or in combination.
CANDLESTICK CHARTING
Charting market data in candlestick form uses the same dataavailable for standard bar charts; open, high, low, and close prices.While using the exact same data, candlestick charts offer a much
*This chapter was contributed by Gregory L. Morris.
297298 Chapter 12
more visually appealing chart. Information seems to jump off thepage (computer screen). The information displayed is more easilyinterpreted and analyzed. The box below is a depiction of of a sin-gle day of prices showing the difference between the bar (left) andthe candlestick(s). (See Figure 12.1.)
 
Figure 12.1
You can see how the name “candlesticks” came about. Theylook somewhat like a candle with a wick. The rectangle representsthe difference between the open and close price for the day, and iscalled the body. Notice that the body can be either black or white.A white body means that the close price was greater (higher) thanthe open price. Actually, the body is not white, but open (notfilled), which makes it work better with computers. This is so thatit will print correctly when printing charts on a computer. This isone of the adaptations that have occurred in the West; theJapanese use red for the open body. The black body means that theclose price was lower than the open price. The open and closeprices are given much significance in Japanese candlesticks. Thesmall lines above and below the body are referred to as wicks orhairs or shadows. Many different names for these lines appear inJapanese reference literature, which is odd since they represent thehigh and low prices for the day and are normally not consideredvital in the analysis by the Japanese. (See Figure 12.2.)
Figure 12.2 shows the same data in both the popular barchart and in a Japanese candlestick format. You can quickly seethat information not readily available on the bar chart seems tojump from the page (screen) on the candlestick chart. Initially, ittakes some getting use to, but after a while you may prefer it.Japanese Candlesticks 299
, Mn, ! wal \, A
 
Candlestick Chart ’ I fh, ! line i, iinp "4“at " bm
Figure 12.2
 
The different shapes for candlesticks have different mean-ings. The Japanese have defined different primary candlesticks,based upon the relationship of open, high, low, and close prices.Understanding these basic candlesticks is the beginning of can-dilestick analysis.
BASIC CANDLESTICKS
Different body/shadow combinations have different meanings.Days in which the difference between the open and close prices isgreat are called Long Days. Likewise, days in which the differencebetween the open and close price is small, are called Short Days.Remember, we are only talking about the size of the body and noreference is made to the high and/or low prices. (See Figure 12.3.)
Spinning Tops are days in which the candlesticks have smallbodies with upper and lower shadows that are of greater length300 3000 Sapte 12 12
i Long Days_- Short Days
Figure 12.3 Figure 12.4 Spinning tops.
 
than that of the body. The body color is relatively unimportant inspinning top candlesticks. These candlesticks are considered asdays of indecision. (See Figure 12.4.)
When the open price and the close price are equal, they arecalled Doji lines. Doji candlesticks can have shadows of varyinglength. When referring to Doji candlesticks, there is some consid-eration as to whether the open and close price must be exactlyequal. This is a time when the prices must be almost equal, espe-cially when dealing with large price movements.
There are different Doji candlesticks that are important.The Long-legged Doji haslong upper and lower shad-ows and reflects consider-able indecision on the partof market participants. TheGravestone Doji has only along upper shadow and nolower shadow. The longerthe upper shadow, the morebearish the interpretation. Figure 12.5 Doji candlesticks.Japanese Candlesticks 301
 
