Wave Function and Elliott Wave
Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary or countertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters (for example, 1, 3, 5, a and c in Figure 1-2). Reactionary waves are labeled with even numbers and letters (for example, 2, 4 and b in Figure 1-2).
All reactionary waves develop in corrective mode. If all actionary waves developed in motive mode, then there would be no need for different terms. Indeed, most actionary waves do subdivide into five waves. However, as the following sections reveal, a few actionary waves develop in corrective mode, i.e., they subdivide into three waves or a variation thereof. A detailed knowledge of pattern construction is required in order to understand the distinction between actionary function and motive mode, which in the underlying model of Figures 1-1 through 1-4 are indistinct. A thorough understanding of the forms detailed later in this chapter will clarify why we have introduced these terms to the Elliott wave lexicon.
Variations on the Basic Theme
The Wave Principle would be simple to apply if the essential design described above were the complete description of market behavior. The real world, fortunately or unfortunately, is not so simple. While an idea such as cyclicality in markets or human experience implies precise repetition, the concept of waves allows for immense variability, which is in fact abundantly in evidence. The rest of this chapter fills out the description of how the market actually behaves. That is what Elliott set out to describe, and he succeeded in doing so.
There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the market can do, and at least as important, what it does not do.
Chapters 2 and 4 present a number of guidelines to proper wave interpretation. If you do not wish to become a market analyst or are concerned that you will become bogged down in technical detail, skim the next paragraph and then skip to Chapter 3. A brief perusal of the highly condensed summary below should ensure that you will at least in later chapters as necessary aspects of the Wave Principle.
Summary of Additional Technical Aspects
Additional technical aspects of waves, which are discussed in detail from here through Chapter 2, are herewith stated as briefly as possible: Most motive waves take the form of an impulse, i.e., a five-wave pattern like those shown in Figures 1-1 through 1-4, in which subwave 4 does not overlap subwave 1, and subwave 3 is not the shortest subwave. Impulses are typically bound by parallel lines. One motive wave in an impulse, i.e., 1, 3 or 5, is typically extended, i.e., much longer than the other two. There is a rare motive variation called a diagonal, which is a wedge-shaped pattern that appears at the start (wave 1 or A) or the end (wave 5 or C) of a larger wave. Corrective waves have numerous variations. The main ones are named zigzag (which is the one shown in Figures 1-2, 1-3 and 1-4), flat and triangle (whose labels include D and E). These three simple corrective patterns can string together to form more complex corrections (the components of which are labeled W, X, Y and Z). In impulses, waves 2 and 4 nearly always alternate in form, where one correction is typically of the zigzag family and the other is not. Each wave exhibits characteristic volume behavior and a "personality" in terms of attendant momentum and investor sentiment.
General readers may now skip to Chapter 3. For those who want to learn the details, we will turn our attention to the specifics of wave form.
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