Elliott Wave and

Fibonacci Ratios
Manual

By Rob Roy
Disclaimer
In providing the information contained in this presentation OPL does not take into
account the investment objectives, financial situation or needs of any individual.
Investing in securities and derivatives involves risk. Before making an investment
decision, you should consider with or without the assistance of a professional advisor
whether that decision is appropriate in light of your particular investment need, objective
and financial circumstances.

For Australian Residents

This presentation is provided in accordance with the conditions of Australian Financial
Services Licence (No: 241060) issued to Investment Educators Australia Pty Limited by its
authorised representative Optionetics Pty Ltd (“OPL”).

OPL and IEA are subsidiaries of Hubb Financial Group Pty Ltd (“HFG”) and optionsXpress
Australia Pty Ltd (AFSL 246743) are affiliated companies under common ownership of
optionsXpress Holdings, Inc, which is owned by The Charles Schwab Corporation. HFG,
OPL, IEA and its officers, employees, independent contractors, and former owners may
receive compensation in connection with this and other marketing efforts.
230-07-000026
 Elliott Wave Theory

Wave Theory is probably the most complex and all

encompassing form of technical analysis ever
developed. It requires a lot of time and practice to
master.
 Elliott Wave Theory

A maze of interlocking interdependent

concepts that an understanding of only
portions of the Theory is insufficient for
accurate forecasting

Glenn Neely
Introducing R.N. Elliott
• Expert business organiser

• Talented mathematician

• Devised a theory to describe

movements of major market
indices
 Definitions

Impulsions – The patterns that occur in the

direction of the trend

Corrections – The patterns that occur against the

trend (the longest of the impulse waves)

All wave movement no matter how large or small is

either impulsive or corrective
Impulses and Corrections
Impulses

Corrections
What is a Wave?
 What is a Wave?
Waves are the result of imbalances in the
markets which occur between the number of
buy and sell orders for whatever reason.

Each time one force (supply or demand) over

powers the other, even for the shortest
period of time, the market changes direction
and a new wave is started.
Basic Elliott Wave Theory
5
B
3
A

1
4

2
Follow the Highest Degree
Degree – SPX Daily
Degree – SPX Weekly
Degree - Monthly
A Digression to Fractals
A Digression to Fractals
 Waves Within Waves
A full 5 wave pattern contained within the
Wave 3 of a larger EW pattern.
5
33
5

4 4
1 1

2
2
 Basic Elliott Theory

• Impulse waves within corrective waves:

Elliott Wave and
Fibonacci Ratios

Chapter 2
Impulse Construction Rules:

Finding the Best Wave 4 Trades

 Impulsion Rules
• There are behavior-specific rules which apply
to Impulse patterns

• If a single one of the following rules is not

adhered to, the market action being analyzed
must then by default be Corrective
 Rule Essential Construction #1
• Five adjacent segments must be present in a
trending pattern
 Essential Construction Rule #2
• Three of the five segments must thrust in the
same upward or downward direction
 Essential Construction Rule #3
• The second segment must never retrace
100% of the first segment
 Essential Construction Rule #4
• The third segment must be longer than the
second segment
 Essential Construction Rule #5

• The fourth segment must never retrace 100%

of the third segment
 Essential Construction Rule #6
• The fifth segment will almost always be longer
than the fourth but only has to be 38.2% of the
fourth segment price wise to qualify.
 Essential Construction Rule #7
The vertical price distance of the third wave does
not have to be the longest, but it can never be
the shortest of the 1,3 and 5 segments
 Conditional Construction Rules
• These additional rules will all but assure that
the market action you are analyzing is
Impulsive
 The Extension Rule
Of the Three Impulse Legs:

One Leg MUST be a Complex Wave

and should be at least 161.8% of the next longest
Wave.
Mono Waves vs Complex Waves
(Complex Waves contain a
Wave within a Wave)
 Rule of Alternation
In an Impulse pattern, Waves 2 and 4 should be
as distinctive and unique as possible.
 Rule of Equality
In an impulse pattern, one of the segments
(1, 3 or 5) must be significantly longer than any
other wave.
The other two waves should tend toward
equality in either price and/or time.
Price is the most important when looking at
equality.

