5th Wave Extensions – How to Measure Termination!
Eurostoxx 50 Index
Whilst the Dow Jones Industrial Average (DJIA) trades to new highs, Europe’s equivalent bull run from last November’s low has temporarily been interrupted. The reason for this relative period of underperformance lies in the Elliott Wave pattern development. Our case study is the benchmark Eurostoxx 50 index and it offers an interesting insight to a very uncommon event – a 5th wave extension.
The Elliott Wave Principle states that a five wave impulse pattern denotes the direction of the dominant trend – there are two types of impulse patterns, the expanding-impulse and the diagonal-impulse, both containing a five wave sub-structure/subdivision. The expanding-impulse is the more common pattern of the two which is the subject of this tutorial.
Every expanding-impulse pattern contains one impulse sequence, either waves 1, 3, or 5 which visibly ‘extends’ - this means it measures larger than the other two waves. About 80-85% per cent of the time, the extension or as we often term as ‘price-expansion’ occurs in the 3rd wave location – less frequent are those occasions where the 1st or 5th wave undergoes price-expansion. Because a high percentage figure is attributed to 3rd wave extensions, we often forget what a 1st or a 5th wave extension looks like. And when they do appear, how to determine the terminal high of the impulse pattern it is part of?
Over the last 25-years, we’ve discovered that each of R.N. Elliott’s 13 patterns unfold to certain dimensions defined and measured using Fibonacci-Price-Ratios. The Eurostoxx 50’s five wave expanding-impulse advance from the Nov.’16 low of 2874.00 (futures) offers a good example of what a 5th wave extension looks like and how to measure its termination – see fig #1.
Fig #1 - EuroStoxx 50 - 540 mins. - Fib-Price-Ratio Tutorial
This advance is labelled into its required five wave structure and assigned to minor degree, i-ii-iii-iv-v. Waves i-ii-iii are normal enough as is minor wave iv. four, but when wave v. five begins its advance from 3211.00, it visibly unfolds larger than its predecessors, waves i. one and iii. three. The correct way to measure the terminal high of this 5th wave is different in circumstances when an expanding-impulse pattern unfolds with a 1st or 3rd wave extension. In the case of a 5th wave extension, minor waves i-iii one-three are extended by a fib. 61.8% ratio, as follows:
- minor wave i. one (2874.00) to minor wave iii. three (3326.00) x 61.8% = minor wave v. five to 3640.00+/-
The actual high ended minor wave v. five just 5 points deviation at 3645.00.
When fib-price-ratios are applied to the correct points in the Elliott Wave process, incredibly accurate forecasting is realised. When prices respond to predetermined upside targets like this, it transforms a subjective study of analysis into an objective one. It offers a quantitative attribute to a qualitative study, something quite unique in the field of financial forecasting.
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