What is Neo wave, difference between Elliott wave & Neo wave?

Neo wave is an advanced concept of Elliott wave developed by Glenn Neely.

Orthodox Elliott wave was originally discovered by R. N. Elliott in 1930s. His original work mentioned that stock market does not move randomly but in systematic fashion that follows Fibonacci numbers and natural laws. This systematic movement in prices are in form of waves. Normally there are 5 step forward and 3 step backward resulting into a net progression which is valid for stock market as well. The concept cannot be just applied but one needs to understand the basic premise and certain rules to apply it objectively.

Any price movement as per basic Elliott wave is classified into Impulsive and corrective. There are various patterns within these broader heads. Impulsive waves need to follow three basic rules:

1. Wave 2 cannot retrace complete of wave 1

2. Wave 3 cannot be the shortest of the directional waves 1,3 and 5

3. Wave 4 cannot enter into territory of wave  1

The above 3 basic rules if followed then the price movement under consideration can be classified as a normal Impulse wave.

However, when the market structure is complex there is possibility that the movement can be counted in many different ways. This can result into subjectivity and the entire purpose of wave theory can be lost. To overcome this limitation,  Neo wave was developed that has more than 15 different rules to define a simple impulse pattern. Following are a few of them:

1. Wave 2 cannot retrace more than 61.8% of wave 1

2. Wave 3 cannot be the shortest of the directional waves 1,3 and 5

3. Wave 4 cannot enter into territory of wave 2

4. There has to be atleast one extended wave which is going to be 1.618% of non extended wave. If there is no extension then the pattern under consideration is corrective

5. One of the directional waves should subdivide

6. Corrective waves should consume more time than the preceding impulsive wave

7. Touch point rule: Out of 6 points not more than 4 points should lie on the channel

8. …

9. …etc

The above shows only a few set of rules for an impulse pattern as defined by Neo wave. There are newly developed patterns as well which were never a part of original Elliott wave. To name a few are:

- Diametric Pattern

- Neutral Triangle

- Extracting Triangle

- 3^rd Extended Terminal with 5^th Failure

These new patterns are equally important to understand because majority of the movement seen in the world equity markets are taking the forms of these patterns that were never covered in original work of R. N. Elliott

We take a step ahead and combine this complex study of Neo wave to that of Time cycles. It is not always that both the studies will be in sync but when they are indeed suggesting the same outcome that is the time that the trade setup is of very high accuracy and it just leaves only one probable outcome. These are the times when one can go all in with prudent risk and money management strategies which have the potential to give the best of the returns in shortest amount of time.

Below part of research was shown on 4^th March 2016 monthly report when Nifty made a low near 6825 levels on Budget day:

Figure 2: Nifty Weekly Time cycle chart (shown on 4^th March 2016 monthly research report)

Figure 3: Nifty daily chart (shown on 4^th March)

The Diametric pattern as shown in Figure 3 highlights completion of wave g of (g) and the previous down leg is so far retraced back in faster time. This virtually confirms completion of the correction from 8340. ….We have published an interim update on 1^st March as soon as 7100 level was broken and from there itself Nifty is up by more than 400 points in 3 days. For now it is better to keep using trailing stop method with levels mentioned in daily short term update to keep profits intact and also be a part of this big uptrend.

In a nutshell, there is high possibility that the trend might break above the channel resistance as well near the level of 7750 – 7800 and might cross above 8000 as there is change in market dynamics. Volume MA, Volume ROC also confirms this subtle shift which might not be visible to majority. The methods that worked previously during the downtrend of past one year might require tweaking and the surprises will be on upside. Looking at weekly Time cycle there is high possibility that we might not be able to cross above 8654 top in 2016 and there can be a higher low formation either in form of intermediate wave 2 or second standard correction. For now the trend is firmly positive as long as 7000 zone is protected and do not try to catch a top in this fast moving market.

The above gist simply shows the power of combining Neo wave with Time cycles. Nevertheless, we were keen on expecting an impulsive rise from 6825 but the entire rise came in form of overlapping pattern and so one need to keep measuring wave patterns against expected outcome.

References are taken from “The Financial Waves short term update”daily research report which covers Nifty, Bank Nifty and stocks on rotational basis and “The Financial Waves Monthly update”that shows medium to long term perspective on Nifty, INR Pairs, Global Markets, Gold, other commodities. For subscription options visit Pricing Page

Attend the most Advanced Technical analysis training on Application of Neo wave and Time cycles with practical charts for portfolio creation, stock selection and trade setups. This training will focus on the above methods along with lot of other studies which can be combined together to produce very high conviction trade setups. Register NOW as limited seats available. For more details Contact US or write to us at helpdesk@wavesstrategy.com or call us at +91 22 28831358 / +91 9920422202

Nifty moving in “No Trading Zone”…Is it an impulse pattern or only corrective rise?