(This rule exerts the most influence when the 3rd

wave is the longest of the three)
 Rule of Overlap
Wave 4 Pullback Must Never violate the
Wave 1 High
 Rule of 15%
The Distance That the First Wave Travels Must
Equal 15% or More of  the  Third  Wave’s  
Extension
Rule of 15%

146.57
Rule of 15%

359.27
 Rule of 15%

146.57 / 359.27 = .40796

=40.8%
 Retracement Range

Look for the Fourth Wave to Retrace at Least

30% but not More than 55% from the Wave 3
High
 Elliott’s Use of
Fibonacci Ratios
Elliott’s  Use  of  the  Fibonacci  Sequence
• Fibonacci was an Italian mathematician
from the 13th Century
• Devised a series or sequence of numbers which are
often seen to occur in nature
+ =
+ =
+ =
+ =
+ =
1 1 2 3 5 8 13 21
• Ratios of Numbers: 23.6%, 38.2%, 61.8% and 78.6%
Fibonacci Numbers in Nature

13

2
3
1
8
5
Fibonacci Ratios in People
 Fibonacci Relationships for Impulse
Patterns
3rd Wave Extension

• Wave 1 if not equal to Wave 5 will either be

61.8% or 161.8% of Wave 5

• Wave 3 MUST be more than 161.8% of Wave 1

 Fibonacci Relationships for Impulse
Patterns
5th Wave Extension

• Wave 3 will normally be related to Wave 1 by

161.8%

• Wave 5 will relate to the entire move from

the beginning of Wave 1 to the end of Wave 3
by 161.8%
Elliott Wave and
Fibonacci Ratios

Chapter 3
 Rules of Logic:

Finding the Best Wave 5 Trades

 Impulsions
• First apply the Logic Rules after an Impulse pattern
finishes
Pattern Confirmation - The 2-4 Trendline
• Draw a trendline across the end of waves 2 & 4
• The post-Impulsive action must break the trendline
Pattern Confirmation – 5th Wave Retracement
• Determine which wave of the Impulse pattern
Extended

• The extended wave will determine the most likely

market price action

• The price action will retrace to the

support/resistance level defined by the price range
of wave-4 of the impulse pattern
 Impulse Pattern Retracement
Expectations
3rd Wave Extension
• Price action should return to the 4th wave zone and
will usually end near the termination of the wave-4
Impulse Pattern Retracement Expectations
5th Wave Extension
• The market action should retrace at least 61.8% but
not greater than 100% of the wave-5
 Impulse Pattern Retracement
Expectations
Follow the Highest Degree

The preceding rules might not happen for the

following reasons:

• The 5th Extension was the c-wave of a Flat or Zig

Zag pattern of one degree higher
Impulse Pattern Retracement
Expectations
Impulse Pattern Retracement Expectations
• If the 3rd Extension Impulse also completed an
Impulse wave of one higher degree
 Impulse Pattern Retracement
Expectations
• The 5th Extension pattern was part of a larger
Impulse which was also a 5th Extension
 5th Wave Failure
• A 5th wave Failure occurs when the 5th wave is
shorter than wave-4

• The move to follow should retrace the entire

Impulse wave

• Warning: a wave-5 Failure can be mistaken for an

incomplete wave 4
NOTE:
If there is a
failure in the
risk area, the
entire
impulse
pattern will
be retraced.
The
retracement
will move to
the
beginning of
the previous
wave 1.
Elliott Wave and
Fibonacci Ratios

Chapter 4
 Corrections
First determine whether wave-b is shorter, longer or
the same as wave-a in the correction
 Corrective Patterns
ZIG-ZAG TRIANGLE
FLAT
B B

A
C
A C

B is the SAME as A, B is SHORTER than A, B is LONGER than A,

Flat Forming Possible Zig-Zag Possible Triangle
 Triangles
There are two Triangular categories,
Expanding (Rare) and Contracting (Common)
 Triangles

1. The market must break a trendline in the same

time or less that the wave-c took to form
 Triangles
Contracting Triangles

The  “thrust”  after  the  wave-e should exceed the

highest or lowest level achieved

The thrust must terminate in a time frame that is less

than 50% of the time taken by the entire triangle

The market must break a trendline in the same time

or less that the wave-c took to form
Contracting Triangle
 Channeling

Important to know the difference

between an Impulse and Corrective
Pattern
 Channeling
• An essential consideration for pattern formation

