Elliott Wave analysis of the German DAX (DE30) index would have guided us well ahead of time about the deep correction that is underway in the European stock markets. This post discusses how we could have used Elliott Wave analysis to anticipate key turning points in the benchmark index, and taken steps to lighten our equity exposures. The steps I use have all been explained in detail in the Elliott Wave book “Five Waves to Financial Freedom”. Let us start by looking at the various waves since the significant low of 3588 on 13 March 2009.
Wave 1
The first wave, or what we label as wave 1, went from the low of 3588 to a high of 7442. If you look at the intra-day charts of the German Dax during this period, you will be able to see that this wave 1 had its own set of five sub waves. You will also notice that sub wave 3 within this wave 1 was extended, in that it traveled more than 161.8% of sub wave 1. Thus, I would have determined that wave 1 was extended, giving a low probability for either of the upcoming impulse waves to extend. However, the more interesting development happened subsequently. But first, let us look at the chart.
Wave 2
Wave 2 was a complex correction. It has traced what is described in the Elliott Wave book “Five Waves to Financial Freedom” as an irregular correction. Notice that sub wave b posted a high that went above the end of wave 1. We then got a deep sell off as wave c to compete a three-step complex correction. The fact that wave 2 was deep is important at that time because it signaled to us that wave 4 will likely be short and simple.
Wave 3
Next we look at the third wave, or wave 3. Observe that it reached slightly higher than the 123.6% Fibonacci ratio projection of wave 1.
Wave 4
As anticipated earlier on, wave 4 was a brief and short correction. It was also a normal zigzag correction. Traders and investors would have added to their holdings on this dip. When I advise my high-net-worth clients and fund managers, I recommend them to add more to their core holdings during this fourth wave dip.
Wave 5
And finally, Wave 5 finished exactly at the 61.8% measure of the distance traveled from point 0 to point 3. This is quite an amazing phenomenon, and has been described in detail in my book. Now you tell me, which other approach to the financial markets can be more accurate than this in anticipating the end of a bull cycle!
Conclusion:
I agree that it is not easy for traders and investors to be able to label waves with confidence, which is why many high networth individuals and hedge fund managers seek the advice of professionals. But, you too can improve your performance in the stock market by paying simple attention to some relatively straight forward rules and guidelines. I wish you all the best. Ramki
11 Comments
sir,
after high of 12391 of april 2015
low of 8699 of feb 2016 is wave A ?
then
10474 being “B”
now wave “C”
thanks
h.mehta
Himanshu, One can label the waves accurately only AFTER the move is over. Prior to that, all labels are tentative. One should then use his experience and understanding of wave personality, the position of the waves in the sequence, as well as underlying market sentiment to make real-time decisions.Elliott Waves offer you the framework for doing this.
Hi Ramki, you mentioned that sub wave 3 within wave one was extended but – sub wave 3 within wave 3 was extended as well (as it also traveled more than 161.8% of wave 1 of wave 3). Could it be that wave 5 is actually wave 3 since there is a tendency for wave 3 to be the longest wave?
YC Voon, That is a great question. Yes, everything is possible. We could even reach new highs or at least re-test old highs. The key thing is to be able to USE elliott waves when the market is live, and take sensible decisions. There is always a risk of loss, but you would minimize these losses and produce sizeable winners by positioning at the end of ‘possible’ turn levels.Good luck.
Always Amazing 🙂
Acc to FWTFF the correction to follow once a 5 wave is completed should be bigger and take longer than the previous two corrections i.e wave 2 [61.8] and wave 4.
Taking this into account and computing the 61.8 and 50% retracement of Larger wave 1 would the possible targets of 7600-8500 be reasonable ?
Imran, The right way to measure is the actual distance (in points) moved by waves 2 and 4, and the actual number of days each of these waves took. Then you can measure that distance from the peak of the 5th wave as the minimum target.
Dear Ram,
probably there is one approach but i am not sure whether it can be called better approach than this method and the time would tell the answer….
For the record, i would share the approach after the following ( IF it happens true shortly ..)
I know a reversal point very close by to the recent lows and then new highs is my expectation..( exact levels later)..
Cheers..
Kumar
Kumar, My question was more ‘rhetoric’ in nature! Of course there are many approaches to trading and some may be even superior to Elliott Waves. I always urge traders to follow their heart. If they are comfortable with some other method, then they should embrace it. As for the DAX, please see my response to YCVoon’s question below. Cheers
Dear Ram,
As always a pleasure to hear your response..
Could you please post you next message on GOLD as it has been a very long time since you updated it.
thanks and Cheers
Kumar
Hello Sir ,
How wave 2 as abc is here complex correction? I understand from your book complex correction has abc X abc structure but here only abc (Inverted Flat pattern) . so it shall be simple correction.
I understand that,
Simple correction like Zig zag or Flate
Complex correction like more than two or three simple corrections with “X” wave
Am I wrong sir? pls guide
Bharat, By definition, a Flat correction is a complex correction. IN this case, we see an irregular ‘b’ wave which is certainly a complex correction.