Trading five-wave reversals Part 2 by Dan A. Dimock
In "Trading five-wave reversals" (Stocks & Commodities, January 1990), I examined the one place in the market cycle where optimal entry into a win-win situation can occur: at the end of any wave C that has subdivided into five lesser waves of sufficient price range. I also mentioned a technique that can be used to find it. The discussion ended with the three wave classifications (1, B and X) that can follow these optimum entry points within the guidelines of the wave principle, reasoning that a potentially profitable trade with minimal risk is in the offing no matter which track the market picks.
As seen in Figure 1, the more profitable wave to enter is wave 1 of waves I, III or V. However, the possibility that corrective waves B or X could occur ahead of the major change in trend is what first deserves our attention. For example, will a 5-3-5 (zigzag):
• Conclude a corrective pattern with wave X to follow?
• Conclude an entire correction (so we can get into the next wave)? or
• Become wave A of a flat within the correction—with more correction still to come?