• Often makes it possible to determine whether a

move is Impulsive or Corrective

• Critical in the confirmation of when a move is

finished or about to finish

• Essential in the detection of then end of wave-2 and

wave 4
 Channeling
Wave 2

After the market has turned back up from a correction

from a wave-1, create a trendline across the lowest
point of the correction
3rd wave
1

Trendline
2

0
 Channeling
Wave 2

If the trendline stays unbroken, you can assume that

wave-2 has been completed

0
 Channeling
Wave 2

If the trendline is broken before the 3rd wave is at

least 61.8% of wave-1, then wave-2 is still in
progress rd
3 wave

Trendline
2

0
 Channeling
Wave-4

• Draw a trendline between wave-2 and wave-4

• No part of wave-3 or wave-5 should break the

trendline unless wave-5 is Terminal

• If wave-5 is complete, the market should break the 2-4

trendline and retrace most or all of wave-5
 Channeling
• If the 2-4 trendline is broken before the market has
risen higher than the end of wave 3 AND a big move
does not follow, then wave-4 is still developing

Assumed 5th wave failure

3

1
5th wave failure target
4
0 2
 Channeling
• To prove a 5th wave failure, the entire move
should be retraced faster than it took to form

Assumed 5th wave failure

3

1
5th wave failure target
4
0 2
 Channeling
• When the 5th wave has completed, the 2-4 trendline
should be broken soon after

• The break should occur in a timeframe equal to or

less than the time it took for wave-5 to develop

• If the break does not occur in this timeframe, it is

likely that the Impuse is not complete
 Channeling
Triangles

• If the price breaks through the 0-b trendline but

does not fall below the b touch point it is an
indication that a Triangle is forming
Assumed c-wave failure
a

b
0
b-wave not exceeded
 Channeling
• With Practice, you can learn to use channeling to
determine which wave of the Impulsion will be
extended

• The earlier you can determine which wave is the

extension, the easier it is to trade the trend
 Channeling
1st wave extension

• The channeling of the pattern should resemble the

channeling of a terminal move

• The 5th wave will usually not touch the upper trend
line

• It  won’t  be  unusual  for  the  trendlines to contract

 Channeling
1st wave extension

3
1
5

4
2
Trendlines contracting
 Channeling
3rd Wave Extension

• The trendlines should always be nearly parallel

3 5

1
4

2
 Channeling
5th Wave Extension

• Look for the trendlines to expand

5
3

2
 Channeling
• Channeling can also be used for identifying
Corrections

• The key benefit of channeling corrections is

determining whether or not the pattern is
completing the corrective phase or will become
part of a more complex pattern

• Channeling can be applied to Flats, Zigzags and

Triangles
 Channeling
Flats

• All channel lines must be horizontal to and parallel

with the high and low of wave-a

• The larger the b move, the higher the probability of

an explosive move after wave-c completion

• To determine support and resistance levels of a Flat,

the channel lines should be drawn across the
beginning of wave-a and the end of wave-b
 Channeling
Flats
b

Common

a c
b
Flat B-Failure,
b
possible Zig-Zag

Elongated, likely end of

a c
Flat (no double)
a Possible Thrust coming
c
 Channeling
Zig Zags

• There are three distinct ways for a Zig Zag to

channel

• The  first  two  patterns  are  “normal”  and  could  likely  

complete a corrective phase

• The third pattern is most likely to be part of a

complex Double or Triple pattern
 Channeling
“Normal”  Zig Zag patterns

b
b

a
c a

Stays above trendline

Breaks below trendline
c
 Channeling
Triangles

• Have a base trendline like Impulse waves

• The base trendline must always be used

• The trendlines are b-d and a-c

 Channeling
• Triangle
b-d trendline

d
Triangle is complete

c
a
a-c trendline
 Channeling
• You can use diagonal channels to try to validate
current Elliott Wave counts

• The channel lines should be parallel or near parallel

• The channel should encase all current market

activity

• The channels must connect with at least two highs

and lows for the move you are studying
 Channeling
End of previous pattern

First high of new pattern

First low of new pattern

Could be a wave-c, part of wave-b or

wave-a of the next section of a complex
pattern
 Elliott Wave and
Fibonacci Ratios

