by Editorial Staff
Updated: January 05, 2017
Do you see a pattern you recognize in this chart of Reynolds American (RAI)?
The Wave Principle separates price action into two categories: motive and corrective, and this price chart has a clear example of one category.
Take a close look, remembering that five-wave moves are motive while three-wave moves are corrective. Then see if you can answer these questions:
Here's some help from Senior Analyst Jeffrey Kennedy:
"A defining characteristic of this pattern is that it tends to be contained within parallel lines. It is the most prevalent corrective wave pattern."
That's a bit of a giveaway. Now label the waves on the chart between the words Top and Bottom.
Now, here's Jeffrey's labeled chart:
Notice that the Wave Principle uses A-B-C to label corrective waves and numerals 1 through 5 (or in this case, i through v) for motive waves.
Jeffrey explains that zigzags, which consist of three waves, are more prevalent than flats or triangles. Their substructure is 5–3–5 because wave A subdivides into five waves, wave B is a three-wave structure, and wave C also contains five waves.