Basics of Elliott Wave
"An action is always followed by the reaction"
An Impulse pattern is always followed by a Corrective Pattern. As we saw earlier, a corrective pattern has 3 waves. In this section, let us understand more about corrective patterns and when they form.
Waves counter to the main trend are corrective waves.
Corrective waves are most of the time, more complex and time-consuming than the impulse wave Correction waves are patterns, which occur between the impulse waves.
Correction patterns are normally made up of 3 mono waves. Correction only becomes “crystal clear” when they have completed or are near completion.
The corrective pattern consists of 3 waves with some exceptions that it moves against the trends of the next larger degree. Wave 2 moves in the direction of the trend, and Wave 1 moves against it. The waves are labelled as A, B and C.
The image below shows the Corrective pattern formation in Nifty50 weekly time frame:
Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.
Prices reverse higher, which many see as a resumption of the now long-gone bull market. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
Prices move impulsively lower in five waves. Volume picks up. Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
What are the various types of corrective patterns?
Corrective patterns are mainly of 3 types:
1. Zigzag correction: It is made up of 3 waves which are named as A,B and C. Zigzags move sharply or strongly up or down. Zigzag patterns are sharp declines in a bull rally or advances in a bear rally that substantially correct the price level of the previous Impulse patterns.
The above image shows a ZigZag correction in Bharti Airtel daily time frame
2. Flat Correction: It differs from Zigzag in that it tends to move sideways rather than strongly up or down. hence the name “Flat”. Flat tend to move the market sideways pattern. It is made up of 3 waves which are named as A, B, and C. These three waves also tend to be equivalent in the length. In the flat pattern, wave B will often undo the work of wave A and frequently reach the top of the previous impulse wave. Due to this action Wave B tends to fool traders who think that correction is over. Wave C then undoes the work of Wave B.
The above image shows a Flat correction in Bajaj Finance in weekly time frame
3. Triangle Correction: It is made up of 5 waves which are named A, B, C, D, and E. It is a sideways pattern like Flat. All the waves are range-bound. It is one of the most common types of pattern.
The above image shows a Triangle correction in Axis bank in daily time frame.