The Dragonfly Doji is the opposite of the Gravestone Doji, thelower shadow is long and there is no upper shadow. It is usuallyconsidered quite bullish. (See Figure 12.5.)
The single candlestick lines are essential to Japanese can-dlestick analysis. You will find that all Japanese candle patternsare made from combinations of these basic candlesticks.
CANDLE PATTERN ANALYSIS
A Japanese candle pattern is a psychological depiction of traders’mentality at the time. It vividly shows the actions of the traders astime unfolds in the market. The mere fact that humans react consis-tently during similar situations makes candle pattern analysis work.
A Japanese candle pattern can consist of a single candlestickline or be a combination of multiple lines, normally never morethan five. While most candle patterns are used to determine rever-sal points in the market, there are a few that are used to determinetrend continuation. They are referred to as reversal and continua-tion patterns. Whenever a reversal pattern has bullish implica-tions, an inversely related pattern has bearish meaning. Similarly,whenever a continuation pattern has bullish implications, anopposite pattern gives bearish meaning. When there is a pair ofpatterns that work in both bullish and bearish situations, they usu-ally have the same name. In a few cases, however, the bullish pat-tern and its bearish counterpart have completely different names.
Reversal Patterns
A reversal candle pattern is a combination of Japanese candlesticksthat normally indicate a reversal of the trend. One serious con-sideration that must be used to help identify patterns as beingeither bullish or bearish is the trend of the market preceding thepattern. You cannot have a bullish reversal pattern in an uptrend.You can have a series of candlesticks that resemble the bullish pat-tern, but if the trend is up, it is not a bullish Japanese candle pat-tern. Likewise, you cannot have a bearish reversal candle patternin a downtrend.302 Chapter 12
This presents one of the age-old problems when analyzingmarkets: What is the trend? You must determine the trend, beforeyou can utilize Japanese candle patterns effectively. While vol-umes have been written on the subject of trend determination,the use of a moving average will work quite well with Japanesecandle patterns. Once the short term (ten periods or so) trend hasbeen determined, Japanese candle patterns will significantly assistin identifying the reversal of that trend.
Japanese literature consistently refers to approximatelyforty reversal candle patterns. These vary from single candlesticklines to more complex patterns of up to five candlestick lines.There are many good references on candlesticks, so only a few ofthe more popular patterns will be discussed here.
Dark Cloud Cover. This is a two dayreversal pattern that only has bearishimplications. (See Figure 12.6.) Thisis also one of the times when the pat-tern’s counterpart exists but has a dif-ferent name (see Piercing Line). Thefirst day of this pattern is a longwhite candlestick. This reflects thecurrent trend of the market and helpsconfirm the uptrend to traders. Thenext day opens above the high priceof the previous day, again adding tothe bullishness. However, trading forFigure 12.6 Dark cloud the rest of the day is lower with acover -. close price at least below the mid-point of the body of the first day.This is a significant blow to the bull-ish mentality and will force many to exit the market. Since theclose price is below the open price on the second day, the body isblack. This is the dark cloud referred to in the name.
Piercing Line. The opposite of the Dark Cloud Cover, thePiercing Line, has bullish implications. (See Figure 12.7.) The sce-nario is quite similar, but opposite. A downtrend is in place, theJapanese Candlesticks
303
 
Figure 12.7 Piercing line +.
first candlestick is a long black daywhich solidifies traders’ confidencein the downtrend. The next day,prices open at a new low and thentrade higher all day and close abovethe midpoint of the first candle-stick’s body. This offers a significantchange to the downtrend mentalityand many will reverse or exit theirpositions.
Evening Star and Morning Star. TheEvening Star and its cousin, theMorning Star, are two powerful rever-sal candle patterns. These are boththree day patterns that work excep-tionally well. The scenario for under-
standing the change in trader psychology for the Evening Star willbe thoroughly discussed here since the opposite can be said forthe Morning Star. (See Figures 12.8 and 12.9.)
Figure 12.8 Evening star -.
Figure 12.9 Morning star +.304 Chapter 12
The Evening Star is a bearish reversal candle pattern, as itsname suggests. The first day of this pattern is a long white candle-stick which fully enforces the current uptrend. On the open of thesecond day, prices gap up above the body of the first day. Tradingon this second day is somewhat restricted and the close price is nearthe open price while remaining above the body of the first day. Thebody for the second day is small. This type of day following a longday is referred to as a Star pattern. A Star is a small body day thatgaps away from a long body day. The third and last day of this pat-tern opens with a gap below the body of the star and closes lowerwith the close price below the midpoint of the first day.
The previous explanation was the perfect scenario. Manyreferences will accept as valid, an Evening Star which does notmeet each detail exactly. For instance, the third day might not gapdown or the close on the third day might not be quite below themidpoint of the first day's body. These details are subjective whenviewing a candlestick chart, but not when using a computer pro-gram to automatically identify the patterns. That is because com-puter programs require explicit instructions to read the candlechart, and don’t allow for subjective interpretation.
Continuation Patterns
Each trading day, a decision needs to be made, whether it is to exita trade, enter a trade, or remain in a trade. A candle pattern thathelps identify the fact that the current trend is going to continueis more valuable than may first appear. It helps answer the ques-tion as to whether or not you should remain in a trade. Japaneseliterature refers to 16 continuation candle patterns. One continu-ation pattern and its related opposite cousin are particularly goodat trend continuation identification.
Rising and Falling Three Methods. The Rising Three Methods con-tinuation candle pattern is the bullish counterpart to this duo andwill be the subject of this scenario building. A bullish continua-tion pattern can only occur in an uptrend and a bearish continu-ation pattern can only occur in a downtrend. This restates therequired relationship to the trend that is so necessary in candlepattern analysis. (See Figures 12.10 and 12.11.)Japanese Candlesticks 305
 
