Applied Elliott Wave to Stocks and Commodities

There are some differences in applying wave theory to stocks and commodities. For example, wave 3 tends to extend in stocks and wave 5 in commodities. The unbreakable rule that wave 4 can never overlap wave 1 in stocks is not as rigid in commodities. (Intraday penetrations can occur on futures charts.) Sometimes charts of the cash market in commodities give a clearer Elliott pattern than the futures market. The use of continuation charts in commodity futures markets also produces distortions that may affect long term Elliott patterns.

Possibly the most significant difference between the two areas is that major bull markets in commodities can be "contained," meaning that bull market highs do not always exceed previous bull market highs. It is possible in commodity markets for a completed five wave bull trend to fall short of a previous bull market high. The major tops formed in many commodity markets in the 1980 to 1981 period failed to exceed major tops formed seven and eight years earlier. As a final comparison between the two areas, it appears that the best Elliott patterns in commodity markets arise from breakouts from long term extended bases.

It is important to keep in mind that wave theory was originally meant to be applied to the stock market averages. It doesn't work as well in individual common stocks. It's quite possible that it doesn't work that well in some of the more thinly traded futures markets as well because mass psychology is one of the important foundations on which the theory rests. Gold, as an illustration, is an excellent vehicle for wave analysis because of its wide following.