Dear friends!

Today, I will finish covering the rules of retracement. Read on about the retracement rule 7.

If you are not familiar with the NeoWave theory, I strongly recommend reading all the articles in
the NeoWave series to learn about the most modern interpretation of the Elliott Wave theory,
based on Glenn Neely’s book Mastering Elliott Wave, starting from the first one:

Neo Wave theory. Part 1. Rules for creating charts.

Neo Wave theory. Part 2. Basic information on Polywaves and Structure Labels.  

NeoWave. Part 3. Retracement Rule 1.

NeoWave theory. Part 4. Retracement Rule 2.

NeoWave theory. Part 5. Retracement Rule 3.

NeoWave. Part 6. Retracement rule 4. Conditions “a” and “b”.

NeoWave. Part 7. Retracement rule 4. Conditions “c”, “d” and “e”.

NeoWave. Part 8. Retracement rule 5. Conditions “a” and “b”.

NeoWave. Part 9. Retracement rule 5. Retracement rule 6, condition “a”.

NeoWave. Part 10. Retracement Rule 6. Conditions “b”, “c”, and “d”

Rule 7 explanation

Rule 7 works if m2 is moving in the opposite direction to m1 and is more than 261.8% of m1.
After measuring the relation of m0 to m1, we pick up one or several of the conditions and mark
the waves with the corresponding structure labels.

Condition (a). If m0 is less than 100% of m1, then:

If m2 is a polywave and is composed of more than three monowaves (or

monowave groups), then:

1. Place ":5/:s5" at the end of m1 and "x:c3?" at the end of m2, if the first three monowaves of
m2 do not retrace more than 61.8% of m1. In this case, the first or second monowave
(immediately after the end of m1) may start a complex correction moving in the opposite
direction of m1, representing the x-wave. In an alternative scenario, m1 contains a "missing" x-
wave in its center, or m1 is the 3rd-wave of a 5th-failure impulse pattern (trending or terminal).
Remember, I covered the basics of Elliott wave patterns, x-waves, trending, and terminal
impulse patterns, as well as basic structure labels in the second part of the NeoWave series.

Considering the missing x-wave scenario,  circle the center of m1  and  place ":5 ?" to the left of the
circle and ":F3 ?" to the right of the circle, the end of the  complex  correction  will be confirmed
immediately before the point when the market violently turns (in the opposite direction  of m1)
andm2exceeds the 61.8% retracement level of m1.

2. If the first three monowaves of m2 retrace more than 61.8% of ml, m1 may complete the a-
wave of a flat with a complex b-wave, or m1 may have complete the third wave of a 5th failure
impulse pattern. Place ":F3/:5" at the end of m1 to show these two possibilities respectively.

If m2 is composed of no more than three monowaves (or monowave

groups) or is a monowave, then:

No matter what wave pattern is m1, “:L5” is a very likely possibility here, so, place it at the end if
m1.

If m3 is less than 61.8% of m2, m(-2) is shorter than m(-1), and m(-2) and m0 share some similar
price territory, m1 might conclude a terminal impulse pattern. So add"(:L3)" to the structure list.

Let us see how rule 7 (a) works on the example:

First, we check if the current market situation refers to rule 7. Wave m2 is moving in the
opposite direction of m1 and retraces more than 261.8% of m1. So, the activation requirement
of rule 7 is met.

Next, we pick up the relevant condition of rule 7. It is clear from the chart that m0 is a little less
than 100% of m1, so the (a) works here.

The next step is to find out the relevant paragraph of the (a) condition. As m2 (its start and end
are marked with red circles in the chart), is a polywaves that is composed of three monowaves,
the second paragraph of the (a) condition applies there.
The final step is to pick up the relevant structure label. In the given situation the basic case of
the (a) condition works, according to which we place “:L5” at the end of m1.

Condition (b). If m0 is at least 100% but less than 161,.8% of m1, then:

If m3 is a polywave and is composed of more than three monowaves (or

monowave groups).

