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Part 4 - Retracement Rule 2
Part 4 - Retracement Rule 2
Dear friends!
We continue studying the rules of retracement based on the NeoWave theory (based on the famous book by Glenn Neely Mastering Elliott
Wave). In the previous article, I provided a table of rule identification, according to which, you can identify the rule you need to apply to a
particular market situation. I also described the conditions concerning the first rule (read this article (https://www.litefinance.com/blog/for-
professionals/neowave-part-3-retracement-rule-1/)).
If you haven’t heard about the NeoWave theory before, I recommend you get familiar with the previous articles devoted to Mastering Elliott Wave
by Glenn Neely:
Neo Wave theory. Part 1. Rules for creating charts (https://www.litefinance.com/blog/for-professionals/neo-wave-theory-part-1-rules-of-creating-
charts/)
Neo Wave theory. Part 2. Basic information on Polywaves and Structure Labels (https://www.litefinance.com/blog/for-professionals/neo-wave-
theory-part-2-basic-information-on-polywaves-and-structure-labels/)
The second rule of retracement proportions and the conditions to apply retracement rule 2
Wave m2 is moving in the opposite direction to m1 and reaches the ratio between 38.2% and 61.8% (exclusive) of m1. When measuring the
relation of m0 to m1 we pick up one of the following conditions and mark the wave with structure labels corresponding to the relevant condition.
1. If m4 doesn’t exceed the end of m0, m1 may be completing a corrective pattern with a complex formation where m2 is an x-wave. Put “x:c3” at
the end of m2, and “:s5” - at the end of m1. I covered the basic price patterns and structure labels in the second article
(https://www.litefinance.com/blog/for-professionals/neo-wave-theory-part-2-basic-information-on-polywaves-and-structure-labels/) in the
NeoWave series.
However, if m1 is not the shortest of three when comparing m(-1), m1, and m3, and the longest of three is about 161.8% (or greater) of the next
longest wave in the list, and m4 is at least 61.8% of m3, there may be forming an Impulse pattern with m1 as a center segment (the third
element).
3. If m0 is composed of more than three monowaves, and m1 reaches the beginning of m0 in the same amount of time (or less) that mo took to
form, m0 is likely to be the conclusion of an important Elliott pattern.
4. If m0 and m2 are related by 61.8% in price and re equal or related by 61.8% in time and m(-1) is 161.8% or more of m1 and m3 (the wave
group starting with m3) is longer than m(-1) during the time that is not more than it tool m(-1) to form, there is likely to be developing one of the
variations of a running correction. In this case, we add “[:c3]” after the “:5” already at the end of m1 (remember, brackets mean that this
presumption is highly likely to be correct, and the correction is a running correction if it is flat and its b-wave is much higher than the peak of the
previous rise). The running correction is likely to start at m0, and it should end at m2. You will be able to identify the variation of the running
correction after you’ll read my next articles where I will explain how to group structure labels. The “:c3” here may be in the position of the b-wave
of a running correction, or it can be an x-wave of a double three running correction.
Now, I would like to cover additional circumstances possible at this juncture:
If m0 and m2 are roughly equal in time, and m3 is less than 161.8% of m1, and m(-1) is longer than m0, m1 is likely to be an element of a
complex correction, including an x-wave. The x-wave can be in of the three positions:
a. If m(-2) is shorter than m(-1), the x-wave is at the end of m0;
b. If m4 is 161.8% or less of m3, the x-wave is at the end of m2;
c. If m0 is 50% or less than m1, and m1 is longer than m(-1) and m3, the x-wave is likely to be a missing wave hidden in the center of m1 (circle
the center of m1).
According to the variant, put “x:c3?” at the end of m0 or m2 or in the middle of m1. The x-wave position in the center of m1 is the least likely.
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7/16/22, 8:21 AM A further description of the Elliott wave theory - the NeoWave by Glenn Neely. | Litefinance | LiteFinance (ex. LiteForex)
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If m(-1) is longer than m0, m0 is shorter than m1, m3 is not the shortest of the three waves, m(-1), m0 and m1, and m3 (plus one time unit) is fully
retraced during the time equal or less than the time m3 took to form, m1 is likely to be the third wave in the terminal impulse pattern. So, put
“:c3” at the end of m1.
