Does the Wave Principle Subsume All Valid Technical “Chart Patterns”? – Part II
This essay by Robert R. Prechter, Jr. originally appeared in The Elliott Wave Theorist in October 2005.
Ascending Triangle
The chartists’ and Elliott’s ascending triangles are nearly identical in general form and implication, per Figure 12a. Edwards and Magee affirm, as did Elliott, that “they give advance notice of their intentions”18 for subsequent price movement. The main difference between the two ideas is that triangles under the Wave Principle always occur as or within corrections such as in Figure 11c, while chartists also see them in places that Elliotticians would view as epiphenomena attending normal Elliott wave development. Figure 12b is an illustration from Edwards and Magee showing a purported Ascending Triangle between dashed lines. I have added wave labels to show that this apparent form has nothing to do with an ascending triangle under the Wave Principle, either in form (it has only three subwaves) or position.
Figure 11c
Figure 12a
Figure 12b
Descending Triangle
Comments under “Ascending Triangle” pertain equally to Descending Triangles. See Figures 13a and 13b.
Figure 13a
Figure 13b
Broadening Formation
Edwards and Magee’s “broadening formation” is a general description of Elliott’s
more specifically defined “expanding triangle.” Elliott’s triangle, as depicted
in Figure 14a, “always occurs in a position prior to the final actionary wave
in a pattern,”19 i.e., just before a top or bottom. Edwards and
Magee observe the same thing about the broadening formation, which “develops
most frequently in the later and more ‘excited’ stages of a Primary Bull Market.”20
Figure 14b shows a close-up of a real-life example of Elliott’s expanding
triangle. Figure 14c shows its position in the larger pattern, showing that
it occurred in exactly the position that Edwards and Magee (and Elliott) described.
Figure 14d shows one of Edwards and Magee’s examples of a “broadening formation.”
Elliott wave labels are added to show that again it occurs in the position
that Elliott and Edwards and Magee described. See Figure 5-5 in Elliott
Wave Principle for another real-life example.
Figure 14a
Figure 14b
Figure 14c
Figure 14d
Rectangle
The chartist’s rectangle is Elliott’s “sideways” correction, per Figures 15a and 15b. Chartists also see rectangles at tops and bottoms, but again these may be deemed a spurious pattern imposed upon normal wave development. An example is the apparent rectangle from February through September of 1976 shown in Figure 15c, which is properly depicted in Figure 14b as part of an expanding triangle.
Figure 15a
Figure 15b
Figure 15c
Double and Triple Tops and Bottoms
According to the chartist, these are four distinct patterns. According to an Elliottician, these are not distinct patterns at all but the occasional result of certain quantitative relationships among two or more waves near the termination of a larger wave. Supporting that conclusion are Edwards and Magee’s own words, “True Double Top and Bottoms are exceedingly rare; Triple forms are even rarer.”21 In the unusual circumstances when wave 5, C or A is relatively short and/or wave 2 or B is relatively long, the market has the appearance of a double or triple top or bottom. Figure 16a shows Elliott wave labels imposed upon Edwards and Magee’s example of a double bottom. Figure 16b does the same thing (the solid line has been added to delineate a triangle) with their example of a triple top, which is rather strained given that the peaks actually occur at three different levels.
Figure 16a
Figure 16b
Diamond
Like the rectangle, “the Diamond is not a common pattern.”22 Elliotticians
once again would explain this fact by saying that the diamond, which typically
occurs near market tops, is an epiphenomenon attending occasional times when
ending waves are clustered. Figure 17a is a graph from Edwards and Magee showing
a diamond. The Elliott wave labels superimposed upon it are crystal clear.
A mid-trend diamond, such as Edwards and Magee see in at least one instance,
is simply a complex corrective wave such as illustrated in Figure 17b, from
Elliott
Wave Principle.
Figure 17a
Figure 17b
Falling or Rising Wedge
A wedge is a formation in which “the price fluctuations are confined within converging straight (or practically straight) lines, but differing from a Triangle in that both boundary lines either slope up or slope down.”23 This general description is part of Elliott’s more specific description of a “diagonal triangle.” Figure 18a shows Elliott’s depiction of a diagonal triangle. Figure 18b shows Edwards and Magee’s example of a wedge at the end of a trend. I have added Elliott wave labels to show that Elliott’s depiction accounts for this example.
Figure 18a
Figure 18b
Pennant
The appearance of a wedge intra-trend, which Edwards and Magee call a pennant, may simply outline the shape of a single, double or triple zigzag under the Wave Principle. Figure 18c is from Edwards and Magee, with Elliott wave labels added to reveal a triple zigzag.
Figure 18c
Flag
A flag “looks like a flag on the chart.... It might be described as a small, compact parallelogram of price fluctuations....”24 This is another example of a general form that may be imposed upon Elliott’s more specific forms. Figure 19 is a chart from Edwards and Magee, with labels added to show how well it depicts an Elliott wave. The “flag” is simply two boundary lines around a zigzag and waves 1-2, i-ii of the next advance. Most examples from Edwards and Magee are single, double or triple zigzags.
Figure 19
For a continuation of this report, read Does the Wave Principle Subsume All Valid Technical “Chart Patterns” - Part III.
NOTES
18 Edwards, Robert D., and John Magee. (1996, 5th ed.). Technical Analysis of Stock Trends. Springfield, MA: John Magee, p. 102.
19 Frost, Alfred John, and Robert Prechter, Jr. (1978). Elliott Wave Principle—Key to Market Behavior. Gainesville, GA: New Classics Library, p. 51.
20 Edwards and Magee, p. 141.
21 Ibid., p. 128
22 Ibid., p. 153.
23 Ibid., p. 155.
24 Ibid., p. 169.