The Rule of Alternation
Elliott’s Rule of Alternation has an important message for the chart watcher. He noted that the corrections between rally thrusts tend to alternate between complex shapes and simple shapes. It’s used most generally to determine what type of correction shape is not likely.
For example, if there was complex price movement early in a trend, alternation would predict that you should expect much simpler reversals during the trend. It’s likely this was first observed and applied by George Cole, who equated it to the Law of Action and Reaction in his work, ‘Graphs and Their Application to Speculation’, published in 1936.
Channels
By now you should be seeing how technical analysis comes together, revisiting old ideas as we explore new ones. Channels were covered in the trend discussion in module 3, and they are an important part of wave theory. A channel is drawn by first drawing a trendline connecting the lowest points in an uptrend, or connecting the peaks in downtrend. Then a line parallel on the other side of the price action may often form a boundary to the movements. This technique isn’t going to work all the time but it relies on the principle of trend following which makes it worth to consider as markets tend to trend over all sorts of time frames. Channels helps to spot trends and refine an entry point. They can also often signal a break out in either direction.
In his first book, published in 1938, Elliott said, “To properly observe a market’s movement, and hence to segregate the individual waves of such a movement, it is necessary that the movement, as it progresses, be channeled between parallel lines.” He used channels in two ways, firstly to determining price objectives, and also to help in making wave counts. If the price movement is not regular within the boundaries of the channel, then the final channel will be drawn under the two corrections and above the intermediate peak.
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