Question of the Week: 2/27/2008
In Mastering Elliott Wave, you talk about "missing waves." What is this NEoWave concept all about and doesn't it conflict with the X-wave phenomenon?
About 50% of the time, an X-wave is "involved" when a pattern is "missing" a wave, but it is not the cause of the missing wave. To explain, let's say you drew a daily chart based on the high and low in the order they occurred (this is what I call a "wave" chart). Each high or low plotted will constitute "1 unit" of time. This applies no matter what time frame is chosen - monthly, weekly, daily, hourly, etc.
After plotting your daily chart, you notice a "three time unit" advance that looks like a Zigzag, but it contains an abnormally large C wave (i.e., wave-C is 400% of wave-A). Based on the NEoWave "Rule of Similarity and Balance," plus Zigzag design rules in Chapter 5 of Mastering Elliott Wave, you realize the move you are studying cannot be a Zigzag. You also realize labeling it a 1-2-3 will not work since wave-3 is too large in relation to wave-1. So, what is it?
There are only two possibilities:
1. The uptrend began AFTER the low (at the point currently marked wave-B or wave-2),
2. or, the uptrend started AT the low, is impulsive, but is "missing" wave-4.
How and why does this occur? Markets unfold on their own rhythm and time frame, not the time frame you happen to pick. For example, if you plotted the same market using the high and low of every 12 hours instead of every 24 hours, you would clearly see the "missing" 4th-wave.
As you move from smaller to larger time frames, a phenomenon I call complexity compression occurs. This is what the NEoWave "Missing Wave" concept addresses.
IMPORTANT: Please remember that "missing waves" can ONLY occur in a very limited environment when the pattern being studied consumes either 3 or 5 time units. If 3 units of time make up the pattern being studied, and the structure does not fall into any known wave pattern category, an impulsion (with a missing 2 or 4-wave) is the best explanation. If 5 units of time make up the pattern being studied (and again it does not fall under known pattern development rules) and the first correction is near the bottom of the range and the second correction is near the top of the range, then a complex correction with a "missing" x-wave (near the center of the pattern) is the best explanation.
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