In order to make a reliable analysis, based on the Elliott Wave Principle, one has to be able to find the different patterns that are visible on a price chart. In this article we will examine of them.
In our lesson about Elliott Wave Patterns you can see everything, which, according to the theory, constructs the behavior of the financial markets, including the three types of corrective patterns – zig-zags, flats and triangles. Here we will focus our attention on the triangle correction. There are two sub-types of triangles: contracting and expanding. An idealized example of the contracting variety is given below.
Every triangle correction consists of 5 waves moving sideways, labeled A-B-C-D-E. Each one of these 5 waves has a 3-wave structure (3-3-3-3-3). Triangles indicate that there is only one final move left in the direction of the larger trend, after which, a reversal should be expected. This means that triangles occur as wave 4 of an impulse, wave B of an A-B-C correction, or the final wave X in double and triple zig-zag corrections. If wave B of the triangle is larger than A in terms of price, the triangle is called “running”. On very rare occasions a triangle could be positioned as wave Y or wave Z of a corrective combination. The chart below shows a running triangle in the position of wave 4 of an impulse in AUDJPY.
Triangles precede the last wave of one larger degree. In this case, the larger degree pattern is the five-wave impulsive decline and the last wave is its wave 5. After that, there is a reversal, because every five waves are followed by a three-wave correction in the opposite direction. The next chart depicts a wave B triangle in platinum.
As you can see, the triangle fits perfectly between waves A and C of an A-B-C zig-zag correction to the upside. It indicates, that the recovery should be limited. And indeed, once wave C, the wave after the triangle, was over, the price of platinum started declining. However, not all triangles are as easy to label as this one. Sometimes wave E forms a smaller triangle within the larger one. That is exactly what happened with the ASX 200 in the summer of 2014.
The chart shows a corrective (A)-(B)-(C) decline, where wave (B) is a triangle. Note that wave E of (B) is also a triangle. It may be a little complicated, but it does not change the consequences at all. As soon as wave E was over, there was a sharp sell-off in the face of wave (C), which completed the larger pattern. After its end the Australian stock index surged to 5680.
The information a triangle gives us, is that we should not get overconfident in the current trend, because its direction is likely to change soon. Recognizing a triangle is like seeing a “proceed with caution” sign.