I previously posted the “Three Hard and Fast Rules of Elliott Wave Theory” and now it’s time to see these simple rules in action on three stocks on different time frames.

First, let’s review those rules:

1.  Wave #2 Cannot Retrace 100% of Wave #1

2.  Wave #3 Cannot be the Shortest Wave (but does not have to be the longest)

3.  Wave #4 Cannot Enter the Territory of Wave #1

Now, let’s see them in action:

Apple Inc (AAPL) 15-minute chart (to current):

I may not have mentioned but Impulse (5 swing) waves can occur going up or going down.  In this case, we’ll look at a Five-wave Elliott Wave Impulse down on Apple’s 15 minute chart.

In this interpretation, Wave 2 does not retrace more than 100% of Wave 1 (it actually retraced the 61.8% Fibonacci retracement, as we’ll soon see); Wave 3 was the longest wave (clearly not the shortest), and Wave 4 did not enter the territory of Wave #1.

This actually is - in my interpretation - a near perfect example of Elliott Wave in action in terms of Impulse Waves (down).

What if we combine simple Fibonacci Retracements with basic Elliott Wave Theory in this chart?

The Blue lines represent the wave count (labeled in the first chart) and the blue and red horizontal lines represent retracements - the Blue grid represents a retracement of Wave #1 while the red grid represents the retracement of Wave #3.

I mentioned that Wave 2 is expected to be deep - but not deep enough to retrace all of Wave 1.  Often, the 61.8% Fibonacci retracement will be tested or breached in a Wave 2 correction.  Indeed, this is the case, such that price retraces to the 61.8% Fibonacci zone of the prior impulse down.

Wave Three then unfolds as price finds resistance at the 50 period EMA as well as the 61.8% Fibonacci retracement.  This would be an ideal location for a short-sell trade, but if you overlay a possible Elliott Wave Interpretation over that, you can apply possible price projections as well as have higher confidence in a possible successful trade (with experience, that is).

Elliotticians know that Wave 3 impulses can be some of the strongest moves in a price swing, and if you think you might be identifying a Wave 3 impulse, you’ll want to press your edge a little if possible.

Nevertheless, Wave 3 finished with 2 dojis (obscured by my drawings) and then retraced exactly to the 38.2% Fibonacci retracement of the prior Wave 3 impulse down… and also to the declining 20 period EMA (which - in and of itself - would have set up a short-sell trade.  Keep in mind wave 3 made a new momentum low on the oscillator - not shown).

Armed with the prior four wave count, you can trade with confidence in the higher probability (but clearly not certainty) that these levels will hold and the next impulse will be down to new lows as Wave 5 commences and terminates just beyond Wave 3.

This example in Apple would be an ideal reference for a near perfect Elliott Wave count on the basic level.

How about another example on the Daily Chart?

Sears Holding (SHLD) Daily:

I chose this recent example for fun because this chart actually contains two Elliott Impulse Waves.  Wave 5 is actually an “Extended” Wave which contained its own ‘fractal’ 5-Wave pattern.  Elliott is Fractal, in the nature that wave counts occur on all time frames that build up to the larger picture (to the monthly charts).

Let’s look at the larger impulse drawn in Blue first.

I won’t discuss Fibonacci but you can apply the grids yourself to find that Wave 2 retraced 50% of Wave 1 while Wave 4 also retraced 50% of Wave 3.

Following the basic rules, Wave 2 did not retrace 100% of Wave 1; Wave Three was NOT the shortest (Wave #1 was - but Wave 3 was NOT the longest!); and Wave #4 did not retrace into the price territory of Wave 1 (though it was close).

Wave 5 was actually an extended Wave and it had its own mini-Elliott Wave Impulse that follwed the same rules as mentioned above.  You may want to pull-up Sears (SHLD) on your own chart terminal to see it, but the rules are the same.

Wave 2 (Green) was a deep reracement of Wave #1, Wave #3 wasn’t the shortest (it was the longest), and Wave 4 did not enter the price territory of Wave 1 (though again, it was close).

The Moving Averages in both Waves served as support, as well as from confluence from Fibonacci retracement levels.

As I continue to learn more and apply Elliott Wave to different stocks and markets, I’ll keep you informed and educated on these concepts and more.