Figure 12.10 Rising Three Figure 12.11 Falling ThreeMethods +. Methods -.
The first day of the Rising Three Methods pattern is a longwhite day which fully supports the uptrending market. However,over the course of the next three trading periods, small body daysoccur which, as a group, trend downward. They all remain with-in the range of the first day’s long white body and at least two ofthese three small-bodied days have black bodies. This period oftime when the market appears to have gone nowhere is consid-ered by the Japanese as a “period of rest.” On the fifth day of thispattern, another long white day develops which closes at a newhigh. Prices have finally broken out of the short trading range andthe uptrend will continue.
A five day pattern such as the Rising Three Methodsrequires a lot of detail in its definition. The above scenario is theperfect example of the Rising Three Methods pattern. Flexibilitycan be applied with some success and this only comes withexperience. For example, the three small reaction days couldremain within the first day’s high-low range instead of thebody’s range. The small reaction days do not always have to bepredominantly black. And finally, the concept of the “period ofrest” could be expanded to include more than three reactiondays. Don’t ignore the Rising and Falling Three Methods pat-tern; it can give you a feeling of comfort when worrying aboutprotecting profits in a trade.306 Chapter 12
 
Using Computers for CandlePattern Identification
A personal computer with software designed to recognize candlepatterns is a great way to remove emotion, especially during atrade. However, there are a couple of things to keep in mindwhen viewing candlesticks on a computer screen. A computerscreen is made up of small light elements called pixels. There areonly so many pixels on your computer screen, with the amountbased upon the resolution of your video card/monitor combina-tion. If you are viewing price data that has a large range of pricesin a short period of time, you may think that you are seeingmany Doji days (open and close price are equal) when in fact,you are not. With a large range of prices on the screen, eachpixel element will have a price range of its own. A computersoftware program that identifies patterns based on a mathemat-ical relationship will overcome this visual anomaly. Hopefully,the above explanation will keep you from thinking that yoursoftware isn’t working.
FILTERED CANDLE PATTERNS
A revolutionary concept developed by Greg Morris in 1991, calledcandle pattern filtering, provides a simple method to improve theoverall reliability of candle patterns. While the short term trendof the market must be identified before a candle pattern can exist,determination of overbought and oversold markets using tradi-tional technical analysis will enhance a candle pattern’s predictiveability. Concurrently, this technique helps eliminate bad or pre-mature candle patterns.
One must first grasp how a traditional technical indicatorresponds to price data. In this example, Stochastics %D will beused. The stochastic indicator oscillates between 0 and 100, with20 being oversold and 80 being overbought. The primary inter-pretation for this indicator is when %D rises above 80 and thenfalls below 80, a sell signal has been generated. Similarly, when itdrops below 20 and then rises above 20, a buy signal is given. (SeeChapter 10 for more on Stochastics.)Japanese Candlesticks 307
 
Here is what we know about stochastics %D: When itenters the area above 80 or below 20, it will eventually generate asignal. In other words, it is just a matter of time until a signal isgiven. The area above 80 and below 20 is called the presignal areaand represents the area that %D must get to before it can give atrading signal of its own. (See Figure 12.12.)
 
pensie6 {COMS) 3 Com Corp
lho ud
 
l'
 
Stochastic %D
 
 
 
 
 
pre-signal buy area (below 20)
29 ase '5
 
42 10 28."WAG Ela Prraed akg Venda aalan © Ora Reeorh V7
 
Figure 12.12
The filtered candle pattern concept uses this presignal area.Candle patterns are considered only when %D is in its presignalarea. If a candle pattern occurs when stochastics %D is at, say 65,the pattern is ignored. Also, only reversal candle patterns are con-sidered using this concept.
Candle pattern filtering is not limited to using stochastics%D. Any technical oscillator that you might normally use foranalysis can be used to filter candle patterns. Wilder’s RSI,Lambert’s CCI, and Williams’ %R are a few that will work equallyas well. (These oscillators are explained in Chapter 10.)308 Chapter 12
 
