The rule of alternation and channeling

In its more general application, this rule or principle holds that the market usually doesn't act the same way two times in a row. If a certain type of top or bottom occurred the last time around, it will probably not do so again this time. The rule of alternation doesn't tell us exactly what will happen, but tells us what probably won't. In its more specific application, it is most generally used to tell us what type of corrective pattern to expect. Corrective patterns tend to alternate. In other words, if corrective wave 2 was a simple a-b-c pattern, wave 4 will probably be a complex pattern, such as a triangle. Conversely, if wave 2 is complex, wave 4 will probably be simple.

Another important aspect of wave theory is the use of price channels. Elliott used price channels as a method of arriving at price objectives and also to help confirm the completion of wave counts. Once an uptrend has been established, an initial trend channel is constructed by drawing a basic up trend line along the bottoms of waves 1 and 2. A parallel channel line is then drawn over the top of wave 1. The entire uptrend will often stay within those two boundaries.

If wave 3 begins to accelerate to the point that it exceeds the upper channel line, the lines have to be redrawn along the top of wave 1 and the bottom of wave 2. The final channel is drawn under the two corrective waves-2 and 4-and usually above the top of wave 3. If wave 3 is unusually strong, or an extended wave, the upper line may have to be drawn over the top of wave 1. The fifth wave should come close to the upper channel line before terminating. For the drawing of channel lines on long term trends, it's recommended that semilog charts be employed along with arithmetic charts.