See for yourself how to build a better Elliott wave forecast with this free excerpt.
By Jill Noble
Tue, 06 Nov 2012 18:45:00 ET
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You may know that you can use supporting indicators to add confidence to your wave count.

Yet when it comes to practical application, there's an important difference between knowing and understanding: This quiz is designed to help you understand how ancillary technical tools can indeed support your Elliott analysis.

"A completed Elliott wave pattern supported by additional evidence allows for more confident forecasts and higher probability trades."
-EWI Senior Analyst, Jeffrey Kennedy

This lesson was excerpted from Kennedy's educational service, and looks at the advance in Goldman Sachs from the October 2011 low of \$84.27 to the March high of \$128.72.

See if you can build your confidence as you identify the corrective wave pattern and then spot additional support from a classical chart pattern, RSI Divergence and Japanese Candlesticks.

If you like what you learn, take a look at Jeffrey's new Elliott Wave Junctures service for instant access to even more valuable insights like you'll find below.

Question #1: Do you recognize a pattern?

Answer #1: Jeff labeled the large flat correction in Goldman Sachs: "Three waves in wave (A), three waves in wave (B) -- which ends at or near the origin of wave (A) -- followed by a five-wave move to the upside in wave (C).

Note that two items are necessary to confidently identify a change of trend or possible trade setup: First is a completed wave pattern; second is corroborating evidence.

To confirm, Kennedy looks at what was unfolding at the time wave (A) reached its extreme -- as well as the extremes of waves (B) and (C) -- in addition to having completed wave patterns in those junctures.

Question #2: On your labeled chart, what classic chart pattern do you see forming at the extreme of wave (A)?

(Need a hint? Think Edwards & Magee)

Answer #2: "Wave (A) peaked in unison with the formation of a bearish island reversal. We have a "key reversal" because prices made a new high, yet they actually closed below the prior day's close.

"That's what was going on, combined with the Wave Principle as well as other forms of technical analysis. The Island Reversal is a standard Edwards and Magee chart pattern."

Investopedia defines an Island Reversal as "An occurrence in technical analysis where a stock price will gap up/down, trade higher than this price, and then gap down/up below the initial price."

You've just seen how Jeffrey uses this classic pattern to support his wave count.

Question #3: Looking at the RSI charts below, do you see any evidence that wave (B) was ending?

Answer #3: "The termination of wave (B) was coincident with bullish RSI divergence. At the extreme of Wave (B), you have a very nice (14-period) RSI Divergence.

Prices made a new low. In Wave B we have waves A, B and C of (B) -- notice how prices diverge between C and A, and how that bullish divergence was demonstrated in the RSI at the time."

Question #4: What Candlestick pattern can you see at wave 5 of (C)?

Answer #4: "The last two trading days of wave 5 of (C) formed a bearish engulfing pattern.

"If we look at the extreme of wave (C), you can see waves 3, 4 and 5 of (C) -- and even within wave 5 you can see five structures: waves 1, 2, 3, 4 and as wave 5 was coming to the culmination, we form a bearish Engulfing Pattern."

At the extremes of these completed wave patterns, the accompanying technical evidence allows analysts and traders alike to build confidence in their decisions.

Did the answers to this quiz make sense to you? If so, now is the perfect time to strengthen your understanding of technical analysis and trading with Jeffrey's educational video service, Elliott Wave Junctures.

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