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Elliott used volume
as a tool for verifying wave counts and in projecting
extensions. He recognized that in any bull market, volume has a
natural tendency to expand and contract with the speed of price
change. Late in a corrective phase, a decline in volume often
indicates a decline in selling pressure. A low point in volume
often coincides with a turning point in the market. In normal
fifth waves below Primary degree, volume tends to be less than
in third waves. If volume in an advancing fifth wave of less
than Primary degree is equal to or greater than that in the
third wave, an extension of the fifth is in force. While this
outcome is often to be expected anyway if the first and third
waves are about equal in length, it is an excellent warning of
those rare times when both a third and a fifth wave are
extended.
At Primary degree and greater,
volume tends to be higher in an advancing fifth wave merely
because of the natural long term growth in the number of
participants in bull markets. Elliott noted, in fact, that
volume at the terminal point of a bull market above Primary
degree tends to run at an all-time high. Finally, as discussed
earlier, volume often spikes briefly at points of throw-over at
the peak of fifth waves, whether at a trend channel line or the
terminus of a diagonal triangle. (Upon occasion, such points can
occur simultaneously, as when a diagonal triangle fifth wave
terminates right at the upper parallel of the channel containing
the price action of one larger degree.) In addition to these few
valuable observations, we have expanded upon the importance of
volume in various sections of this course.
The "Right Look"
The overall appearance of a wave
must conform to the appropriate illustration. Although any
five-wave sequence can be forced into a three-wave count by
labeling the first three subdivisions as one wave "A"
as shown in Figure 2-13, it is incorrect to do so. The Elliott
system would break down if such contortions were allowed. A long
wave three with the end of wave four terminating well above the
top of wave one must be classified as a five-wave sequence.
Since wave A in this hypothetical case is composed of three
waves, wave B would be expected to drop to about the start of
wave A, as in a flat correction, which it clearly does not.
While the internal count of a wave is a guide to its
classification, the right overall shape is, in turn, often a
guide to its correct internal count.
Figure 2-13
The "right look" of a
wave is dictated by all the considerations we have outlined so
far in the first two chapters. In our experience, we have found
it extremely dangerous to allow our emotional involvement with
the market to let us accept wave counts that reflect
disproportionate wave relationships or misshapen patterns merely
on the basis that the Wave Principle's patterns are somewhat
elastic.
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