Question of the Week: 9/29/2010
Most books and EW analysts seem to ignore the rule of extension listed in Mastering Elliott Wave (i.e., the longest wave must be at least 161.8% of the next longest). Is this rule a requirement or just a preferred condition?
This question addresses a core difference between Elliott Wave and NEoWave. Under R.N. Elliott's original theory, there were only a few "never break" RULES (e.g., waves-2 and 4 could not share any of the same price range, except in "Diagonal Triangles" AND wave-3 could never be the shortest wave in an impulsion). Nearly all other concepts, including the rule of alternation (which I consider essential), is not enforced by orthodox Elliott Wave analysts. It is hoped for, but does not make or break a count.
NEoWave's logical structure is composed only of hard-and-fast rules, no "sometimes, maybe's or guidelines." If a market does not produce the specific, NEoWave behavior required, a different pattern is forming than thought. There are no exceptions to behavior under NEoWave. If the behavior isn't present, something else is going on.
So, for example, if you see a rally that looks like a "perfect" 1-2-3-4-5 advance (i.e., it contains no overlap between waves-2 and 4, it has "perfect" alternation between waves-2 and 4), BUT there is no extended wave, then that move is NOT impulsive. Under NEoWave it would be an unfinished, complex a-b-c-x-a-b-c corrective rally that still has to complete the final waves-b & c.
The strict requirements of NEoWave pattern development create two, unique circumstances not present under Elliott Wave. When a market is near the beginning or end of a pattern, wave structure is clear, forecasting is easy and NEoWave allows for extremely detailed forecasts not possible with orthodox Elliott Wave. When toward the center of a pattern's development, NEoWave's inflexible nature and extensive rule set creates the exact opposite problem - the inability to predict what will occur next.
Orthodox Elliott Wave, on the other hand, allows the analyst so much flexibility that it is possible to have an opinion nearly all the time. The cost of such flexibility is frequent inaccuracy. NEoWave allows one to know when it is safe to forecast and when it is dangerous. The "loose" nature of orthodox Elliott Wave does not allow such fine differentiation, which frequently gives the orthodox Elliott Wave analyst the false belief he can predict markets all the time.
Click here to view NEoWave's Question Of The Week archive