One of the first Elliott Wave patterns we devoted an entire lesson to was the ending diagonal. It is relatively easy to recognize and very important, because it is usually followed by a sudden trend reversal. But if there is an ending diagonal, there must be a leading diagonal, as well, right? Yes, there is and it is the topic of this article.
The leading diagonal pattern is very similar to the ending one. It consists of five sub-waves, labeled 1-2-3-4-5. Its first wave is usually the longest, while the third wave cannot be the shortest among waves 1, 3 and 5, and waves 2 and 4 are always corrective. Waves 1 and 4 should overlap. There are, however, few notable exceptions. First, leading diagonals occur in the position of the first wave within a regular five-wave impulse or in the position of wave A of a simple zig-zag correction. Second, unlike ending diagonals, where each of the five waves is corrective in nature, the structure of the three motive waves of the leading diagonal – 1, 3 and 5 – can be corrective as well as impulsive. Let’s see some examples.
The chart above shows a complete five-wave impulse drawn by the USD index between April 2011 and January 2017. Pay attention to wave (1). It is a clear leading diagonal. It consists of five sub-waves, marked 1-2-3-4-5. Its contracting shape is obvious and waves 1 and 4 are overlapping. Leading diagonals carry the same meaning as regular impulses. They indicate the direction of the larger trend. On the other hand, before the larger trend continues, a three-wave correction in wave (2)/B occurs. In the above-shown example, the leading diagonal in wave (1) is followed by a running flat correction in wave (2). Then, the uptrend resumed in wave (3). Now, let’s see how leading diagonals look like in a downtrend.
2013 was a nightmarish year for gold investors, who saw the price of the precious metal crash from nearly $1700 to as low as $1182. Even though the exact size of the selloff was impossible to predict, there was a complete leading diagonal on the daily chart of gold, preparing Elliott Wave analysts for lower prices ahead. Now we can see that the leading diagonal fits in the position of wave (1) of a five-wave decline gold still has not managed to completely recover from. The next example shows us a leading diagonal as an A-wave within a zig-zag retracement.
In fact, this 4-hour chart of gold makes not one, but four leading diagonals visible. We will focus on the big one, labeled as wave (A), which took place between the low at $1123 and $1264. It is made of five waves, where waves 2, 3, 4 and 5 consists of only three sub-waves, while wave 1 is a textbook five-wave impulse. Wave (A) then makes way for a double flat correction in wave (B), whose wave A is a running flat itself. Wave (B) terminates at $1204 and gives the start of wave (C), which took the price of gold up to $1357. The other three leading diagonal on this chart can be found in the position of waves 1 of (c) of A, (a) of B and 1 of (C).
Recognizing a leading diagonal can help you determine the direction of the larger trend. One problem is that while it develops, this pattern looks a lot like a double zig-zag correction. Keep both alternatives in mind when you think you have found a leading diagonal.