Basic EWT Rules

• Wave 2 cannot retrace more than 100% of wave 1.
• Wave 2 cannot be a triangle (but can be a part of it).
• Wave 3 cannot be the smallest between waves 1, 3, & 5.
• Waves 1, 3, & 5 can have extension cycles within them.
• Only 2 of the 3 bullish waves can extend in one cycle.

Advanced EWT Rules

• When wave 1 extends, the cycle completes at 61.8%-78.6% the length of wave 1 (from 2).
• Wave 2 Retracements: Typically 50%-61.8%, sometimes 38.2% (% of wave 1).
• Wave 2 can be any corrective pattern (not triangles).
• Wave 3 Targets: Usually extends past 100% the length of wave 1.
• 161.8% is the ideal target for wave 3.
• When wave 3 extends, it can reach 261.8%, 423.6%, or 685.4% the length of wave 1.
• Wave 4 Retracements: 23.6%-38.2%, sometimes 50%-61.8% (%of wave 3).
• Wave 4 and wave 1 generally do not overlap.
• Wave 4 can be any corrective pattern.
• When wave 2 is flat, wave 4 is usually deep and sharp.
• When wave 2 is deep, wave 4 is usually flat (triangle).
• Wave 5 Targets: When wave 5 extends price usually reaches 100% the length of wave 1. A standard wave 5 typically targets 38.2%-61.8% the length of waves 1+3 and can sometimes extend to 100% the length of waves 1+3.

The EWT sections below include illustrations and real examples of extended wave structures for each of the bullish waves (1, 3, & 5). Please view the ALL PATTERNS education section for rules on corrective patterns which should be used to map out corrective cycles 2 & 4.

Extended Wave 1

What is an extended wave 1?

Excessive sub-cycles that occur within wave 1.

Targets

When wave 1 is extended, wave 3 usually reaches 61.8% the length of wave 1 while wave 5 reaches 78.6% the length of wave 1. When wave 1 is extended it is usually the largest wave in its cycle. As a rule wave 3 can never be the smallest. Therefore, when wave 1 is extended, then wave 5 is almost always the smallest between the 3 bullish waves in a cycle.

Why is this important?

Extended wave 1 patterns can be found on all frames. It is a favorite for market makers when they want to move price quickly because it usually begins with an impulse wave within wave 1 of 1. Additionally, since stock patterns are fractal and repeat themselves, all bullish trends will eventually become extended wave 1 structures. This pattern is also easy to identify by its distinctive characteristics and structure shape.

When wave 1 is the largest, it is best practice to measure wave 3 against 5 to locate the price ceiling. If wave 3 is smaller than wave 1, wave 5 must be less than 100% of wave 3 since wave 3 can never be the smallest. Identifying the structure for wave 1 allows for future projected moves in waves 2 & 3 (view EWT rules).

Extended wave 1 example: $AMZN

In the example above $AMZN is showing an extended Grand Cycle Wave 1 structure from IPO. Price extended in sub-degree waves 1 & 3 within their parent Grand Wave 1. Since Grand Cycle Wave 1 was extended, the price target for the entire cycle (Grand Cycle Wave 5) is between 61.8%-78.6% the length of Grand Cycle Wave 1. Since wave 3 also extended, wave 5 CANNOT extend which is offering price acceleration towards the final price target with minimal pivots.

Extended wave 3

What is an extended wave 3?

Excessive sub-cycles that occur within wave 3.

Targets

Wave 3 can never be the smallest of the 3 bullish waves. This means wave 3 almost always reaches more than 100% the length of wave 1. Extended wave 3s are the most commonly extended wave usually with an extended sequence within its wave 3 as well. The extended cycle often mirrors its parent. This means if the parent cycle is in a wave 3 then the sub cycle may extend within its 3rd wave too. These patterns often match but can also be any of the other extended combinations. When Wave 3 extends, price can reach 161.8%, 261.8%, 423.6%, or sometimes 685.4%+ the length of wave 1 before pulling back in wave 4.

Why is this important?