☰
Let us see how the (a) condition of the second retracement rule works on the example.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_1.jpg?
q=75&s=3fccfd0d1d7b844c5b9cac43041b6e24)
Let us check the conditions of the second rule. Wave m2, marked with the red line in the chart, reaches 50% of m1, marked with the green lines
(m1 is complex, its start and end are marked with the red filled circles). So, the condition of the second rule is met when m2 is between 38.2%
and 61.8% (exclusive) of m1.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_2.jpg?
q=75&s=43e05d0897f04adec4268b853b137fc5)
The m0 is less than 38.25% of m1. And so, there applies the (a) condition of the second rule, and we put “:5” at the end of m1.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_3.jpg?
q=75&s=f4bc8c6883a046e746b86221442eaa48)
At the final step, we need to pick the paragraph of the (a) condition corresponding to the current situation. The m4 (the turquoise horizontal line)
doesn’t exceed level m0 (pink horizontal line), and so, m1 is likely to be the end of the corrective pattern within a complex formation. Its x-wave is
m2, so, we put “x:c3” at the end of m2, and “:s5” - at the end of m1.
The further conditions of the first paragraph of the (a) condition are not met, as it is clear that m1 is longer than m(-1) and m3, it is greater than
161.8%.
If m0 and m2 are approximately equal in price and time and m3 is not 161.8% (or more) m1, m4 exceeds the level of the end of m3 (plus one
time unit) during the time less than m3 took to form, m1 is likely to be an element of a complex formation. Like in the (a) condition, there are also
three possible positions of the x-wave:
The hidden x-wave is more likely to appear if m3 is less 61.8% m1. You should put “x:c3” at the possible points of the x-wave position, next, in the
process of regrouping of monowaves, we leave the label in the most likely point (I will cover the principles of grouping in the next articles).
If a part of the price range of m2 is shared by m0, and m0 and m2 differ by at least 61.8% in time, if m1 is not the shortest wave when compared
to m3 and m(-1), and after m3, the market returns to the beginning of m1, m1 may be “:sL3”, which is a part of the terminal pattern.
Let study the (b) condition on the example.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_4.jpg?
q=75&s=f271f22fae478dd61f3e3a2eab7ba732)
Let’s check the requirements of the second retracement rule. Wave m2 (marked with the green line in the chart, its start and end are marked
with red filled circles) is more than 38.2% of m1. So, the second rule is met.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_5.jpg?
q=75&s=1f4fbf45ff0cde373722a54ae019f1d2)
Wave m0 is a little less than 50% of m1. Accordingly, the (b) condition of retracement rule 2 is met. So, we put “:5” at the end of m1.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_6.jpg?
q=75&s=3d90e8e685dad40223831dd23289d114)
We pick up the paragraph corresponding to our situation and place the relevant structure labels. M4 (the end of the wave is marked by the pink
horizontal line). So, m1 is likely to the end of the corrective pattern in a complex formation. The x-wave in this pattern is m2, and so, we place
“x:c3?” at the end of m2. And we put “:s5” at the end of m1.
1. If m4 doesn’t exceed the end of m0, m1 is likely to be the end of a flat correction in the complex formation. The x-wave in this pattern is m2, so
we place “x:c3” at the end of m2. Accordingly, we place “:s5” at the end of m1.
If the “:5” is used as a preferred structure label, m1 is likely to be the end of an irregular failure flat correction or a zigzag of a running correction
(I will cover these patterns in detail in my next training articles, in the meanwhile, it is enough to accept the fact that m1 concludes a zigzag or a
flat), or it can be an element of a complex correction, whose x-wave is at the end of wave m0 or m2:
a. If m(-2) is shorter than m(-1), the x-wave is within m0. This scenario is more likely if m(-4) is longer than m(-3);
b. If m(-2) is longer than m(-1), the x-wave is within m2. Besides, m1 should be at least 38.2% of m(-1). The x-wave will be more likely to be in m2 if
m1 is at least 61.8% of m(-1).
2. If m(-1) is longer than m0, but it is less than 261.8% of m1, m3 is shorter than m1, m3 is shorter than m1, and after m3, the market quickly
returns to the beginning of m1 (or beyond), m3 may finish a terminal pattern, and so, put “:c3” at the end of m1.
3. If m0 is composed more than three monowaves and m1 goes beyond the end of m0 in the same amount of time (or less) than that m0took to
form, m0 is likely to be the end of an important Elliott pattern. We place “:5” at the end of m1.
4. If m2 (plus one time unit, i.e. the period between two points of the base monowave) is completely retraced in the same amount of time (or
less) that m2 took to form, and m3 is longer and more vertical than m1, and m(-1) is not greater than 161.8% of m1, m2 is likely to finish a
running triangle (the triangle, where the b-wave is longer than the a-wave, and the d-wave is longer than the c-wave). In this case, we put “:sL3” at
the end of m1.
a. If m3, being a so-called thrust out of the triangle, is fully retraced by m4, and, m4 forms faster than that m3 took to form, there is a Limiting
triangle.
b. If m3 is not completely retraced by m4 or is retraced during a longer time than it tool m3 to form, and m4 is fully retraced by the next wave,
there may be two variations: m3 will either be a part of the fifth segment of a terminal formation, or it is a Non-Limiting triangle (I will write more
about Limiting and Non-limiting triangles in the next articles).
