P1: PIC/PIC c03
August 18, 2008
Printer: Yet to come
Practical Pattern Recognition for Trends and Corrections
The one modification Iâ€™ve made to the accepted E-wave rules is the Wave-4 rule with daily data. The typical E-wave rule is Wave-4 cannot trade into the range of Wave-1. My modification to the rule is Wave-4 cannot make a daily close into the daily closing range of Wave-1. Over the past 20-plus years, Iâ€™ve seen a market trade a few ticks into the Wave1 range and then continue the trend to complete an otherwise perfect five-wave trend so many times that I modified the rule, and it has served me and others very well over the years. The SPX daily chart in Figure 3.18 illustrates the three trend rules. Guideline 1, that a Wave-2 may not exceed the beginning of a Wave-1, is logical. If a market took out the beginning of Wave-1, it would have made a new high or low and voided any logical beginning of a new trend. In Chapter 4, you will learn how we can use guideline 2, where the Wave-3 cannot be the shortest in price of waves 1, 3, and 5, to project the maximum trend price target in certain circumstances.
FIGURE 3.18 The Three Trend Pattern Rules