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Estimating price targets cannot only be done based on support and resistance lines, but also using trend channels, Fibonacci projections and Elliott wave targets. Now that we introduced Fibonacci numbers in the previous video, you will understand that even the Elliott wave counts 5+3=8 are all Fibonacci numbers. That is why all further wave subdivisions are also Fibonacci numbers.
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Hallo, Sylvain Vervoort with technical analysis part 24. With this video we will be looking at Elliott waves target prices. Pay a visit to my website at stocata dot org and buy my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system.
Estimating price targets cannot only be done based on support and resistance lines, but also using trend channels, Fibonacci projections and Elliott wave targets. Now that we introduced Fibonacci numbers in the previous video, you will understand that even the Elliott wave counts 5+3=8 are all Fibonacci numbers. That is why all further wave subdivisions are also Fibonacci numbers. In this example chart, there is a trendline drawn through the start of wave 1 and the end of wave 2. A parallel line through the top of wave 1, gives you a future Elliott price target for wave 3, namely the upper side of this channel. Using a Fibonacci projection over wave 1, there is a first price target at $46. And yes this target is reached while price also touches the upper side of the price channel. Wave 4 falling back to the lower side of the channel was certainly no surprise, and kept this correction wave of the same degree within the price channel.
The most common wave 1 target, the start of a new impulse wave, retraces most of the time anywhere between 23.6% and 61.8% of the previous correction wave.
In this example, price reaches the 23.6% Fibonacci retracement level over the last complete reaction, starting a new impulse wave 1.
Correction wave 2 retraces a minimum of 38.2% of impulse wave 1. However, a lot of the retracements are between 50% and 61.8%. Even 100% retracement is possible and still complies with the Elliott rules. 20% of the time the retracement will generally be small with a flat wave 2 correction.
In this chart you can see how wave 2 retraces between 50% and 38.2% of the previous wave 1 up move. And also how wave 3 reaches exactly the first Fibonacci target at 161.8%.
Once correction wave 2 is completed, you can draw an uptrend line from the start of wave 1 through the end of wave 2. Next, you draw a parallel line with this trend line through the top of wave 1. Now you have a trend channel. The upper side of this channel is the first price target for wave 3. If the price does not reach the upper side of this channel anymore, you probably are looking at a wave C, not a wave 3. You should keep a horizontal support through the endpoint of wave 2. If the price falls through this level, wave 2 is not finished and will become more complex, and wave 3 has not yet started. Impulse wave 3 often is the wave with the biggest move. So, usually, wave 3 will move up above the trend channel. In a rising impulse wave, it is common for the price to reach at least 161.8% of wave 1. In a falling impulse wave, wave 1 usually will reach minimum 123.6%.
The minimum target here is broken as will be mostly the case with an extension impulse wave of a lower degree in wave 3. And here price is still moving much higher, because wave 5 also has an extension.
At the end of wave 3 you can draw a trend line through the tops of waves 1 and 3. Now draw a parallel line through the bottom of wave 2. You now have a trend channel of which the lower side is the primary target for correction wave 4. Not reaching the lower side of this channel probably means that there is a strong trend and that you are still in wave 3, or there is only a short wave 5 to be expected.
Looking at Fibonacci levels, wave 4 usually retraces back to 23.6% and to 38.2% of wave 3. Most of the time, this will be in the price area of sub-wave 4 of the extended lower degree impulse wave 3.
The parallel line created from the line through the tops of waves 1 and 3 and through the end of wave 2, is a primary price target for correction wave 4.
Quite often you will see a wave 5 that is equal to wave 1, or 61.8% to 76.4% of wave 3. If there is a wave 5 extension, then wave 5 is commonly 161% of wave 3, or of the sum of waves 1 and 3.
Looking at trend channels, there are two possible methods you can apply:
At the end of wave 4 you draw a trend line through the end of wave 2 and wave 4. Now, draw a parallel line through the top of wave 3. The upper side of this trend channel is the target for wave 5. However, most of the time, this target will not be reached by wave 5, except when there are extensions in the making of wave 5, or when wave 3 was weak with just a moderate move.
Usually, wave 3 has the highest acceleration compared to waves 1 and 5. If wave 3 makes a bigger, sharp up-move, then draw the basic trend line through the end of waves 2 and 4, but draw the parallel line through the top of wave 1. This line will cross wave 3 and gives a more moderate target for wave 5.
Look here at the wave 5 method 1 target. Draw at the end of wave 4 a trend line through the end of waves 2 and 4. Now, draw a parallel line through the top of wave 3. The upper side of this trend channel is the target for wave 5.
Look here at the wave 5 method 2 target. If wave 3 makes a bigger, sharp up-move, then draw the basic trend line through the end of waves 2 and 4, but next you draw the parallel line through the top of wave 1 instead of wave 3. This line will cross wave 3 and gives a more moderate target for wave 5.
Wave A in a zigzag correction will, most of the time, retrace 38.2% and 50% of the previous 5 wave.
Wave B in a zigzag correction mostly retraces 38.2% to 50% of wave A. In a flat correction, this will be 100%. A triangle correction will take back 90% to 100% of wave A. An inverted widening triangle retraces commonly 61.8% of wave A.
Wave C will, many times, equals or is larger than wave A. Wave C is a minimum 61.8% of wave A. In a double zigzag, this is commonly 138.2% of wave W. In a flat or double flat correction, this often is 138.2% of wave A, or wave Y, respectively. Wave C in a triangle is generally 76.4% of wave B. For an inverted widening triangle, this is commonly 123.6% of wave B.
At the end of wave B, draw a trend line through the beginning of wave A and the end of wave B.
You now can see a target for wave D, anticipating that a triangle correction is developing. You will get a confirmation at the end of wave C. At the end of wave C, draw a line through the end of wave A and wave C. You now can see the target for wave E. Many times, wave E will not reach this trend line; conversely, it may pass it very shortly, next continuing the basic trend.
When drawing a price trend channel, it is a good idea to distinguish a double zigzag from an impulse wave. Both have about the same characteristics. However, double zigzags fit almost perfect within the price channel. While if it is a wave 3, remember that a wave 3 mostly will break this channel, being the bigger, more accelerating move. Wave X of a double zigzag, a double flat correction, or a triple zigzag is, most of the time, 50% of wave W. In a triple flat correction, this will be 76.4% of wave W.
This is the end of the Elliott wave's part about price targets. Next video we will look at an indicator that will help you to make Elliott wave counts and some wave examples. Tell your friends about these videos and while visiting my website order my new book “Capturing Profit with Technical Analysis”, a complete technical analysis reference and a winning trading system. See you then!
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