proportion Subjective? No. xxi CHAPTER 1 Using the Elliott Wave Principle to Evaluate Mass Psychology 1 Geometric Proportion in Market Data 2 CHAPTER 2 The Patterns That Describe Trending Market Movement 17 Impulse Waves Create Market Trends 18 How to Label a Specific Price Pivot 23 Using Fewer Bars to Represent Complete Impulse Waves 24 Working with Impulse Waves in Strong Trends 26 Termination Diagonal Triangles: An Introduction 35 CHAPTER 3 The Basic Patterns That Describe Corrective Market Movement 39 How to Examine Corrective Price Movement 40 A Zigzag Corrective Pattern 43 A Flat Corrective Pattern 49 An Expanded Flat Corrective Pattern 53 The Triangle Corrective Patterns 58 CHAPTER 4 Diagonal Triangles (Wedges) 67 Termination Diagonal Triangle Pattern 67 Leading Diagonal Triangle Pattern—Type 2 73 ix x Contents CHAPTER 5 A Summary with Study Flash Cards for Patterns, Rules, and Guidelines 77 Study Flash Cards for the Basic Patterns 78 A Summary of Rules and Guidelines 83 A Table of Degree Labels and Names 85 Beginner Level: Practice Examination 86 Beginner Level: Final Examination 95 Exercise Appendix 105 About the Author 137 Index 139 Acknowledgments IwouldliketoexpressmysincereappreciationtotheteamatJohnWiley& Sons:KevinCommins,MegFreeborn,andStaceyFischkelta.Thesubjectof the Elliott Wave Principle presents several unique challenges. The fractal nature of the method carries a message in charts that reflects on the bigger picture of the market in discussion. Therefore timing was an issue for the manuscript. I would also like to acknowledge and thank the efforts of the creative team. Thereisnotopicmoredifficulttoeditasanumberwithinachartcould mean a point to help focus the reader’s attention, or it could be a critical numberwithinalargerwaveinterpretation.Theeditorialteamhashelpedus all by allowing me to use quote marks to define the start and end of wave notations. In practice this has helped my followers find it a little easier to read the unique dialog that develops within the analysis of wave patterns. A special acknowledgment must be given to Robert Prechter, Jr., who saved this analysis method from obscurity. The work of R.N. Elliott might have been lost had it not been for his efforts. I once analyzed the S&P 500 market throughout the trading day before a real-time global audience for Elliott Wave International. It was the last step I needed to build my con- fidence that I could step out on my own and start my own company and Hedge Fund in 1996. I cannot let it be unsaid that all eight of my books can be traced back to the confidence and guidance of Stephen Isaacs with Bloomberg Press. MyloyaltytohimexplainsthemultiplepublishersIhaveworkedwithover the years. xi Introduction After20yearsofexperiencehelpingothertradersbecomemoreconfidentin howtheyapplytheElliottWavePrinciple,Iknowhowdifficultitcanbefor manypeople.Butovertheyearsthesepeoplehavehelpedmeevolvemyway of teaching this subject so that even the most challenged may finally see markets move in repeating fractal price patterns. Why This Teaching Approach Is Different We have failed to help you understand that price swings and Elliott Waves are not the same thing. Everyone begins with counting price swings since these are the easiest to understand, but the final result is disastrous. Why? You learn to ignore the internal construction of a price swing and overlook therulesthatareintellectuallyunderstood,butthenincorrectlyapplied.Itis suchawidespreadproblemthatitmeritstheefforttotrysomethingnewto explain these concepts. Though our words are carefully chosen to match impeccable market charts, we have failed to really test your understanding by having you stop your reading at critical points to challenge your understanding. This is one subject that must offer ways for you to check your progress in small incre- mentalsteps beforethelearning curvebecomeshopelesslyentangled.Many traders on professional desks have told me they wish they had a way to test theirunderstanding.Thentheywanttocomparetheirerrorswithadetailed description of where they likely stepped off course. So often I see people correctly verbalize a rule or correctly identify and name an isolated pattern, onlytothenfailmiserablyfiveminuteslaterwhenaskedtoidentifyitinthe context of a market chart. It is clear that my mission must include helping youbridgethisgap.Therewillbenumerouspersonalteststoensureyouare ready to move forward. I also have a method of drawing boxes to help you understand how connections develop within trends and corrections. xiii