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CHART: Learn to Label Elliott Waves More Accurately
Senior Analyst Jeffrey Kennedy shows you how to use momentum patterns to confirm your count.

By Jill Noble
Thu, 27 Dec 2012 16:15:00 ET
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Are you looking for an easy way to improve your confidence as you analyze the charts you trade? Take a quick look at this chart (adapted from Jeffrey Kennedy’s December 26 Elliott Wave Junctures) to see how divergence relationships help clarify your analysis.
 
According to Jeffrey, divergence relationships are easy to identify. Whenever prices make a new extreme, look for underlying indicators to move in the opposite direction. Specifically,
 
The momentum relationship most often seen in waves 3 and 5 is divergence. Bullish divergence forms when prices make a new low while an accompanying indicator does not. Conversely, bearish divergence occurs when prices register a new high while an accompanying indicator does not. Bullish and bearish divergences are common to waves A and C, just as they are waves 3 and 5.
 
Notice the bearish divergence between waves 3 and 5 in the daily price chart of Halliburton Company (HAL) -- Prices reach a new high, yet the MACD indicator moves in the opposite direction:



Jeffrey notes that if you label an advance as a 5th wave move, and yet you do not see momentum divergence, that tends to argue for an extended 5th wave.
 
Next, at waves A and C, you can see an example of bullish divergence. Wave A bottomed at $32.90 in HAL and wave C ended much lower at $29.83. The histogram readings that correspond to waves A and C are -36.26 and -26.60, respectively.
 
 
Understanding that Elliott waves demonstrate unique momentum relationships as well as price structure allows you to label waves more accurately.
 
This is merely one chart example of how you can use supporting indicators to strengthen your wave count. In this Halliburton chart Kennedy uses MACD and the MACD Histogram to strengthen his analysis. Yet in his Elliott Wave Junctures service (3-5 video lessons per week) he explains how to utilize a variety of additional technical tools – from RSI, Stochastics and Candlesticks to classic chart patterns, his own proprietary system, and more.
 


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