Elliott’s wave

In this chapter we will talk about Elliott’s waves and how they could help us understand price trends .

Elliott waves support the principle that the market is cyclical and can be divided into waves. The two main waves are the impulsive one, where the price increases substantially, and the corrective wave called ZigZag in which the price decreases. Each of these two waves can then be then decomposed into smaller waves.

Taking for example the impulsive wave and numbering the alternation of points of maximum and minimum relative to the bullish waves, and instead marking with letters the points of maximum and minimum relative in the Bearish wave, we have the following waves:

WAVE 1: go up to 1 then 2,3,4,5

WAVE 2: I go down to a then b, c (in downtrend)

WAVE 3: go up to 1 then 2,3,4,5

WAVE 4: I go down to a then b, c (donntrand)

WAVE 5: I go up to 1 then 2,3,4,5

Image 1: representation of Elliot waves

Then we will have the corrective wave that is drawn with the same principle.

What is then difficult is to be able to correctly identify the waves on the price chart, also positioning on the correct timeframe.

Below is an example of a 12345 impulsive wave, still in training, on the #ETH chart:

Image 2 : tradingview – eth – example of wave 12345 still in formation

From this theory also derive some corrective patterns as can be seen in image 3 :

Image 3 : representation of corrective patterns derived from Elliot waves

We have already seen some of these patterns in previous articles but without going into the details of the underlying theory.

References

  1. Images: image1 and image3 taken from google images
  2. Achille Fornasini, “Financial markets: choice and management of speculative operations – Methods and systems of modern Technical Analysis to support operational decisions”, 1st edition of 1996, ETAS

ETH Analysis: 20/03/2018 – evening

In this article we’re going to describe an example of technical analysis made this evening on ETH (Etherium).

In image 1 we can observe the analysis: 

Image 1: ETH TradingView chart (BITSTAMP) – Timeframe 4h – 11: 08hr on 20/03/2018

What we can see is:

  • The main downtrend (and relative retracement);
  • The support created by the minimum of 2 February 2018;
  • The highest resistance created by the high of March 10, 2018;
  • In purple, a bullish flag.

The possible interpretation is that the bullish flag, which is a continuation pattern, indicates that the price will continue to rise. The resistance just surpassed this thesis, in addition to the fact that most of the major currencies (BTC, XRP, XLM) in this period have begun to rise.

Therefore, in the short term , there may be a rise (with the possible goal given by the dotted line in purple). We must however pay attention to a possible rebound dictated by the various resistances and downtrends.

In the medium term, it is also hoped here to have a rise. My goal would be to return to a rate of 740 euros and make a take profit.

The long period , at least for now, remains bearish. Nothing, however, forbids that there may be a reversal of the situation (ie instead of aiming at the umpteenth local maximum and then down again, we could continue with the ascent).

Pattern – Part 2: Double / Triple TOP / BOTTOM, Rounding TOP / BOTTOM

With this article we continue with the family of inversion patterns.

DOUBLE TOP / BOTTOM

The double top / bottom is another inversion figure. Like the head and shoulders, it’s consequently formed by an excessive inclination of the uptrend / downtrend.

In case of double top :

  • Increase the excursion between the tops;
  • as we go up to the first top we have an increase in volumes, which decreases with the fall in prices;
  • the second top has an increase in volumes but lower;

The trend in volumes in this case must follow the price trend.

The figure is completed when the support line, generated by the minimum of the figure, breaks down.

Image1: example of double top on BTC – daily timeframe

The double bottom is a inverse figure, moreover as the bottom head and shoulders occurs at the end of a bearish trend.

It is formed as follows:

  • two large downward fluctuations and a trend in volumes that on average is increasing;
  • after the first price drop with low volumes there is a recovery with volumes that on average increase.
  • The second descent also has low volumes.

A possible target can be obtained the distance of the peak with respect to the maximum of resistance.
Another possible target is identified by the sum of the two peaks.

The figure is completed overcoming the resistance line traced making it pass for the maximum reaction (the maximum of the ascent between a bottom and the other).

NB: the two top / bottom have about the same height

TRIPLE TOP / BOTTOM

The triple top is also an inversion figure generated similarly to the double top.
The main difference is that it creates a third top / bottom that however has very low volumes.

ROUNDING TOP / BOTTOM

This is an inversion pattern that, compared to previously seen, is more gradual and therefore does not involve a marked change in the trend. Usually we have the termination of trends that last very long.

TOP rounding is formed as follows:

  • Start with high volumes
  • Half of the pattern has the absolute minimum of volumes
  • subsequent increase in volumes on the end of the pattern.

The BOTTOM rounding instead:

  • start with low volumes
  • at the absolute minimum there is a clear increase in volumes
  • next volume of the volumes at the end of the figure.

References:

  1. Ettore Coliva, Lucio Galati, “ANALISI TECNICA FINANZIARIA”, 1th edizione del 1992, UTET Libreria (Pag 18 – 19).

Pattern – Part1: Head and Shoulders

Analyzing candlestick charts, it is possible to identify patterns, or figures, that allow us to hypothesize, with a certain probability, the price trend.

The patterns are divided into two large families : trend inversion patterns and continuation patterns.

The main inversion patterns are:

  • Head Shoulders
  • double minimum / maximum
  • triple minimum / maximum
  • maximum / minimum rounded off
  • Formation of a V

The main continuation patterns are:

  • Triangles
  • Rectangles
  • wedges
  • Flags and Guidons

We will divide the treatment of the various patterns into more articles.

HEAD AND SHOULDERS

The head and shoulders is one of the main inversion patterns , and it is also the one that, if completed, is most likely to predict an inversion.

In the event of an uptrend , the basis points are as follows:

  • existence of an up-trend;
  • subsequent occurrence of exaggerated increases;
  • three consecutive rises (the two shoulders and the head).

More in detail, the figure is formed as follows:

  • Left shoulder:
    • shape: the wave follows the previous uptrend;
    • volume: they are high at the beginning, until there is a downsizing given by the meeting between supply and demand;
  • Head :
    • shape: has a wider movement than the shoulder;
    • volume: volume are on average lower than the left shoulder. In fact, a divergence between rising prices and falling volumes is created, leading to the downsizing of prices which creates a relative minimum;
  • Right shoulder :
    • shape: formed for the most part due to sales made in the previous downhill phase;
    • volume: growing.

It is important to know that starting from the minimum of the left shoulder and arriving at the minimum of the head you can trace the neckline .
The neckline is important for the following reasons:

  • the figure is completed when the neckline is clearly exceeded;
  • the probability of this figure is also due to the divergence of the inclination of the neckline with respect to the trend of origin;

Image1 : schematization of head and shoulders with volumes

 

The head and shoulders can also be in horizontal phases but with less clear consequences.

The occurrence in the case of is also interesting   bearish trend , in which one has abottom head and shoulders.

The graphic formation is similar but overturned, in detail:

  • The left shoulder is formed as a result of a decrease in prices that occurs with volumes sustained and subsequently with a recovery in prices with low volumes.
  • The head has a further decrease in prices, accompanied by very low volumes.
  • Finally, the right shoulder is formed with sustained volumes, which increase even more once the neckline has been overcome.

The bottom head and shoulders usually occurs at the end of a primary descending trend.

Image2: schematization of head and shoulders bottom with volumes

 

References:

  1. Ettore Coliva, Lucio Galati, “ANALISI TECNICA FINANZIARIA”, 1th edizione del 1992, UTET Libreria (Pag 59 – 113)