Impulsive vs Corrective Waves

CastAwayTrader Market Analysis
9 min readOct 2, 2020

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How to identify them in real life and what to do when you do not feel confident about your count

According to the Harmonic Elliott Wave theory, a modified version of the classic Elliott Wave theory, every trending move in price on financial assets should follow a repeating pattern, the Five Wave up fractal.

Normally price for any tradeable asset fluctuates up and down in zig-zags. We consider price for any asset trending up if it keeps making higher highs and higher lows.

You can see that those moves that push price to new highs are colored in blue color. Traders who believe that price will get higher keep buying the asset and push its price higher. We call moves in the direction of the main trend that make higher highs in price impulsive waves. Impulsive waves are themselves structured as a small Five Wave up fractal. That means that if you zoom-in you will see that every impulsive wave is composed of five micro waves of smaller size.

But every impulsive wave is followed by a corrective wave, a temporary pullback driven by traders who feel skeptical about continuation of the move higher. They sell because they expect the price to go down. You can read why the sentiment of market participants is the main driving force in financial markets in my article here.

Corrective waves normally have a clean a-b-c micro internal structure.

Recently I got a letter from Yuliana, a student of my video course “Predict the Market with the Harmonic Elliott Wave Analysis”. She asked me to elaborate on how we can identify impulsive and corrective waves in real life when we deal with incomplete price structures.

In this article I will attempt to explain to Yuliana and other students how understanding of interchanging sequence of impulsive and corrective waves can actually help you to make long term predictions about prices of financial assets (including stocks, futures, commodities, bonds and crypto currencies).

Let’s go together through the rally performed by RTY since 2008 up to now and I will be explaining the logic of never ending sequence of impulsive and corrective waves.

A glance at this chart tells me we are dealing with an impulsive structure. You can also calling it a trending structure. Price kept making higher highs and higher lows over the ten year period of ten years. If you are a novice Elliott Wave analyst you could argue that it is not clear for you why I call it impulsive.

Let’s make a small trick and add two moving averages with periods 50 and 200:

You can see that both moving averages kept moving higher and 50 moving average kept over 200 moving average. You can also note that price spent 95% of the time over both of them and when it came back down to test them it bounced up strongly. Momentum traders call that configuration of price and moving averages that can not catch up with the uptrending price the “bull train”. Analysts who practice Elliott Wave theory call it “Wave 3”. That is the strongest part of any rally when every short lived pullback is followed by another extended run to new highs.

Any trending market starts from a relatively small move up in wave ( 1 ) up followed by a corrective wave ( 2 ) down:

A corrective wave ( 2 ) down was followed by an impulsive subwave ( A ) of wave ( 3 ) up.

And an impulsive subwave (A) of wave ( 3 ) up was followed by a corrective wave, subwave (B) down of wave ( 3 ) up. On the chart below you can see a clean A-B-C subdivision of both corrective waves labelled as ( 2 ) down and ( B ) of ( 3 ):

You can see that subwave (A) of wave ( 3 ) is structured as an impulsive wave. It is subdivided into five waves of one degree lower. We label them “1, 2, 3, 4 and 5”.

A completed corrective subwave (B) of wave ( 3 ) up was followed by an impulsive subwave ( C ) of wave ( 3 ) up.

After completion of an impulsive subwave ( C ) of wave ( 3 ) up we expect a corrective decline in wave ( 4 ) down. Because wave ( 4 ) down is a corrective wave we expect to get some decline with an (A)-(B)-(C ) internal structure.

And there are many cases when we get a strong decline but the internal structure of such a decline does not look like a clean A-B-C.

The Five Wave up fractal is our skipper that helps us to navigate through rough waters of financial markets.

On that map we can see that subwave (A) of wave ( 5 ) up had to come as a strong rally that was supposed to retest the top made by the preceding rally in wave ( 3 ) up.

