Elliott used the word “failure” to describe a situation in which the fifth wave does not move beyond the end of the third. We prefer the less connotative term, “truncation,” or “truncated fifth.” A truncation can usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as illustrated in Figures 1 and 2. Truncation often occurs following a particularly strong third wave.

Truncation gives warning of underlying weakness or strength in the market. In application, a truncated fifth wave will often cut short an expected target. This annoyance is counterbalanced by its clear implications for persistence in the new direction of trend.

Key Takeaway: A truncation suggests underlying strength or weakness and an impending market reversal.

For a complete description, please read Elliott Wave Principle: Key to Market Behavior by Robert Prechter and A.J. Frost.