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This is the second part in a multipart series of articles designed to highlight some very unique but under-used tendencies of the Elliott Wave methodology. As stated in the previous article, this series of articles is aimed at the more advanced trader.

We will be analyzing the same chart that we did in the previous article (EUR/AUD), in which we learned how to use the A wave of a zigzag corrective pattern to forecast the likely price target for the end of the entire ABC correction. The focus for this article is to demonstrate how to forecast the likely price target of the corrective ABC wave that follows an extended 5th wave.

Chart 1. EUR/AUD with 5th Wave Extended

Typically, only one of the motive waves (1, 3 or 5) will experience an extended wave, and it does not always occur. But, when it does, it provides us with a mountain of information that we can use in our trading. As you look at chart 1 of the EUR/AUD, you will notice that the 5th wave is extended.

To be precise, we have wave 3 of the 5th wave, which sub-divides, and you see this displayed on the chart as a series of Roman numerals that are sandwiched between the end of wave 2 and the end of wave 3. To the new Elliott Wave (EW) trader this may not seem important, but to the experienced EW trader, it provides some information that we can really use in our trading.

The first valuable piece of information that this chart is screaming out to us is that we should expect a very sharp and fast corrective ABC pattern. Why? Because when we have an extended 5th wave, the tendency is for the market to correct with authority and speed. So, this information will allow us to trade counter-trend (or beginning of a new trend) with the expectation that a sizeable move to ensue.

Chart 2. Possible 760-Pip, Counter-Trend Trade

The second piece of information on this chart is where the price correction is likely to end (we can now use this as a profit target). When we have a 5th wave extension, not only do we expect a speedy and sharp correction, we also know that the chart will have a tendency to trade up to the level of wave 2 of the extension. I have marked this on Chart 2 with a horizontal line at a price of 1.3689.

When we put this information in its proper perspective, we know that, after a market experiences a 5th wave extension, it should also experience a sharp and fast correction. On this chart, wave 5 terminates at a low price of 1.2929, and the high of wave 2 of the extension sits at a price of 1.3689. So, we have a possible 760-pip, counter-trend trade to try to profit from.

The primary unknown information is how the price will arrive at the 1.3689 objective. We know that the market should experience an ABC correction. But, sometimes, the A wave will terminate at the wave 2 objective, and the C wave will travel even further. Sometimes, the C wave will terminate at the wave 2 objective; sometimes, if the volume was climactic on the wave 5 low, the market will change to an immediate up trend. And, sometimes, the market will do none of the above and confuse everyone.

Because 3 of the 4 previously-described scenarios involve price moving in the upward direction, we will want to get involved in a long trade. Your trading plan should adjust your trade size based on the trade being a counter-trend trade. Your trading plan should also, obviously, include a trailing stop strategy to keep you in the trade as long as possible before getting out of the trade altogether.

In this example, you can see that the market shot straight up to nearly 1.4300, so our initial 760-pip price objective actually provided a potential of almost 1,400 pips in 8 days. The beauty is that the informed EW trader would see this setting up on the charts, but the non-EW trader would simply have no clue about this opportunity!

It is always important when writing an article about chart tendencies to point out that not all 5th wave extensions will act as you expect them to. This is why it is critical to trade with a written trading plan that includes the use of stops, so you can act appropriately while you are in the trade.

For thoroughness, it is also important to state that the same analysis can be performed in reverse to find the likely corrective ABC low after an extended 5th wave to the up side. In the first two parts of this series on trading with the Elliott Wave, we have concentrated on where corrective waves have a strong tendency to end. The next two parts in the series will focus on the 5-wave motive series. Stay tuned for more.

*Reprinted (and modified) with permission from Todd Krueger, a full-time professional trader, renowned expert on the Wyckoff trading methodology, creator of the Wyckoff Volume Analysis and Wyckoff Candle Volume Analysis methodologies and founding President of Traders Code, LLC, which provides trading tools and education to help the retail trader succeed. For more information, you can visit www.TradersCode.com or reach Krueger at todd@traderscode.com.