The second alternative count would be to consider the move down that bottomed in December 2018 as subwave (A) of wave ( 4 ) down, the first part of a corrective wave ( 4 ) down. In that case a traded had to expect a corrective A-B-C up bounce followed by another strong decline.

The truth is that nobody could be sure about what is going to happen next in 100% of cases. There are plenty of cases when a trader has to consider two, three or even four alternative scenarios. How do you trade that uncertainty? The right answer is you do not trade when you have so many different scenarios on the table. You sit on your hands and observe. You collect evidence in favor of each scenario. You goal is to discard several scenarios and either to leave the most probable scenario. Or get to the point when two different equally probable scenarios suggest the next market move into one direction albeit of different magnitude!

Now lets come back to RTY. The Scenario 1 would be based on assumption that decline from the top made in August 2018 to the bottom made in December 2018 was all of wave ( 4 ) down. That corrective wave had to be followed by an impulsive rally in subwave ( A ) of wave ( 5 ) up:

This is how an alternative Scenario 2 would look like:

When we are uncertain about the way how to count some move we need to wait for the following move. We need to get arguments in favor of some of alternative scenarios.

In this case if decline into December 2018 was a completed corrective wave we would get an impulsive move up.

In contrast, if the drop into December 2018 low was only the first leg down in subwave (A) of wave ( 4 ) down we would get a corrective looking bounce in subwave (B) up. Corrective looking means that a move has a clean A-B-C subdivision:

By January 2020 RTY still could not get back up to where it was in August 2018. But what was even more important for a wave analyst, is that the move up off the December 2018 low had a clean A-B-C structure. The move up had a corrective structure!

At this point you could discard the Scenario no.1 that suggested an impulsive move up following the low made in December 2018. From that you could confidently conclude that the low made in December 2018 could not be all of wave ( 4 ) down but only its subwave ( A ). And then the move up that topped in January 2020 was subwave ( B ) up of a corrective wave ( 4 ) down.

The strong decline that followed confirmed that conclusion:

Once you get a completed corrective wave you should expect next an impulsive wave in direction of the main trend.

Again we come back to the Five Wave up fractal and see that the next one should be a rally in subwave (A) of wave ( 5 ) up:

Now let’s look at the rally produced by RTY by early August 2020:

First we can note that it looks impulsive! Here you can see again that a completed corrective wave ( 4 ) down was followed by an impulsive subwave (A) of wave ( 5 ) up. That is the good news. That adds makes us more confident in the count we have been tracking.

The bad news is that subwave (A) of wave ( 5 ) up normally reaches the previous top made by wave ( 3 ) up. Because RTY has not reached the top made in August 2018 we can consider the Bullish scenario where RTY still has room to go higher in wave ( v ) that would complete subwave ( A ) of wave ( 5 ) up.

Because there are enough cases when subwave (A) of wave ( 5 ) up topped without reaching the previous top made by wave ( 3 ) up I have to consider a BEARISH alternative wave count:

Here we face uncertainty whether to conclude the rally off the low made in mid March 2020 low having topped or not.

But here we employ the very same logic we discussed when we reviewed the structure of the decline into December 2018 low and subsequent rally into January 2020 top.

Under the BULLISH scenario we should get an impulsive micro rally in subwave (A) of wave ( v ) up that would target the previous high made by RTY at 1,602 on Aug 11, 2020.

Under the BEARISH scenario subwave (A) of wave ( % ) up has already topped and RTY should produce a large enough A-B-C down corrective structure.

You can watch my latest video lesson explaining how we can can count micro waves on intraday charts to pinpoint turning points of bigger price moves.

I hope that my explanation helped you to understand how we identify impulsive and corrective waves, what challenges we may face doing that and how we can resolve inevitable uncertainty.

You can contact me at castawaytrader@gmail.com if you have any questions.

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CastAwayTrader Market Analysis
CastAwayTrader Market Analysis

Written by CastAwayTrader Market Analysis

I trade and teach others to trade with Harmonic Elliott Waves. Follow me on Twitter and read my analysis on www.CastAwayTrader.com

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