The Wave Principle

On the other hand, stocks tend to bottom simultaneously.

In fast markets the hourly and daily movements are the best guides; in slow markets, the daily and weekly.

There are three important reasons why weekly range charts are necessary:

— Only by this method is it possible to observe the movement over a sufficient historical background in order to judge the nature of the several degrees of waves, especially the larger.

— So-called “lines” are converted into patterns of flats or triangles, composed of three or five waves, respectively, useful in determining or confirming future movements.

Tops of big moves scatter or fan out in different groups and stocks, whereas bottoms of big moves consolidate; that is, different groups and stocks tend to establish lows simultaneously.

Volume decreases gradually from the beginning to the end of horizontal triangles, flats and other types of corrections. Volume often helps to clarify the character of a movement

Characteristics of volume are very impressive when considered in conjunction with the five wave cycle. For example, during an advance or a decline of some importance, volume will increase during wave number one, diminish during number two, increase during number three, decrease during number four, and increase during number five. Immediately following number five, volume should be fairly well maintained, with little, if any, further progress in price, indicating reversal.

On the daily chart, the appearance is an uninteresting line, but when condensed into a weekly range chart a perfect triangle is disclosed, with the second wave pointing upward, thus assuring the trader that the market would move upward following the end of the triangle.

When the range (weekly or daily) in a triangle embraces the entire width of the triangle, the end has about arrived. Confirmation should be required in wave number five. A throw-over is not essential.

market will reverse its direction at the end of this diagonal (that is, when the fifth triangular wave has terminated) and will return to about the base of the triangle, as illustrated.

1) Waves in the direction of the main movement, or the odd numbered waves, are made up of five lesser waves.

2) Corrective waves, or waves against the main movement (even numbered waves) are made up of three lesser waves.