CONCLUSION
Japanese candlestick charting and candle pattern analysis areessential tools for making market timing decisions. One shoulduse Japanese candle patterns in the same manner as any othertechnical tool or technique; that is, to study the psychology ofmarket participants. Once you become used to seeing your pricecharts using candlesticks, you may not want to use bar chartsagain. Japanese candle patterns, used in conjunction with othertechnical indicators in the filtering concept, will almost alwaysoffer a trading signal prior to using other price-based indicators.CANDLE PATTERNS
The candle patterns listed below comprise the library that is used toidentify candlestick signals. The number in parentheses at the end ofeach name represents the number of candles that are used to definethat particular pattern. The bullish and bearish patterns are dividedinto two groups signifying either reversal or continuation patterns.
Bullish Reversals
Long White Body (1)Hammer (1)
inverted Hammer (1)Belt Hold (1)
Engulfing Pattern (2)Harami (2)
Harami Cross (2)Piercing Line (2)
Doji Star (2)
Meeting Lines (2)
Three White Soldiers (3)Morning Star (3)Morning Doji Star (3)Abandoned Baby (3)Tri-Star (3)
Breakaway (5)
Three Inside Up (3)Three Outside Up (3)Kicking (2)
Unique Three Rivers Bottom (3)Three Stars in the South (3)Concealing Swallow (4)Stick Sandwich (3)Homing Pigeon (2)Ladder Bottom (5)Matching Low (2)
Bullish ContinuationSeparating Lines (2)
Rising Three Methods (5)Upside Tasuki Gap (3)
Side by Side White Lines (3)Three Line Strike (4)
Upside Gap Three Methods (3)On Neck Line (2)
In Neck Line (2)
Bearish Reversals
Long Black Body (1)Hanging Man (1)Shooting Star (1)
Belt Hold (1)
Engulfing Pattern (2)Harami (2)
Harami Cross (2)
Dark Cloud Cover (2)Doji Star (2)
Meeting Lines (2)
Three Black Crows (3)Evening Star (3)Evening Doji Star (3)Abandoned Baby (3)Tri-Star (3)
Breakaway (5)
Three Inside Down (3)Three Outside Down (3)Kicking (2)
Latter Top (5)
Matching High (2)Upside Gap Two Crows (3)Identical Three Crows (3)Deliberation (3)Advance Block (3)
Two Crows (3)
Bearish Continuation
Separating Lines (2)
Falling Three Methods (5)Downside Tasuki Gap (3)
Side by Side White Lines (3)Three Line Strike (4)
Downside Gap Three Methods (3)On Neck Line (2)
In Neck Line (2)
 310 Chapter 12
|ell |] iy
Hammer + Hanging Man — Inverted Hammer +
 
i i
Shooting Star - Belt Hold + Belt Hold -
| i ||
Engulfing + Engulfing - Harami +
 
 Japanese Candlesticks 311
|
 
|if I:
Harami -— Harami Cross +
Piercing Line + Doji Star +
 
i
Meeting Line + Meeting Line —
  
Doji Star —
 312 Chapter 12
Abandoned Baby + Abandoned Baby — Tri-Star +
 Japanese Candlesticks 313
    
Breakaway —
Tri-Star - Breakaway +
 314 Chapter 12
1.
Three Stars in theSouth +
   
   
Wh
Unique Three River
pl
Stick Sandwich +
al
Concealing BabySwallow +
a
Deliberation —
          
  
 
|
  
Identical ThreeCrows —
      
I ali
Matching Low +
Matching High —
Upside GapTwo Crows—
    Japanese Candlesticks 315
ly
Ladder Top -
I1
Separating Lines +
Ta
Ladder Bottom +
        
(ii i
Advance Block -
 
. . Rising Three Falling ThreeSeparating Lines — Methods + Methods —
 Chapter 12
Side by Side WhiteLines +
Side by Side White
 
Upside Gap Three Downside Gap ThreeMethods + Methods +
On Neck Line +
 Japanese Candlesticks 317
 
