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From the point of view of the classical technical analysis after the consolidation of the price in the form of a triangle the trend always continues in the preceding direction. From the point of view of the wave analysis after a corrective wave in the form of a horizontal triangle the price always forms the ending actionary wave of a pattern of a greater degree in the direction of actionary waves of this pattern. The both types of analysis of the financial markets unanimously say that the horizontal triangle is a reversal pattern.
The question is when a horizontal wave structure is forming how to determine if this is a consolidation or not, a triangle or not, if the trend will continue further or will reverse in the opposite direction. The price of the question increases when we speak about large time-frames (for example on monthly and weekly charts).
Here is a small example from not-so-distant past.
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Figure 1. One of the variants of wave counting of EUR/USD released by EWI in April 2002.
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From the beginning of 2001 and to the end of 2002 such experts in the wave analysis as the team of R. Prechter (the president of Elliott Wave International — EWI), didn’t rule out forming of wave four (4) of the downward impulse [C] on the weekly chart of EUR/USD in the form of a horizontal triangle expecting the ending shoot down of the price after its completion.
Indeed in the process of forming of this horizontal structure especially in its first half the whole construction resembled a contracting triangle, i.e. the most probable wave pattern in the position of the fourth wave of an impulse. But later after the completion of the supposed wave C of (4), when the triangle formed more than by half, its sizes exceeded noticeably the sizes of the adjacent waves of the downward global impulse that must have placed in doubt the accepted scenario.
From the point of view of the classical technical analysis the construction remained a hundred-per-cent triangle and after its completion further price decline should have been expected.
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Figure 2. One of the variants of wave counting of EUR/USD released by EWI in November 2002.
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By the end of 2002 when the price distorted the geometry of the supposed triangle and went up everybody understood that the variant with a horizontal triangle «croaked». The scenario with the truncated fifth (5) of [C] and a more proportional wave (4) of [C] became the new accepted variant (refer to Figure 2).
That’s why during the ending stage of forming of an extended horizontal construction it is desirable to estimate the maximum number of initial parameters in order to find the most probable solution:
- the internal structure of the main waves of the forming pattern,
- the survey wave counting on the larger time-frames,
- the correlation of the main waves in patterns by their length and duration,
- if the price moves within the trend channel or out it moves out of it ,
- the forecasted price movement of adjacent or dependent currency pairs,
- proximity of the price to the critical or confirmatory levels,
- signals of additional indicators,
- for such large time-frames as monthly and weekly it is desirable to take into consideration fundamental indicators.
The cross pair EUR/JPY suits well as an example for considering a similar case not on historical data but on a real time basis.
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Figure 3. The weekly chart of EUR/JPY in February 2008.
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That’s how the weekly chart of EUR/JPY looked like in February 2008. And the wave structure of the global upward impulse and the top as the beginning of the correction were projected precisely and in advance in April 2007 (the error of determining of the top that formed in July was only 67 points, refer to the article Never-ending Ascension (EUR/JPY)).
Analysis of the developing horizontal structure in February 2008 let us suppose that a half of the extended correction was formed, perhaps in the form a horizontal contracting triangle. But considerable final sizes of this triangle didn’t let consider it to be the fourth wave of an upward impulse though this very scenario was considered as the most probable in 2007 in the articles Never-ending Ascension (EUR/JPY) and EUR/JPY, GBP/JPY. This triangle was too big in comparison with the adjacent waves that formed the global upward impulse.
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Figure 4. The wave counting draft on the monthly EUR/JPY chart in February 2008.
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That’s why in February 2008 the double zigzag pattern where the supposed correction was presented in the form of the forming horizontal triangle (B) of [Y] was taken as a draft variant of the wave counting of the upward section of the monthly chart of EUR/JPY (refer to the article System of equations with an endless number of solutions ).
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Figure 5. The EUR/JPY weekly chart at the present.
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And that’s how the weekly chart of EUR/JPY looks like now. From the point of view of the classical analysis a hundred-per-cent horizontal triangle is forming after which further upward movement should be expected.
If we analyze new data from the point of view of the wave analysis the picture suffered a number of considerable changes that lets us specify the counting not only of the last horizontal section of EUR/JPY, but of the whole global pattern (refer to Figure 6..8, below).
Besides the mathematical modeling of the price movement of several currency pairs for 2008-2009 years implemented on the last data (they aren’t given here), rules out upward movement of EUR/JPY above the 168 mark before the price reaches the 140 mark. To what extent this supposition is true we will see relatively soon, but at the present it is true only on condition that forecasts of movements of the dependent currency pairs (EUR/USD and USD/JPY), considered on an ongoing basis in «Wave analysis» are true.
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Figure 6. The wave counting draft on the EUR/JPY daily chart.
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First of all the central pattern of the horizontal construction under consideration in the course of the last 3 months was supplemented by a downward impulse (wave [v] of 1 in Figure 6), that supposes not a horizontal correction but downward movement in the form of a wedge 1 or A.
The wedge 1 itself and the construction situated to the right of it are the wave sequence 1-2, 1-2, of decreasing wave degrees.
Five-wave pattern situated to the left of the wedge 1, can be easily counted in the form of upward impulse 5 of (5) with a truncated fifth wave [v] of 5 of (5), which itself is a truncated fifth 5 of (5).
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Figure 7. The wave counting draft on the EUR/JPY weekly chart.
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In spite of the fact that the fourth wave 4 of (5) is much longer than the second wave 2 of (5) it doesn’t go to the territory of the first wave 1 of (5). Besides MACD 5-34-5 confirms the correctness of the accepted counting of impulse (5) of [A].
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Figure 8. The wave counting draft on the EUR/JPY monthly chart.
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In this case on the monthly chart we get a completed upward impulse [A] or [1] with a truncated fifth 5 of (5). At the present this very pattern unites optimally all the data and interlinked wave patterns of smaller wave degrees. But the variant with a possible horizontal triangle isn’t cancelled for good though it is relegated to the background.
If the supposition is true the truncated fifth 5 of (5) and the extension in the fifth wave (5) of [A] insistently warn about possible impressive price decline while the downward wedge 1 of [B] says the downtrend has begun already (supposedly wave [B] may assume the shape of a zigzag (A)-(B)-(C)).
Of course this supposition requires its confirmation (the critical and confirmatory levels are plotted on the chart).If the wave picture changes or the critical levels are broken the current scenario will have to be reconsidered.
Read the continuation in the article A rare form of zigzag (EURJPY).
Note
Given possible trading plans are purely informational purpose only and they should not be considered as trading guides or an invitation to make a transaction.
Reference
Dmitry Voznuy
forDmitry@yahoo.com
May 27, 2008
When using any part of the article for publication or analytical materials reference to the author and Alpari is obligatory.
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