Question of the Week: 6/13/2007

What is the importance of channeling and how do you use it?


In my opinion, channeling is misunderstood and is mistakenly used as a predictor of future price action. The reality is that channeling is much more effective in identifying turning points than in predicting future market action.

As part of NEoWave theory, channeling is best used to identify the conclusion points of waves-2, 4, b and d. It is virtually useless in identifying the conclusion of waves-1, 3, 5, a, c or e. Discussed in detail on page 5-9 of Mastering Elliott Wave (MEW), the most important use for channeling is in identifying the conclusion of wave-2 of an impulsive pattern. As shown at the top of page 5-10, if what you mark as a "0-2" trendline is broken soon afterward, the "0-2" trendline must be adjusted and shifted to the right, concluding wave-2 later. If after that second point, the market does not rally at least 61.8% of wave-1, and the channel is broken again, wave-2's conclusion must again be shifted into the future.

Under orthodox Elliott Wave, most people call this a series of 1-2's of decreasing degree, but logic (and future behavior) nearly always forces the person who attempts this process to change their count later, which means the assumption was wrong from the start.

If you want your counts to be correct both in current time and into the future, you must make sure there is a clean line from the start of wave-1 to the end of wave-2 OR that wave-2 finishes after (and higher) than the last touch point created by the "0-2" trendline.

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