On Neck Line - In Neck Line + In Neck Line —
   
HISTORICAL BACKGROUND
In 1938, a monograph entitled The Wave Principle was the firstpublished reference to what has come to be known as the ElliottWave Principle. The monograph was published by Charles J.Collins and was based on the original work presented to him bythe founder of the Wave Principle, Ralph Nelson (R.N.) Elliott.
Elliott was very much influenced by the Dow Theory,which has much in common with the Wave Principle. In a 1934letter to Collins, Elliott mentioned that he had been a subscriberto Robert Rhea’s stock market service and was familiar with Rhea’sbook on Dow Theory. Elliott goes on to say that the WavePrinciple was “a much needed complement to the Dow Theory.”
In 1946, just two years before his death, Elliott wrote hisdefinitive work on the Wave Principle, Nature’s Law—The Secret ofthe Universe.
Elliott’s ideas might have faded from memory if A.Hamilton Bolton hadn't decided in 1953 to publish the ElliottWave Supplement to the Bank Credit Analyst, which he did annual-
319320 Chapter 13
ly for 14 years, until his death in 1967. AJ. Frost took over theElliott Supplements and collaborated with Robert Prechter in1978 on the Elliott Wave Principle. Most of the diagrams in thischapter are taken from Frost and Prechter’s book. Prechter went astep further and in 1980 published The Major Works of R.N. Elliott,making available the original Elliott writings that had long beenout of print.
BASIC TENETS OF THE ELLIOTTWAVE PRINCIPLE
There are three important aspects of wave theory—pattern, ratio,and time—in that order of importance. Pattern refers to the wavepatterns or formations that comprise the most important elementof the theory. Ratio analysis is useful in determining retracementpoints and price objectives by measuring the relationships betweenthe different waves. Finally, time relationships also exist and can beused to confirm the wave patterns and ratios, but are considered bysome E}liotticians to be less reliable in market forecasting.
Elliott Wave Theory was originally applied to the majorstock market averages, particularly the Dow Jones IndustrialAverage. In its most basic form, the theory says that the stockmarket follows a repetitive rhythm of a five wave advance fol-lowed by a three wave decline. Figure 13.1 shows one completecycle. If you count the waves, you will find that one completecycle has eight waves—five up and three down. In the advancingportion of the cycle, notice that each of the five waves are num-bered. Waves 1, 3, and 5—called impulse waves—are rising waves,while waves 2 and 4 move against the uptrend. Waves 2 and 4 arecalled corrective waves because they correct waves 1 and 3. Afterthe five wave numbered advance has been completed, a threewave correction begins. The three corrective waves are identifiedby the letters a, b, c.
Along with the constant form of the various waves, thereis the important consideration of degree. There are many differ-ent degrees of trend. Elliott, in fact, categorized nine differentdegrees of trend (or magnitude) ranging from a Grand SupercycleElliott Wave Theory 321
THE BASIC PATTERN
 
Figure 13.1. The Basic Pattern. (A.J. Frost and Robert Prechter, ElliottWave Principle [Gainesville, GA: New Classics Library, 1978], p. 20.Copyright © 1978 by Frost and Prechter.)
spanning two hundred years to a subminuette degree coveringonly a few hours. The point to remember is that the basic eightwave cycle remains constant no matter what degree of trend isbeing studied.
Each wave subdivides into waves of one lesser degree that,in turn, can also be subdivided into waves of even lesser degree. Italso follows then that each wave is itself part of the wave of thenext higher degree. Figure 13.2 demonstrates these relationships.The largest two waves—1 and 2—can be subdivided into eightlesser waves that, in turn, can be subdivided into 34 even lesserwaves. The two largest waves—1 and 2—are only the first twowaves in an even larger five wave advance. Wave 3 of that nexthigher degree is about to begin. The 34 waves in Figure 13.2 aresubdivided further to the next smaller degree in Figure 13.3,resulting in 144 waves.322 Chapter 13
QDond@= 2 Woves(QM3(4Sha(bley= 8 Woves12,3, 45,0, b,c,etc. =34 Woves
 
Figure 13.2 (Frost and Prechter, p. 21. Copyright © 1978 by Frost andPrechter.)
The numbers shown so far 1,2,3,5,8,13,21,34,55,89,144—are not just random numbers. They are part of the Fibonacci num-ber sequence, which forms the mathematical basis for the ElliottWave Theory. We'll come back to them a little later. For now, lookat Figures 13.1-13.3 and notice a very significant characteristic ofthe waves. Whether a given wave divides into five waves or threewaves is determined by the direction of the next larger wave. Forexample, in Figure 13.2, waves (1), (3), and (5) subdivide into fivewaves because the next larger wave of which they are part—wave1—is an advancing wave. Because waves (2) and (4) are movingagainst the trend, they subdivide into only three waves. Lookmore closely at corrective waves (a), (b), and (c), which comprisethe larger corrective wave 2. Notice that the two decliningwaves—(a) and (c)—each break down into five waves. This isElliott Wave Theory 323
COMPLETE MARKET '“4 CYCLE
 