1. If the first three monowaves of m3 do not retrace more than 61.8% of m2, a complex
correction may be unfolding with the first or second monowave (immediately after the end of
m2), moving in the same direction as m1, representing an x-wave. In an alternative scenario,
m2 has a "missing" b-wave in its center, or m2 is the 3rd-wave of a 5th-failure impulse pattern
(trending or terminal). Therefore, place ":F3/:c3/:L3/:L5" at the end of m1.

Besides:

 If more than five monowaves are required to retrace more than 61.8% of m2,
drop ":F3" and the 3rd-wave or 5th-Failure scenario as a possibility.
 Considering the "missing" wave scenario, circle the center of m2 and place
":5”to the left of the circle and "b:F3/ x:c3 ?" to the right of the circle.
 The scenario suggesting the end of the complex correction will be confirmed
when the market violently turns (in the opposite direction of m1) and m3
exceeds the 61.8% retracement level of m2. The termination of the complex
correction would be at the beginning of the violent turn-around. To consider
 all these possibilities, place "x:c3 ?" at the end of the first and second
monowaves of m3.
2. If the first three monowaves of m3 retrace more than 61.8% of m2, m2 may complete the a-
wave of a flat with a complex b-wave, or m1 may complete the third wave of a 5th failure
impulse pattern. Place ":F3/:5" at the end of m1 to show these two possibilities respectively

If m3 is composed of three monowaves (r monowave groups) or less, or it

is a monowave, then:

1. If m3 is between 100%-261.8% of m2, m1 may be a part of an expanding triangle. So, place
":c3" at the end of m1.

If m4 is more than 61.8% of m3, add “:F3” to the structure list of m1.

2. If m1 is not much more than 61.8% of m0, andm3 is less than 61.8% or more than 100% of
m2 in a period of time equal to or less than that taken by m2, andthe time it took for m2 to
equal the length of m0 was equal to or less than that consumed by m0, andm2's movement is
more vertical than that of m0, m1 is likely to complete a contracting triangle or a c-failure flat;
then, place ":L3/:L5" at the end of m1.

3.  If m3 is at least 61.8% but less than 100% of m2, m2 is likely to conclude an elongated flat.
Therefore, add "(:c3)" to m1’s structure list.

4. If m2 (plus one time unit) is completely retraced in the same amount of time (or less) that it
took to form, m2 may finish a trending impulse pattern. Then, place ":L5" at the end of m1.

However, you should add “:sL3” to m1’s structure list, m2 may conclude a 5th extension
terminal impulse if all the below conditions are met:

 m(-1) is shorter than m0, and m0 is equal to or longer than m(-2) or m2.
 The price approaches (or exceeds) the beginning of m(-2) in a period of time
50% or less of that consumed by the group of waves m(-2) through m2.

Let us see how rule 7 (b) works on the example:

First, we check if the current market situation corresponds to retracement rule 7. It is clear from
the above chart that m2 is more than 261.8% of m1. Therefore, the requirements of rule 7 are
met.

The next step is to pick up the relevant condition of rule 7. It is clear from the above chart that
m0 is between 100% and 161.8% of m1, and m3 is a monowave. We can state that the wave
structure corresponds to the (b) condition, its second paragraph.
And, finally, we identify the structure label. In our case, the most relevant seems to be the
second condition of the second paragraph of rule (b). It is clear from the chart that m1 is little
more than 61.8% of m0, m3 is noticeably less than 61.8% of m2, and it reaches its low in a
period of time that is equal to (or less) that it took to form m2. However, not all the
requirements of this paragraph are met, for example, the time, during which m2 approaches
the length of m0, is longer than m0, and m2’s movement is less vertical when compared to m0.
Neely accepts a failure to comply with some conditions. Note that the exact position of the
wave being analyzed can be identified after studying the surrounding waves. In the meanwhile,
we place “:L3/:L5” at the end of m1.

Condition (c). If m0 is between 161.8% and 261.8% of m1 (inclusive), then:

1. If ml takes the same amount of time (or more) as m0, or m1 takes the same amount of time
(or more) as m2, despite any other circumstances, ":F3" is a good possibility; place “:F3" at the
end of m1.