Wave 3s are the most likely of the bullish waves for extensions to occur. Wave 3s are almost always the largest wave since it can NEVER be the smallest. Wave 3s are usually accompanied by bullish news and strong price movements in one direction with very shallow pullbacks or retracements. Since Wave 3 can never be the smallest along with its nature of rapid price movements, wave 3s are ideal for trading and investing for large gains, often in a short period of time relative to the degree of cycle (i.e. Grand, Major, Minor). When a wave 3 begins, it is almost always safe to assume that it will reach more than 100% the length of wave 1 with the only exception being when wave 1 is extended.

Identifying the wave 3 structures parameters allow for trades within wave 3 as well as the potential for wave 5 (in conjunction with wave 1)

Extended wave 3 example: $FICO

In the example above $FICO is currently in a powerful Grand Cycle wave 3. I chose this chart because of the combinations of extended cycles used to compose the overall cycle pattern. Wave (1) of 3 was not extended which opens the doors for extensions later on. Wave (3) of 3 is a classic wave 3 extended cycle with (i) being small, extensions within 3 of (iii) and an extended wave 1 structure for wave (v) of (3). Since wave (1) was small, wave (5) can and is extending and has already broken above the classic target of 61.8% the length of waves (1)+(3) and just recently completed wave (iii) of (5) with the final wave (v) targeted to reach 100% of waves (1)+(3) (because wave (5) of 3 is also extending. Ideally wave 3s should reach 161.8% of wave 1 but when extended within wave 3, price can reach higher extensions within the Fibonacci Sequence, in this case it is the 423.6%.

Extended wave 5

What is an extended wave 5?

Excessive sub-cycles that occur within wave 5.

Targets

Extended wave 5 structures usually reach 100% the length of waves 1+3.Sometimes extended wave 5s can reach other extensions of 1+3 such as the 161.8% or 138.2%. Since wave 5s are in an ending sequence (wave 5), it is important to zoom out to the greater degree to determine what the greater price target is. There is usually a convergence of extensions between the greater & smaller degrees.

Why is this important?

Identifying wave 5 structures can expose all sorts of data for traders and investors. Since wave 5s are last in a cycle, price can accelerate quickly if extending to reach a larger target or to create a capitulation moment. Wave 5 structures can also help a trader or investor know when to reduce or exit a trade knowing that the next wave in the greater degree will begin soon (i.e. retracements or 3 swing bounces during corrections). Any degree wave 5 can extend within its larger wave cycle as long as one of the two other bullish waves within that cycle has not already extended. Since wave 3 almost always extends, you must look whether wave 1 is extended. If wave 1 is extended it is safe to assume that wave 5 will not extend.

Extended wave 5 example: $CMG

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In the example above $CMG printed a very nice looking extended wave (5) structure to complete its first Grand Cycle. In this cycle price extended in wave 3 as well as wave 5. In wave (5) price structure extended within wave (v) accelerating right to the 100% target with minimal resistance in an extended wave 1 structure quickly completing in waves 3, 4 & 5. Remember that price can extend in a number of combinations. Even though it is extending in a wave (v) of (5) it extended in wave 1 of (v) of (5) of Grand Cycle Wave 1.

This take us full circle to the fractal concept where all cycles inevitably become extended wave 1 structures. Now that Chipotle stock has completed a Grand Cycle (accompanied by a new catalyst of CEO change) it is retracing for a Grand Cycle wave 2. Traders should look for the 61.8%-78.6% extension of $CMG Grand cycle wave 1 against 2 lows once it occurs to BTD & targets for Grand cycle wave 3...Since it is now an Extended Wave 1 structure.

Cycles will repeat in Bullish trends until price breaks below 100% of the largest wave 2 lows. This can create a bear market where all rules still apply. Only the direction of price changes, so instead of bullish cycles higher with corrections lower, it would be bearish cycles lower and corrections higher. This also applies to any stock that is in a major downtrend usually accompanied by bad fundamentals.

$QQQ 500 tick ($5) bar price chart & 4 hour time chart

We're going to look at the cycles and apply the lessons above while hinting one more lesson on confirming trade setups.

