The Expert Advisor™, with its huge capacity for code, allows us to refine and focus on exceptions. A good example is the extension wave that can develop after a wave 5 has peaked. The Expert Advisor™ will detect that the following wave does not retrace enough and will flag it as an x wave. This pattern is risky and the wave 5 can terminate very quickly or carry us to distances unforeseen. However, if we use the other indicators such as AOZZ, we will have a better feel for what is happening.
The extension wave itself is a correction within the impulse wave preceding and it resets the calculation for where the new wave five will carry. Sometimes we will see more than one extension to wave five (in fact, we may see a whole new 5 wave pattern); this could be indicative that the volatility is measured poorly by the sensitivity percent used in the expert or events of crucial importance took precedence in the market sentiment. Try looking at a larger timeframe or sensitivity when we keep having repetitive extension waves will help to overcome this.
Important: Please note that this nomenclature of x wave is specific to AlphOmega and differs from textbook definition. By definition, an extension is a five-wave pattern within one of the impulse waves comprised in a five-wave pattern. From this definition, you can have an extension in any of the 3 impulse waves.
Our definition for the x wave is closer to the missing wave of Glenn Neely or simply, like a bridge between the wave 5 and its extension that is a continuation of wave 5! In fact, there could be more than one x-extension if the volatility is too high. This will happen in times of strong trends. Because the filter cannot cope with the acceleration in price movement, it will display erratic peaks and troughs. The filter is static and cannot be made dynamic for the time being (MetaStock® does not allow a variable in the arguments of that function).
Our x wave never takes place after a wave 1 or a wave 3 but a grayed wave 3 and 4 may be followed by an adjusted wave 3 and 4. This situation is detected by the Expert and displayed properly, however the Explorer™ cannot differentiate since it detects the beginning of the wave and not the completed pattern. It will however correctly track the relocated 3 and 4. When there is a textbook extension in wave 1, 3, or 5, the Expert will display this extension in its cycle as a five wave pattern, followed by an ABC correction pattern: these two patterns are separated by the peak or trough of a larger cycle. Spotting an extension is important because it tells you information about the next impulse(s). Not seeing one in the first 2 impulses will strongly suggest that one is coming in the third impulse. Do not confuse this textbook extension with the x wave.
We will at times see confusing labels within a wave pattern, for example a wave 3 will break before retracing fully the previous wave. It is a case of wave failure. How does the expert handle that? It will assume that the previous wave’s count was wrong and it was part of a new pattern; hence the previous wave should have been a wave 1 and the current wave is a 2. This is shown on the above chart in the blue ellipse. It will not amend the previous wave count, only the current wave.
There are two reasons for not changing the count, first the count could still be correct if the next wave also fails and the price resumes the initial pattern; the second reason is that the label describes properly the situation at that bar with the information that was available at that time. Failures can be identified and observed throughout the chart. Sometimes we will have a quick double reversal, and then the expert will display dots so our screen is not cluttered with meaningless symbols. What we must know is that at all times we can find out the name of a symbol (especially those we don’t know) by putting our mouse on it. We also can turn off this feature and put back numbers instead of dots; edit the symbol tab of the expert and uncheck for the desired sensitivities, all “Wave 2 t” boxes.
There is one instance where the label could be replaced after the fact, when a larger sensitivity pattern is recognized, its label will cover the smaller wave and reset its counter to zero after that bar. An example is shown in the green ellipse of Fig. 58. In this case, a 5 was shown until the wave ran over the 13% trigger used for its sensitivity. It does not invalidate the previous count, it only confirms a stronger move completing at the same bar. This approach we selected to respect the hierarchy of waves and always favour the display of the largest and most powerful wave. The alternative is usually to display all wave labels for the same data point, making the chart difficult to read; this alternative is not possible with MetaStock® as only one label can be displayed for a given bar.
The last example we have is related to x waves. We have seen previously that the expert can detect an x wave and when it happens, we should anticipate the trend to resume. Sometimes an x wave will take place although the wave has gone beyond the point where it is normally considered an x. The expert will not flag the x wave since it is past the reversal point; it will however label the next wave properly as a 5. As you know, the extensions can repeat more than once in a pattern. An example is shown in the red triangle.
Although the wave is called an “a” (does not happen in version 5.5 and up), because the would-be “b” wave retraces past “a” wave, the expert labels it a 5 (and later a 4 because this higher sensitivity is also completed). As can be seen from these 3 examples, having the expert display the labels does not mean there is no interpretation to be applied. The wave failures are more frequent in consolidation periods (trading range), while the x waves and extensions occur in strong trending periods. The failure patterns were studied by Elliott chartist who derived construction rules and identified them as various triangular patterns. They are also part of what we call corrective patterns. Below are a few examples:
There are many more, such as contracting or symmetrical, expanding and diagonal. The main thing is that the trend resumes after the completion of the pattern. The numbers will never appear as in the sketch above for the simple reason that these patterns do not respect the rules we have set in the expert. With the knowledge provided, we can follow the formation of the triangle and position ourselves accordingly to ride the exit trend. As mentioned earlier, the AO Triangle indicator will detect triangles that have reached at least point 4. Trade either the 5th wave or the breakout of the triangle.
AlphOmega Elliott Waves 5.5
This set will display Elliott waves count, price projections and time projections.
For MetaStock® 9.0 and MetaStock® Pro 9.0 and higher
By AlphOmega Inc. http://AlphOmegaEW.com