Wednesday, December 21, 2016

What we are looking for

Below is a crystal clear example of a fourth wave - this time in the chart of the two-hourly US Dollar Index. Follow this example in detail, and you will likely learn a lot about wave-counting for yourself.

US Dollar Index - March Future - 2 Hr

First, the waves you see clearly form a channel. The channel is first drawn between waves 1 & 3. Wave 3 is denoted in this case by the maximum of the Elliott Wave Oscillator (EWO). We did not draw 120 candles on the chart for this example .. which is occurring in real-time. We highly recommend you do.

Next, look at wave 2, before paying attention to anything else. Wave 2 is a sharp wave (i.e. zigzag). It has an impulse wave a, a short b, and and ending contracting diagonal c wave - which forms perfectly in every detail. Wave 2 also has it's EWO cross below the zero line, and it crosses under the EMA-34 to indicate it's a different wave.

Then, after wave 3, there is another zigzag downward to the point marked in blue as a:3, and this structure in and of itself, would provide no alternation for wave 2. That is your first major clue about wave 4. The second major clue is that the EWO has not crossed below zero in the downward direction. That is a major warning that wave 4 is not done.

Because the EMA-34 is not crossed lower, we should not expect that wave 4 ended at that location. Even visually just eyeing the wave at the point of a:3, wave 4 would be very short in time compared to wave 2, if it ended at the a:3 location, wouldn't it? And what do we know about Elliott 4th waves? Usually, most often, (not always) the fourth waves take up a lot of time, particularly if they turn out to be triangles.

Now the a:3 wave forms as a zigzag, also. It has an impulse wave a, a more substantial b wave than the one in wave 2, and the c wave down is also a contracting ending diagonal. This time, if you go down to the level of the 30-minute chart, you'll find that the fifth wave of the diagonal truncates ever so few pips. That's fine. That's allowed in an ending diagonal, and never allowed in a Leading Diagonal. The truncation is your second major warning about wave 4. A truncation in an up market means, "stronger prices dead ahead", and that's what happens. A new high is made in the market. But this high also occurs in three waves - black a,b,c. Wave c is clearly in five waves. And notice, that it is only a marginal new high. This is what we call a regular b wave.

But this is the important point: After wave 3, when you have three-waves down - as an a:3 wave - the meaning of the a:3 is that the b:3 wave must reach the 90% level for a flat wave. And it does, too. That is clear.

So, now we see on the down side that wave 4 has indeed crossed the EMA-34 again to make a wave with good form and balance. So, this is the minimum time that we should normally look for wave 4 to complete. And it could. Wave 4 could form what we call a "running flat" and end right there to begin a wave 5, up. But that would be the very rare case.

More typically, wave 4 would form a FLAT wave, with a c:5 wave down, lower than the a:3 wave down. Flats are common, but most people make the mistake of putting the Elliott wave label for 3 at the highest point on the chart, and not drawing in the reference channel. And that prevents them from recognizing the FLAT wave structure.

Now, finally, with all of those prerequisites put into place, we might finally expect wave 4 to attack the lower trend channel boundary in some way. It could still do it as a triangle (in this case it would be a running triangle because of the slightly higher b wave), or it could do it as a FLAT, or a double flat or other more complex structure, and in it's attack the EWO will likely be within +10% to -40% of the zero line compared to the wave 3 high of the EWO.

But, the number of structures I have just described above - and the legitimate ways the fourth wave could complete - are what I call the fourth wave conundrum. It is very difficult to predict the ultimate shape of that wave. Many Elliotticians - wanting perfection for their own systems and biases - don't want to hear about that uncertainty, and so they don't call fourth waves properly, or they confuse them with second waves.

But, after reading this post, we hope you won't. With a few simple tools and techniques you can do this for yourself, increasing your own confidence in wave counting.

The bottom line is there should be a fifth wave up in the Dollar Index, and it should approximate the length of the first wave, wave 1 - perhaps ending on or near the mid-channel.


  1. Thx TJ! I'm very curious what happens with the ongoing 4th wave in S&P.

    1. Still a triangle or double flat (complex flat) .. waiting on resolution.

  2. Joe, can you give me a service that offers EWO. I subscribe to stockcharts but they don't offer EWO as an indicator. Thanks Sam

    1. offers it for free (along with their free streaming quotes). They call it the Awesome Oscillator (AO) .. as Williams originally did. It's absolutely the same thing.

  3. Thanks for the detailed explanation. Any idea how this 5-wave move up fits into the larger picture for the USD?

    1. Yes, I do. Intermediate (3) when it is finished.