Advanced Wave Personality and Analysis

Video Transcription:

Hello, traders. Welcome to the Elliott Wave Theory course, and the fourth module, Guidelines of the Elliott Wave Sequence. In this lesson, we are going to talk about the personality of each wave in the sequence. And, well, you’re going to see that we are going to start talking about the human side of the Elliott Wave sequence and the Elliott Wave Theory overall. And it’s important to talk about it because up until now we only have seen this course as a way to count waves, to perfectly time your entries and of course your exits, and to having an edge on predicting price action.

But let’s start by the general idea, and the general idea that each wave has a different personality brings out the human face of the Elliott Wave Theory. Up until now, we have only focused on levels, correct counts, and perfect timing, but the personality of each wave is important to understand because waves form this way because of mass psychology. Remember that price action is driven by human decisions, the decisions to buy or sell a financial asset. And these decisions create what we call here waves or patterns. So we are going to study the mass psychology behind these patterns and behind each and every single wave.

Wave Personality

Remember that each cycle starts with pessimism, which is naturally converted to optimisms through mass emotion and then back to pessimism again when we start correcting. Do you remember the first lessons when we started the basic pattern, which started at the bottom at a very extreme level in the market and then we started to move up in waves? From pessimism to optimism, from pessimism at the beginning of Wave 1, to optimism at the end of Wave 5, then back to pessimism again when we started to correct on the A-B-C. So this is what we’re talking about here: the personality of each wave or the emotions or the mass psychology or mass emotions behind each wave. And these emotions and this psychology is going to explain to us why does each wave form the way it does, why don’t we have a deeper correction than 100% of Wave 2, why Wave 4 cannot correct beyond the end of Wave 3, etc.

Wave Personality

These emotional cycles create identifiable patterns in price action, which we label as waves. When there’s more optimism than pessimism in the markets, the more powerful the actionary wave is and this is normal. And right now we’re going to see this diagram that I pulled out of a book called Idealized Elliott Wave Progression. As you can see right here, we have a five-wave pattern and we have correctly channeled the pattern from the end of Wave 2 to the other end of Wave 5, and then a parallel line at the end of Wave 3 to pinpoint the end of Wave 5.

Now let’s start by the bottom. The bottom is the beginning of Wave 1: large degrees, questions of existence, survival, depression, war, intermediate degrees, recession, panic, limited wars, and minor degrees often accompanied by bad news. This means that everything that I just said has driven price to these lows, and there is so much pessimism in the market that this is the bottom of the market and it cannot go lower.

Then we have a rebound from undervalued levels. This is due to the recognition of survival by humans. Humans understand that this is not the end and that we are going to bounce out of this depression and then here comes the first wave. Then a natural test of the lows, which is a fundamental condition often as bad or worse than those of the previous bottom.

When this happens and the Wave 2 starts to create, the underlying trend is considered down. But when it does not carry to a new low, we have found again a powerful wave: strength, breath, best fundamentals. This is due to, of course, the formation of the previous waves. We have a rebound from the bottom, then a test of the lows. And because we have broken with the bottom and the down pattern or the down structure our price was in, here comes the buyers, powerful, brave, their strength, breath, best fundamentals increasing real prosperity. By the end, the underlying trend is considered up. Here is where the actual trend shift occurs. It doesn’t occur in Wave 1 or Wave 2. It occurs on Wave 3, which is called the powerful wave. And this is why Wave 3 or the third wave cannot be the shortest wave because this must be the powerful wave.

Now here we have clearly shifted trends and now the trend is considered up. Then we have a surprising disappointment. This signals that the best part of growth phase has ended because a powerful wave has ended. Because of profit taking maybe, there is disappointment in the market. But this pessimism is not strong enough to drive price below the high or below the end of Wave 1.

Then we have the final advance. After this small moment of disappointment, the market performance and fundamentals improve, but not to levels of Wave 3 and psychology creates overvaluation. And this is why Wave 5 is the final wave on an impulse pattern. We do have final advance. We have a better performance in the market. We have better fundamentals, but this does not bring price levels of Wave 3. And because of it, mass psychology creates overvaluation of this asset and this is why we are going to start an A-B-C corrective move from the high of these five-wave impulse moves. And this is basically the personality of each wave. I needed you to understand what lies behind each and every single one of the waves. And the reason that I needed you to understand this is because now you can see why we are going to trade the final advance on the powerful wave only.

Adam

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