5. If m3 and m(-1) are both at least 161.8% of m1, m2 may complete an Irregular Failure. In this case, we put “:c3” at the end of m1.
Let us study the (c) condition of the second retracement rule on the example.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_7.jpg?
q=75&s=9c9f09a23c0f6ddae5410934ee377248)
Wave m2 (marked with the red line in the chart) is about 50% of m1, which is more than 38.2% but less than 61.8% of m1. So, the requirements
of the second rule are met.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_8.jpg?
q=75&s=ef661ad22056e84bfdd070ece062216c)
Wave m0 is a little less than m1. So, the (c) condition of the second rule is met. We put “:5” at the end of m1.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_9.jpg?
q=75&s=9421abaf784e8643bab44582c102766c)
Let us pick the relevant paragraph of the (c) condition. The m(-1) is longer than m0 but is clear even visually that it is less than 261.8% of m1, m3
is shorter than m1, and, after m3, the market quickly returns to the start of m1 (the turquoise horizontal line) or beyond (the pink line marks the
endpoint of the fall). So, according to the second paragraph of the (c) condition, m3 could finish a terminal pattern. We place “;c3” at the end of
m1.
3. If m3 is longer and more vertical than m1, and m4 is at least 61.8% but less than 100% of m3, m(-3) is longer than m(-2), m(-2) or m(-1) is longer
than m0, and m0 has “:c3” in its structure list, m1 may be the second-to-last wave in a contracting triangle. Add “:sL3”.
4. If m3 is shorter than m1, m3 is retraced by at least 61.8%, and m1 takes less time than m0, and m2 takes as much time (or more), m1 is likely
to be an element of a triple zigzag, which is concluded by m3. In this case, we place “:5” at the end of m1.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_10.jpg?
q=75&s=2b890128d73ba90fa9ac1353b88b6511)
Wave m2 (marked with the red line) is more than 38.2%, but less than 61.8% of m1. The main requirement of the second rule is fulfilled.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_11.jpg?
q=75&s=e745c715f521daeb20b481643864d491)
Wave m0 is between 100% and 161.8% of m1. So, the condition (d) of rule 2 is met.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_12.jpg?
q=75&s=57e9b3cce92a7960dacb5b03554b5d12)
In our example, there are fulfilled two paragraphs of the (d) condition. First, m2 (blue zone in the chart) takes the same amount (or more) to form
than m1 (green zone) and m3 (red zones). So, we place “:5” at the end of m1.
Second, we see that m3 is shorter than m1, m3 is retraced obviously more than 61.8%, m1 forms faster then m0, and m2 takes much more time
to form than m1. So, m1 is likely to be an element of a zigzag that is terminated by m3. So, we place “:5” at the end of m1.
If the beginning of m2 (plus one time unit) is completely retraced in the same amount of time (or less) it took to form, and m3 is longer and more
vertical than m1, and m(-1) and m1 do not share the same price range, the most likely scenario is a complex correction with a missing x-wave in
the center of m0. The final segment of such correction is likely to be m2. In this case, we add “:с3” to the structure list of m1, we also circle the
center of m0 (better at the end of m1). On the right of the circle is “x:c3”, on the left, we place “:5”.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_13.jpg?
q=75&s=3e78fe4b3731323fd1266a9739bfda2e)
Wave m2 (marked with the green line in the chart) is more than 38.2% but less than 61.8% if m1. So, the requirements of the second rule are
met.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_14.jpg?
q=75&s=e28a92ae60e014c544a7269b7f6f03bc)
Wave m0 is more than 161.2% of m1. So, the (e) condition of the second rule is met.
(https://cdn.litemarkets.com/cache/uploads/blog_post/cryptocyrrency/hyipov/2020.03.21/BTCUSD_hyipov_15.jpg?
q=75&s=d787e70333610d8307a4bbdd32d6a0dd)
Wave m3 is shorter and is less vertical than m1. So, the structure label “:5” is the only correct alternative. The additional requirement of the (e)
condition is not met.
That is all for today. The next training article (https://www.litefinance.com/blog/for-professionals/neowave-part-5-retracement-rule-3/) will deal
with the third rule of retracement, which will provide more information on the Elliott wave patterns.
P.S. Did you like my article? Share it in social networks: it will be the best “thank you" :)
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