Friday, July 22, 2011

7 Month Trading Range: Breakdown or Breakout (Part 4)

Definition of Triangle and Sideways Correction, per Elliott Wave Theory

Triangles are overlapping five wave affairs that subdivide 3-3-3-3-3. They appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles fall into four main categories as illustrated in Figure 18. These illustrations depict the first three types as taking place within the area of preceding price action, in what may be termed regular triangles. However, it is quite common, particularly in contracting triangles, for wave b to exceed the start of wave a in what may be termed a running triangle, as shown in Figure 19.
Figure 18

Figure 19
Although upon extremely rare occasions a second wave in an impulse appears to take the form of a triangle, triangles nearly always occur in positions prior to the final actionary wave in the pattern of one larger degree, i.e., as wave four in an impulse or wave B in an A-B-C.

Currently we are in a Bull Market based triangle formation. In the next post, I will discuss various fundamental/sentiment based reasoning to support this scenario.

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