Trade #1

For this trade we are spectating price action exiting an ABC "Zig Zag" correction down to $420. Price exits the zig zag pattern and bounces for a wave 1, then retraces 50%-61.8% for a higher low. This is an ideal wave 2 condition and a good spot for entry to swing or go long for wave 3. Since we're entering a wave 3, Price target 1 is 100% of wave 1, Price target 2 is 161.8% of wave 1. It is a best practice to take out the principal investment of your trade and even lock in some gains when first price target hits. Every trader has their tolerance for risk. Some traders may reduce their positions by whatever metric needed to create a risk free trade.

Trade #2

Since we bought the dip in wave 2 and rode wave 3 for a nice trade, we are now thinking to buy the dip in wave 4 to swing wave 5 higher. Wave 5 can offer a very profitable trade but wave 4s can be tricky so it's important to mitigate risk by reducing the size of the trade, setting stops, and waiting for support confirmations.

The first step is to identify the wave 4 structure and where to BTD (refer to "EWT rules" and "All Patterns" education sections). In this case, wave 4 was a zig zag that failed the 161.8% extensions, retraced 61.8% of wave 3, and found support above the peak of wave 1. The Target for this trade is 61.8% the length of waves 1+3. However, because wave 1 was not extended, it is possible for wave 5 to extend which would increase the potential target for wave 5 to reach 100% the length of waves 1+3.

Gains should be taken and the majority (to all) of your position should be closed when structure looks complete which happened just over the target 61.8% level. This is labeled "wave 1" of 5 (hand drawn in blue) because price eventually extended in wave 5. But at the time we wouldn't know this. At the time we would be labeling it wave 5 and is why we take gains here.

Price then appeared to make a higher low for a possible "wave 2" of 5. Confirmation occurred when price broke over wave 1. Now it's time to look for and BTD. In the next circle when price back tests the former target 61.8% level, dips can be bought and played to the 100% extension of waves 1+3 which is the target for wave 5 when wave 5 extends.

Confirming pivots using momentum

Above is a 4 hour $QQQ chart highlighting momentum divergences and extreme areas which can be used to confirm the major pivots in your Elliott Wave Theory analysis. In this case there were 3 major areas of opportunity where divergence or extreme converged with EWT analysis confirming that it is a highly probable success area to BUY the DIP. These are generally areas where buyers and sellers agree on a price. Finding these areas is the key to a successful trader or investor.

What is momentum?

The rate of change in price plotted over a previous amount of time.

Why is this important?

Identifying the momentum of a stock price can help traders and investors decide on strategy, entry & exit points, or whether to even take a trade. Traders & investors will typically look for divergences in momentum along with extreme areas both of which will offer clues on whether to BUY the DIP, SELL the RIP, or do nothing.

What are "momentum divergences" & "extreme areas"?

Momentum Divergences are when there is a discrepancy between momentum and price. There are bullish/positive divergences and bearish/negative divergences. The most common bullish divergence is when RSI makes a higher low while stock price makes a lower low. Momentum Divergences is one of the most effective ways to identify and confirm pivots. Identifying divergences is a skill worth mastering. Momentum Extremes is another effective way to locate and confirm pivots. There is a science to exposing extreme momentum areas which will be covered in the "Momentum Indicators Section".

Momentum Indicators used to expose divergences and extreme areas can include RSI, MACD, Stochastic, Volume, and many many more. Divergences & extremes can be found on any time or price frame. The longer the frame, the stronger the divergence or extreme area will be.

The momentum chart below highlights some of the signals momentum printed while correcting towards $420. The first extreme area reached on RSI & Stoch but did not break price oscillator. Bullish divergence formed (grey trendlines) but was met with a larger bearish divergence (lilac). Price reached extreme area at $420 when short and long length RSI reached extremes and printed a bullish divergence (green). Notice Price oscillator trend broke, then diverted on the next dip when short RSI reached extreme along with price meeting the trendline down. These are the ideal momentum conditions for a reversal and to go long.