2. If the time it took for m2 to reach the length of m0 is equal to (or less) than that taken by m0,
andm2's price coverage is larger and more vertical than that of m0, andm(-4) is longer than m(-
2), then m1 may complete a contracting triangle. So, place ":L3" at the end of m1.

3. If the time it took for m2 to approach the length of m0 is equal to (or less) than that taken by
m0 and,m2's price coverage is larger and more vertical than that of m0, andm(-2) is at least
161.8% of m0, andm(-2) is at least 61.8% of m2, and m(-l)'s structure list contains an ":F3," m1
may complete an irregular failure flat. And so, place ":L5" at the end of m1.
4. If m2 (plus one time unit) is completely retraced in the same amount of time (or less) that it
took to form, andthe market approaches (or exceeds) the beginning of m(-2) in a period of time
50% (or less) of that consumed to form the wave-group m(-2) through m2, andm0 is longer than
m(-2), m2 may complete an expanding terminal impulse pattern. Add ":sL3" to the end of m1

5. If m1 (plus one time unit) is completely retraced in the same amount of time (or less) that it
took to form, andm2 is at least 161.8% of m0, andm1 breaks through a trendline drawn across
the end of m(-3) and m(-l), m1 may conclude a running correction. Therefore, place “:L5” at the
end of m1.

Let us see how rule 7 (c) works on the example:

First, we check if the current market situation satisfies the requirement of rule 7. It is clear from
the chart that m2 is more than 261.8% of m1. Therefore, the criteria for the seventh rule are
met.
Next, we identify the relevant condition of the seventh rule. It is clear from the above chart that
wave m0 is between 161.8% and 261.8% of m1, so there works the (c) condition.

Now, let us identify the paragraph of the (c) condition that refers to our example. Only
paragraph 2 corresponds to our situation. That is m2 (the green area in the chart) reaches m0
faster than it took to form m0 (the green area), m2’s price coverage is larger and more vertical
than that of m0.
Wave m(-4) (the blue area in the chart) is longer than m(-2) (the green area).

Therefore, m1 is likely to finish a contracting triangle. So, we place “:L3” at the end of m1.

Condition (d). If wave m0 is more than 261.8% of m1, then:

1. If m0 (minus one time unit) is less than or equal in time to m1, or if m2 (minus one time unit)
is less than or equal in time to m1, andas long as m1 is not simultaneously less in time than
both m0 and m2, m1 may be a part of a zigzag or impulse pattern, place ":F3" at the end of m1.

2. Place “x:c3” at the end of m1, as m1 may be an x-wave of a double zigzag or a complex
correction (which begins with a zigzag) if the following requirements are met:

 m1 takes the same amount of time (or less) as m0 and/or m2.

 m(-2) is at least 161.8% of m(-1).

 m(-1) is shorter than m0.

 m1 is less than 61.8% of the distance from the beginning of m(-2) through
the end of m0.

 m3 is longer than m2.

 m4 is shorter than m3.

 61.8% of m(-2) through m2 is retraced before the end of m2 is exceeded.

3. m1 may be the x-wave of a complex correction which starts with a flat and ends with a flat or
triangle; so, put ''x:c3" at the end of m1 if the following conditions are met:

 If m1 takes the same amount of time (or less) as m0 or m2.

 m0 is between 100%–161.8% of m(-1).

 m2 is not more than 161.8% of m0.

 m4 is at least 38.2% of m2.

 m3 is longer than m2.

 m4 is shorter than m3.

4. If m1 is less than or equal to m0 in time and/orm1 is less than or equal to m2 in time, place
":c3" at the end of m1.

However:

 If m(-1) and m1 are almost equal in price or time or both (or related in either
case by 61.8%), andm(-1) is shorter than m0, and,when comparing the price
lengths of m(-2), m0 and m2, m0 is not the shortest of the three and not one
of the three is more than 161.8 of the next smaller, then m1 may be a part of
a complex double zigzag (which will involve one or two x-waves). So, add an
"x" in front of ":c3."
Besides:

 If the longest wave of the three waves mentioned above is m(-2) or m2, the x-
wave is likely to be at the end of m1. But if there are other structure label
possibilities for m1 other than ":c3," the x-wave could be at the end of m(-l)
or m(3).
 If m0 is the longest of m(-2), m0 and m2, the x-wave may be "missing" in the
center of m0, mark the center of m0 with a dot and put "x:c3?" to the right of
the dot and place ":s5" to the left of the dot; m(-2), in this instance, would be
the beginning of the Elliott pattern and m2 would be the end.
 If the group of waves m(-2) through m2 constitutes a complex correction with
a "missing" x-wave, the market should retrace between 61.8%-100% of it
before the next wave group (of the same degree as the complex correction)
begins. If the "missing" x-wave complex correction is retraced less than
61.8%, andthen the market exceeds the end of the complex correction. Either
the wave group of m(-2) through m2 does not make up such a pattern or the
complex correction is part of a terminal impulse pattern.
5. m1 may be the final segment of a running correction, and so, place “:L5” at the end of m1 if
the following conditions are met:

 If m1 (plus one time unit) is completely retraced in the same amount of time
(or less) that it took to form,
 m(-1) and m1 are equal in price and time (or related by 61.8% in either case),

 m2 is at least 161.8% of m0,

 m1 and m(-1) do not share any similar price range,

 m2 is not retraced faster than it took to form.

However, If m(-2) is less than 161.8% of m0, andm3 is less than 61.8% of m2,andthe structure
label ":L5" is used, m1 simultaneously terminates several Elliott patterns, each of consecutively
larger degree.

6. If m3 is less than 61.8% of m2, and m2's price coverage is larger and more vertical than mO
andm(-l) is no more than 161.8% of m0 andm(-1) and m1 share some of the same price range
andat least one of m0’s Structure possibilities contains a ":3", there is a small chance m1
completes a contracting triangle. Place “(:L3)” at the end of m1.

However, If m(-1) and m1 are equal (or related by 61.8%) in price or time or both, andm(-1) and
m1 share some of the same price range, m1 may complete an irregular or c-failure flat. In this
case, place ":L5" at the end of m1
7. If m3 is less than 61.8% of m2, m2's price coverage is between 61.8% and 161.8% of m0,
andm(-1) is shorter than m0, and m(-1) is not more than 161.8% of m0, m1 may be an x-wave of
a complex corrective pattern. So, place “x:c3” at the end of m1.

8. m2 may conclude a terminal pattern, and place “(:sL3)” at the end of m1 if the below
conditions are met:

 If m2 (plus one time unit) is completely retraced in the same amount of time
(or less) that it took to form,
 m4 is no more than 61.8% of m3,

 m(-1) is shorter than m0,

 m(-1) and m1 share a part of the same price territory,

 m0 is not shorter than m(-2) and/or m2,

 m3, in a period of time 50% (or less) of that consumed m(-2) through m2,
closely approaches (or exceeds) the beginning of m(-2).

Rule 7 practical example

Let us see how rule 7 (d) works on the example.

First, we check if the current market situation corresponds to the requirements of rule 7. It is
clear from the chart that m2 is more than m1. So, rule 7 works here.
The next step is to pick up the relevant condition of the seventh rule. Wave m0 is more than
261.8% of m1. So, the (d) condition works here.

And, finally, we determine the structure label. It is clear from the chart that only the first part of
the fourth paragraph of the (d) condition is met. Wave m1 is less than or equal to m0 and m2 in
time. Sp, we place “:c3” at the end of m1.
When you analyze the chart, having determined the rules and the conditions to apply to the
current wave, analyze the next wave, and do the same with all the important waves in the chart.

In the next educational articles, I will cover the Elliot wave patterns, rules of construction and
development.

Take care of yourself and your money! 

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Price chart of BTCUSD in real time mode

Periods
 M1
 M5

 M15

 M30
  H1

 H4

 D1

 W1

Zoom1D1W1M3M6M1YALL30. Nov14. Dec28. Dec11. Jan25. JanDec '20Jan '21F…

15k20k25k30k35k40k45k

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WRITTEN BY
Mikhail Hypov
Investment analyst and independent trader