Nifty has been all over the places over past few days and a few stocks from Metal, Pharma and Realty space showed sharp decline after a strong rise. This has created an environment of confusion with lack of clarity whether the uptrend that started from 6825 is still intact or the same is over.

By using Advanced Elliott wave principle – Neo wave we can apply the rules to first understand the pattern under formation. The first stage of bifurcation will be whether it is an Impulsive pattern or Corrective pattern? Now look at the below chart and try to see if in the entire up move you can count 5 waves which will suggest the ongoing pattern is impulsive in nature with all the rules being applied.

Impulsive rise? Given the steepness of correction and the overlap of the down move from 7750 to 7580 this indicates that the rise is only in 3 waves and not 5 which is the minimum basic requirement of an impulse pattern. So now we cannot expect wonders to happen on the upside given this basic fact. Let us now proceed to identify which corrective pattern is under formation

Corrective pattern – Zigzag pattern has 3 waves with wave b should take more time than the preceding impulse pattern as per Neo wave principle. Now we can see this in the above chart where wave b has taken more time marked between the first two arrows. To get a confirmation that the pattern under consideration is over we require faster retracement below the last rising segment as per the 2 stage confirmation technique. Looking at the above chart we can see that so far the fall has not fully retraced the rise in form of wave c from 7400 and so the fall can be either wave x or some other pattern is forming. This now raise the odds that wave c is either not complete and forming Ending diagonal pattern or the entire pattern is developing into Extracting Triangle. 

Confused? This is exactly what markets are doing as there is no confirmation. The recent fall has opened up number of possible scenarios and it is only on faster move above 7750 or below 7400, clear trend confirmation will be obtained. At times one has to wait for clear directional signals rather than jumping at every move. This is one such time!

Our clients have been able to capture the most of the trend and it is now time to relish what is made rather than giving back everything during times of confusion when the pattern under formation is not clear. You can now see the pattern under formation on daily basis in our flagship product “The Financial Waves Short term update”. To subscribe visit the Pricing page.

Nifty: Money Flow index warning sign! Price confirmation still awaited!

Bottom Line: Mr. Rajan continued to surprise the Bond traders by keeping rates unchanged despite Bond yields easing!

Nifty daily chart:

 Nifty 60 mins chart:

Wave Analysis:

Mr. Rajan continued to act stringent to curb inflation despite the peer pressure and kept the key rates unchanged. The bond trader was caught off guard as the easing bond yields did not help in rate cuts. Since Mr. Rajan has taken over the bond traders are continued to be surprised. Trust me once we see fall in equity prices, RBI will be forced to take steps cutting down interest rates. As falling equity prices is a mirror of how economy is going to perform few months down the line. Looking at current scenario there is a possibility of first rate cut to happen in February 2015.

As soon as the policy decision was announced, Nifty entered into green territory atleast momentarily. This only showed markets have been waiting for news irrespective whether there will be rate cut or not. The index made a low of 8504 and traded in the range of 8540 and 8510 for most part of the day.

An interesting observation is that during the entire up trend from 7723 to recent highs there have been maximum of 2 consecutive red bars formation. Infact, in the entire up move from 5960 made in February there has been only a few times when there were consecutive 3 red bars and each time this resulted into increase volatility or deeper retracement either in terms of price or time. So far prices have formed 2 red bars and it will be crucial to observe whether Nifty can manage to close above previous close today or not.

Money Flow index measures volume along with price momentum. It indicates if money is flowing in or out of the index. It essentially a volume weighted momentum indicator. As can be seen on daily chart there is a strong negative divergence when this indicator is making a lower low against prices making new highs. We have highlighted previous such instances that resulted into atleast temporary halt in uptrend if not a strong downside correction. A break below 8460 is important for deeper downside retracement. However, it will be crucial to watch the 30 levels on Money flow index since everytime it reached there, prices bounced back on upside. First thing first, it will be crucial to observe if Nifty can manage to protect the level of 8460 and bounces back on upside in form of wave (v) of v of c. This wave counts will remain valid as long as 8670 is not taken out on upside else we will be forced to end wave (ii) of v at yesterday’s low in form of irregular Flat correction.

In short, Nifty has continued to trade in a challenging environment and no clear trending direction. Move below 8460 followed by 8430 will be bearish whereas close above 8560 is necessary for positive trend to resume!

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