Objectivity In Elliott Wave-Based Trading by D.W. Davies
There's no doubt about it. Elliott wave analysis can thoroughly confuse the uninitiated due to all the choices at potential turning points in markets. Only the correct wave label will be verified by subsequent market action. Can additional technical tools help identify the most likely turning points? Newsletter publisher D.W. Davies explains his use of cyclical channel analysis and the commodity channel index with Elliott wave analysis to identify turning points in markets.
Elliott wave analysis continues to trigger debate. On one side are those Elliotticians who swear by it
and, on occasion, would bet the family farm if challenged on its prognostications. On the other side are
those who would vehemently claim that Elliott wave theory is about as useful as eye of newt. Many
others may recognize in hindsight an Elliott wave pattern of market action but cannot use it prospectively
because of the permutations of possible future action. Instead, they find themselves paralyzed at
important market junctions because of the possibilities they visualize may be immediately ahead, rather
than trade the low-risk, high-probability opportunity. Here, then, are the major postulates of the Elliott
wave principle and how cyclical channel analysis (CCA) can identify the highly probable turning points of
the Elliott wave. Here also is how the dual commodity channel index (DCCI) can be used to pinpoint entry
and exit when trading with the Elliott wave and CCA combination.
THE ELLIOTT WAVE PRINCIPLE
Market structure can be understood in terms of the Elliott wave principle, which postulates that a
complete market cycle — that is, the complete bull-bear cycle from one bear bottom to the next — is made up of a total of eight waves of activity: five waves up compose the bull phase of the cycle and three
waves down make up the bear phase of the cycle (Figure 1).
The bull phase: The bull phase is made up of five waves of activity, three waves of price advancement
and two of correction or consolidation. The waves up are waves 1, 3 and 5, called impulse waves. The
two corrective waves are waves 2 and 4 (Figure 2).
The bear phase: The bear market is made up of three waves, two declining waves separated by one of a
corrective rally. The corrective wave may be spectacular and is the classic bull trap of the bear market.
The two waves down are waves A and C and are also called impulse waves. Each impulse wave (A and
C) is made up of five smaller waves. The corrective up wave is wave B and is made up of three smaller
waves (Figure 3). When a complete five-wave up movement has been completed, a major three-wave
downward move follows.