Figure 13.3 (Frost and Prechter, p. 22. Copyright © 1978 by Frost andPrechter.)
because they are moving in the same direction as the next largerwave 2. Wave (b) by contrast only has three waves, because it ismoving against the next larger wave 2.
Being able to determine between threes and fives is obvious-ly of tremendous importance in the application of this approach.That information tells the analyst what to expect next. A completedfive wave move, for example, usually means that only part of a Jarg-er wave has been completed and that there’s more to come (unlessit’s a fifth of a fifth). One of the most important rules to remember is thata correction can never take place in five waves. In a bull market, forexample, if a five wave decline is seen, this means that it is probablyonly the first wave of a three wave (a-b-c) decline and that there’smore to come on the downside. In a bear market, a three waveadvance should be followed by resumption of the downtrend. A fivewave rally would warn of a more substantial move to the upside andmight possibly even be the first wave of a new bull trend.324 Chapter 13
CONNECTION BETWEEN ELLIOTTWAVE AND DOW THEORY
Let’s take a moment here to point out the obvious connectionbetween Elliott’s idea of five advancing waves and Dow’s threeadvancing phases of a bull market. It seems clear that Elliott’s ideaof three up waves, with two intervening corrections, fits nicelywith the Dow Theory. While Elliott was no doubt influenced byDow’s analysis, it also seems clear that Elliott believed he hadgone well beyond Dow’s theory and had in fact improved on it.It’s also interesting to note the influence of the sea on both menin the formulation of their theories. Dow compared the major,intermediate, and minor trends in the market with the tides,waves, and ripples on the ocean. Elliott referred to “ebbs andflows” in his writing and named his theory the “wave” principle.
CORRECTIVE WAVES
So far, we’ve talked mainly about the impulse waves in the direc-tion of the major trend. Let’s turn our attention now to the correc-tive waves. In general, corrective waves are less clearly defined and,aS a result, tend to be more difficult to identify and predict. Onepoint that is clearly defined, however, is that corrective waves cannever take place in five waves. Corrective waves are threes, neverfives (with the exception of triangles). We’re going to look at threeclassifications of corrective waves—zig-zags, flats, and triangles.
Zig-Zags
A zig-zag is a three wave corrective pattern, against the majortrend, which breaks down into a 5-3-5 sequence. Figures 13.4 and13.5 show a bull market zig-zag correction, while a bear marketrally is shown in Figures 13.6 and 13.7. Notice that the middlewave B falls short of the beginning of wave A and that wave Cmoves well beyond the end of wave A.
A less common variation of the zig-zag is the double zig-zag shown in Figure 13.8. This variation sometimes occurs in larg-er corrective patterns. It is in effect two different 5-3-5 zig-zag pat-terns connected by an intervening a-b-c pattern.Elliott Wave Theory
325
 
8 8A Ac c
Figure 13.4 Bull Market Zig-Zag(5-3-5). (Frost and Prechter, p. 36.Copyright © 1978 by Frost andPrechter.)
Figure 13.6 Bear Market Zig-Zag(5-3 5). (Frost and Prechter, p. 36.Copyright © 1978 by Frost andPrechter.)
Figure 13.5 Bull Market Zig-Zag(5-3-5). (Frost and Prechter, p. 36.Copyright © 1978 by Frost andPrechter.)
Figure 13.7 Bear Market Zig-Zag (5-3-5). (Frost and Prechter, p.36 Copyright © 1978 by Frost andPrechter.)326 Chapter 13
 
Figure 13.8 Double Zig-Zag. (Frost and Prechter, p. 37. Copyright ©1978 by Frost and Prechter.)
Flats
What distinguishes the flat correction from the zig-zag correctionis that the flat follows a 3-3-5 pattern. Notice in Figures 13.10 and13.12 that the A wave is a 3 instead of a 5. In general, the flat ismore of a consolidation than a correction and is considered a signof strength in a bull market. Figures 13.9-13.12 show examples ofnormal flats. In a bull market, for example, wave B rallies all theway to the top of wave A, showing greater market strength. Thefinal wave C terminates at or just below the bottom of wave A incontrast to a zig-zag, which moves well under that point.
There are two “irregular” variations of the normal flat cor-rection. Figures 13.13-13.16 show