CONNECTION BETWEEN
ELLIOTT WAVE AND DOW THEORY
Let's
take a moment here to point out the obvious
connection between Elliott's idea of five advancing
waves and Dow's three advancing phases of a bull
market. It seems clear that Elliott's idea of three
up waves, with two intervening corrections, fits
nicely with the Dow Theory. While Elliott was no
doubt influenced by Dow's analysis, it also seems
clear that Elliott believed he had gone well beyond
Dow's theory and had in fact improved on it. It's
also interesting to note the influence of the sea on
both men in the formulation of their theories. Dow
compared the major, intermediate, and minor trends
in the market with the tides, waves, and ripples on
the ocean. Elliott referred to "ebbs and flows" in
his writing and named his theory the "wave"
principle.
So
far, we've talked mainly about the impulse waves in
the direction of the major trend. Let's turn our
attention now to the corrective waves. In general,
corrective waves are less clearly defined and, as a
result, tend to be more difficult to identify and
predict. One point that is clearly defined, however,
is that corrective waves can never take place in
five waves. Corrective waves are threes, never fives
(with the exception of triangles). We're going to
look at three classifications of ,corrective waves-zig-zags,
flats, and triangles.
Zig-Zags
A
zig-zag is a three wave corrective pattern, against the
major trend, which breaks down into a 5-3-5 sequence.
A
less common variation of the zig-zag is the double
zigzag. This variation sometimes occurs in larger
corrective patterns. It is in effect two different 5-3-5
zig-zag patterns connected by an intervening a-b-c
pattern.
Flats
What
distinguishes the flat correction from the zig-zag
correction is that the flat follows a
3-3-5
pattern.
Notice that the A wave is a 3 instead of a 5. In
general, the flat is more of a consolidation than a
correction and is considered a sign of strength in a
bull market. In a bull market, for example, wave B
rallies all the way to the top of wave A, showing
greater market strength. The final wave C terminates at
or just below the bottom of wave A in contrast to a
zig-zag, which moves well under that point.
There
are two "irregular" variations of the normal flat
correction. The first type of variation was in the bull
market example, in which that the top of wave B exceeds
the top of A and that wave C violates the bottom of A.
Another
variation occurs when wave B reaches the top of A, but
wave C fails to reach the bottom of A. Naturally, this
last pattern denotes greater market strength in a bull
market.
Elliott Wave and Dow Theory
