From the July 01, 2012 issue of Futures Magazine • Subscribe!

Support and resistance: A wave tendency

Wave tendencies

“Slow turn” (below) depicts the top of the oil market in 2011. The first leg down doesn’t give a retest of the peak but instead turns sideways for 24 days before dropping to retest the area of support. The retest goes no higher than former support but turns into a 25% drop. This setup introduces the next condition, which is the A-wave tendency line.

Elliotticians label moves with numbers or letters. A five-wave impulse is just that — the fifth move of the larger trend. The corrections in those legs are labeled with letters: A, B and C. For simplicity, the first move off a high or low is either a one-wave or an A-wave and is called the “A-wave tendency line.” It doesn’t matter if it’s an impulse or correction because the behaviors are the same and can be traded in any time frame. 

“Setting up” (below) is a recent intraday move in gold. In this case, the move off the low slowly drifts higher until it levels off. It doesn’t have to retrace the bottom necessarily, but you can see a smaller pullback inside the move higher that tests the initial breakout; this is likely an A-wave tendency line on a five-minute chart.

In the bigger picture, the price gaps up beyond the A-wave. It finally pulls back in a bigger way. Traders should look for an edge where any potential pullback might resolve itself. In this case, and in many cases, that area will be the polarity flip and the A-wave tendency line.

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