Yesterday I was checking the Nifty 50 index charts in my favorite Elliott Wave program Advanced Get. Recent studies revealed there may be an ongoing Elliott Wave 4 retracement in the Nifty index. Let me examine whether the retracement is over. Is Nifty poised for another up move soon? I will also discuss why Wave 4 Retracement is the most tradable pattern of the Elliott Waves Theory.
What is Elliott Wave 4 Retracement?
The Elliott wave learners already know that the market always moves in a five-wave pattern. It is one wave up and the second wave down. Then again the third wave up and the fourth wave down. Finally, there is a wave 5 up move that at least goes close to the wave 3 top or even surpasses it to make a final new high. So in case of an uptrend wave 4 is always a downward correction that gives a trader an opportunity to take part in the final up move by taking a long position when wave 4 is ending.
Real-Life Example of Elliott Waves Pattern
In the month of March of this year, Nifty made a low at 9951.90 and since then it has shown a consistent move to 11760.20. The high has been recorded on the 28th of August 2018. Since then Nifty has shown a 5-wave correction on the downside till 11250.20. I have attached an hourly graph for the Nifty 50 index to explain how wave 4 has typically unfolded in a 5-wave pattern. Check the image below to know more.
How To Identify The Elliott Wave 4 Retracement?
Now we can see that the Advanced Get chart suggests that the Nifty 50 has completed the wave 4 correction in the daily charts. The Elliot oscillator almost touching the zero line confirms that the wave 4 correction is almost over. The profit-taking index or PTI is at a value of 58 which suggests that the chance of a new wave 5 up move is very high.
The Advanced Get charts also predict wave 5 levels. The projected wave 5 level is at 12325 and the second projected level is at 13045 marks. Whether Nifty will be able to touch those levels in the coming days is a matter of speculation. However, let us see some contrarian views.
Analyzing The Fibonacci Levels
Let us see the daily Fibonacci retracement chart of nifty 50 here we can see that the up move starting from 9951 marks till 10760 marks have not yet corrected to the 38.2 percent retracement zone. The 38.2 percent Fibonacci retracement zone comes close to the 11070 mark. So a rational view is that till the wave four corrections is not over. Nifty can correct up to 11070 before going up again.
Trading Strategy For Elliott Wave 4 Retracement
Currently nifty is making a lower high lower low pattern which suggests that the intermediate trend is down. What should be the trading strategy now? Shall we buy Nifty now? Today’s close price is 11377.80 as of 17th September 2018.
Trading strategy number 1 can be to wait till the Nifty break the lower high lower low pattern. To enter long only if a lower high gets broken, but sometimes this strategy can give you a late entry.
Trading strategy number 2 can be to enter long in a trendline break or so. In either of the strategies do not try to buy Nifty now rather wait for the above-mentioned strategies to confirm that the Elliott wave 4 retracement is coming to an end. I am not a big master of Elliott waves. Hence, I will love to have your comments about this wave 4 correction scenario.
Generally, wave 4 of an Elliott Wave structure will likely pull back between 23.6% and 38.2% from the top of the previous wave 3 before advancing or extending up for a fifth final wave.
The fourth leg in an Elliott Wave formation seldom moves beyond the starting point of the first ‘impulse’ wave, although there can exceptions due to volatility or gaps occurring during strong up-trends or down-trends in price action.
Correctly predicting what may happen can be extremely difficult at times! However, historically speaking it has typically been seen that a typical deviation would lie between 33%-38%, but this window could expand depending on market conditions and movements as well as specific stocks/indices patterns within any given timeframe.
As per traditional rules established by R N Elliott himself, unless there are certain gaps caused by extreme surges of volatility; usually Yes – implying that generally curve construction remains reasonably contained within its scope making today’s steep corrections expected before upward trends resume again ending off with gains higher levels overall compared to those seen near original entry points associated with Waves 1 & 2 respectively.
The Elliott Wave 4 Retracement pattern is an important tool for traders and investors that can be used to identify opportunities in the markets. It can also provide insight into how much further a market might retrace before continuing its move. This makes it essential for timing entries and exits. The Elliott wave principle gives us insights that explain why some moves fail or succeed with greater precision than other technical indicators, giving traders a clear edge over their contemporaries who rely purely on indication-based trading approaches.