The most complicated part of Elliott wave is the corrective waves. There are many forms of corrective waves which are difficult to comprehend at the hindsight. There are three classifications of corrective waves- zig zag pattern, flat wave and triangle patterns.
Defining the Corrective waves
Before delving deeper into the types of corrective waves, let’s have a clear understanding about corrective waves. The waves 2 and 4 are corrective waves with respect to waves 1 and 3 respectively. The wave b is a corrective wave since it corrects the wave a. Consequently, the wave ‘abc’ is the corrective wave for the 1-5 impulse wave.
Corrective Waves: Zig zag wave (Zig zag pattern)
The zig zag pattern is the most common and simplest forms of ‘abc’ corrective waves. It is of the form of a 5-3-5 wave pattern. The wave ‘c’ goes well beyond wave ‘a’ in the zig zag pattern.
Here the wave b corrects the rally wave a. The wave b retraces to 50-61.8% of wave ‘a.’ It even extends beyond 61.8% in most cases. The wave 4, wave 5, wave a and wave b happens to form a head and shoulder pattern in certain instances. There is also a probability of wave 5 and wave b forming a double top(double bottom, in the case of a downtrend). Both these cases push the wave to a 61.8% retracement of the entire 5 waves, as it fulfills the concept of wave 1 and wave 2 in the next higher degree. (For better understanding, kindly go through our article on Elliot wave)
There is a double zig zag pattern which is less recurring. It is a combo of two zig zag pattern intertwined with an ‘abc’ pattern. It occurs in larger corrections and in larger time frames.
Zig Zag pattern: Head and Shoulder pattern in Elliott wave
The zig zag pattern usually has a deep correction. It mostly retraces to 61.8% of the entire 1-5 impulse wave. And the head and shoulder pattern is a common phenomenon recurring in zig zag patterns. The below image of USD/CAD chart shows a head and shoulder pattern resulting in the 61.8% retracement of the entire bull cycle wave. The head and shoulder patterns are strong trend reversal patterns. When they combine with corrective wave, it usually results in a monstrous rally.
Zig Zag pattern: Double Top pattern as the corrective wave
The zig zag pattern features the double top/bottom pattern which results in a significant correction. This also leads to a 61.8% retracement more often than not. The below chart of GBP/USD shows a double top pattern formed in the corrective wave. The wave a makes an impulse move initially and then the wave ‘b’ retracts to test the top of the wave 5. When it fails to crossover, it results in a significant correction.
The zig zag corrective wave usually happens to be the wave 2 in the next higher cycle. Hence the 61.8% retracement is a common phenomenon and happens rarely. However, when an instrument bounces of from 61.8% retracement after a correction,it is usually followed with a robust rally – wave 3.
Corrective Waves: Flat wave
The flat corrective waves are formed when there is a stronger trend. It generally means that a trend continuation is imminent and bulls (bears, in a downtrend) are itching to get onboard.
The flat wave represents a time correction or consolidation rather than a price correction. It is of the form 3-3-5.
The wave b takes resistance near the wave 5 zone and wave c takes support at wave ‘a’ zone.
At times, the wave ‘c’ breaks wave ‘a’ marginally but, never crosses it substantially.
Also, wave 4 plays a pivotal role in flat correction waves. It is the area of support. Many a time, the lows of wave 4, wave ‘a’ and wave ‘c’ all converge at the same point. A straight line can be drawn connecting the three points. The support at wave 4 of the Elliott wave, holds in flat waves and triangle patterns while the zig zag pattern breaks it down.
The above chart of GBP/JPY daily chart illustrates the power of wave 4 and a flat wave. After a significant down rally, the pair consolidates in the form of a flat wave. Unable to move past wave 4, the corrective waves are shallow and range bound. Then the pair resumes its rally in the form of a new Elliott wave. The flat waves are often construed as sideways trend or range bound move by many.
Corrective Waves: Triangle patterns
The triangle waves are also a consolidation and continuation pattern. Hence, it is essential to identify the prior trend cycle to forecast the continuation direction.
Types of triangle patterns
- Ascending triangle pattern
- Descending triangle pattern
- Symmetrical triangle pattern
- Expanding triangle pattern
Ascending Triangle patterns
The ascending triangle pattern has its highs resisted at one same point and the lows are connected serially with a trendline. There will higher lows which indicate a strength in buyers. It indicates a high chance for upper side breakout above the horizontal resistive trendline.
Descending Triangle patterns
The descending triangle patterns have lower highs consecutively, which, when connected forms a descending trendline. But the lows are fixated at a strong support level. Usually, the support point coincides with the wave 4 of Elliott wave. Therefore, it elevates the chances for a downside breakout. The breaking of the support zone at wave 4 is the key feature that sets apart zig zag pattern and triangle patterns.
Symmetrical Triangle patterns
When the highs of a series of waves (possibly an Elliott wave), and the lows of the same waves are connected with two separate trendlines, respectively and if they intersect each other, then they are symmetrical triangle patterns. Even more, the highs and lows reduce serially, producing symmetricity. The symmetrical triangles when broken out with large volume, leads to a robust rally.
Expanding Triangle patterns
The expanding triangle patterns are emerging in chart formation very frequently. These are similar to the symmetrical triangles but the trendlines don’t intersect each and they widen as time proceeds. The waves within the expanding triangle, produce sharp upswings and downswings.
Note: Triangle patterns
- An ascending triangle can give a bearish breakout based on the Elliot wave’s cycle.
- Likewise, the descending triangle can too give a bullish breakout.
Features of Triangle pattern
The triangle wave contains 5 waves. Here, each wave can and will overlap each other.
In a corrective triangle wave, each wave is 61.8% retracement of the preceding wave (except for the expanding triangle pattern).
The fifth wave tends to make a false breakout towards the opposite direction before resuming its trend.
The correction waves are the most challenging part of the technical analysis to comprehend. The zig zag pattern is easy to understand but rarely recurring whereas the flat waves and triangle waves are difficult to interpret in the live-market scenario. Therefore, it is best to avoid trading corrective waves until you become well-versed in technical analysis.