Take this quiz, then check your answer against one of our top analysts
Do you see a pattern you recognize in this chart of Reynolds American (RAI)?
The Wave Principle separates price action into two categories: motive and corrective, and this price chart has a clear example of one category.
Take a close look, remembering that five-wave moves are motive while three-wave moves are corrective. Then see if you can answer these questions:
- Do you see a motive or a corrective move?
- What's the name of the pattern? (If motive: impulse wave or ending diagonal; if corrective: zigzag, flat or triangle)
- Do you see wave patterns within the larger waves of the pattern?
Here's some help from Senior Analyst Jeffrey Kennedy:
"A defining characteristic of this pattern is that it tends to be contained within parallel lines. It is the most prevalent corrective wave pattern."
That's a bit of a giveaway. Now label the waves on the chart between the words Top and Bottom.
Now, here's Jeffrey's labeled chart:
Notice that the Wave Principle uses A-B-C to label corrective waves and numerals 1 through 5 (or in this case, i through v) for motive waves.
Jeffrey explains that zigzags, which consist of three waves, are more prevalent than flats or triangles. Their substructure is 5-3-5 because wave A subdivides into five waves, wave B is a three-wave structure, and wave C also contains five waves.
Test Your Wave Counting Skills
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This article was syndicated by Elliott Wave International and was originally published under the headline Test Your Knowledge: Find the Clear Wave Pattern on this Chart. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