Chapter 5

Timing the Wave 5 Sell

 Trading the End of Wave 5
A HIGH percentage of 5
the time, a trend
end will correct 3
EW5 Sell
back to the
last low (4)
4

4
4 Elliott Wave Trade Setups
BEARISH BEARISH
Elliott Wave 5 Sell Elliott Wave 4 Sell
EW5 SELL EW4 SELL

BULLISH BULLISH
Elliott Wave 4 Buy Elliott Wave 5 Buy
EW4 BUY EW5 BUY

3
Timing the Wave 5 Sell
5
B
3 Entry
A

1
4
Target

2
San Diego
San Diego
San Diego
 Displaced Moving Average

A moving average that has been shifted

or moved forward a number of intervals

Common is the 6/4

In the example below the 5 interval Mov Avg - Displaced
line (purple) has been set to be displayed (displaced) 5
interval in front of where it would have been plotted if it
were a 5 interval Simple moving average line (turquoise):
 The DMI

DMI = Directional Movement Indicator

Developed by J. Welles Wilder

Measures the Strength of the Trend

As with Elliott Wave, the DMI
works in all time frames.
+DI measures the dominance
of the buyers

-DI measures the dominance

of the sellers

In general, measures the strength of

the bulls and the bears.
 ADX = Average Directional Index

ADX measures the strength of a trend

without regard to direction.
 ADX

Fluctuates between 1 and 100, although

readings above 60 are rare

Reading above 40 indicates a strong trend

20 and 25 are Key Levels

(Developing Trend)
 ADX – Key Notes
ADX dropping below 40 is an early indication of a
possible change in direction.

ADX should be between the two DI lines when

a stock is trending

ADX below 20 is a warning not to trade

directionally
 ADX Rules

Crossover Rule

When the +DI and –DI Cross

The more vertical the crossover, the

stronger the signal
Extreme Point Rule – Avoiding Whipsaws
Turning Point Rule
Elliott Wave and
Fibonacci Ratios

Chapter 6

The Butterfly
Consider the following
Option Chain:
How many 5-POINT call spreads?
2
What are they?
95/100 100/105
 +
$1.60
– –
$0.75
+
Suppose we buy the 95/100?

Suppose we then sell the 100/105?

 +
$1.60
– – $0.85
$0.85
+
Buy the 95/100 AND sell the 100/105
AT THE SAME TIME!
How much?
What is this position called?
The BUTTERFLY!!!
 Strike in Common
Short 100/105 Long 95/100
Call Spread Call Spread

 Reward

0
 Risk 

= Long 95/100/105
Butterfly
95 100 105
Call Fly =Strikes
Put Fly
 Target Price
• Already at Target - Sideways
Movement - ATM

• Future Target - Directional

Movement - OTM
Corrective Patterns – Trading the Zig-Zag

B retraces 61.8% of A
B

A
C
C extends 100% of A
Ft. Myers
165% Return!
325% Return!
Zig-Zag Butterfly Entry Rules
Ideal if the Butterfly is placed 45 Days or Less to Expiration

Sell the Strike that corresponds with the Fib Extension Price
Target. Then Buy a Strike above and below the Strike sold to
complete the Butterfly.

If the OTM Butterfly will not work due to strike availability,

place a standard Vertical Debit Spread

LOSS Adjustment Consideration:

If the Zig-Zag has a C-Wave Failure, simply close the Debit

Spread portion of the Butterfly and hold the Credit Spread
portion to expiration.
Elliott Wave and
Fibonacci Ratios

Chapter 7

Strangles
 Straddle Review
Profit without forecasting market
direction
Buy ATM Calls and buy ATM Puts with
the same expiration—creating a Delta
Neutral Spread.
The net result is a debit

127
 Delta

The amount an option position will change

with the next $1.00 move in the stock
ATM (At The Money) options have
a .50 delta
Meaning you have a 50% chance
of your option closing ITM (In The
Money) at expiration
 Delta Neutral

• Calls have positive Delta

• Puts have negative Delta
 How Straddles Make Money
Stock price goes UP - calls make more
money than puts lose
Stock price goes DOWN – puts make
more money than calls lose
Option prices get more expensive
(implied volatility increases) – both puts
and calls gain value even if share price
does not move.
131
Finding GREAT Straddles

Price Consolidation
Cheap Options
Up-coming News Event –
Earnings Report

133
 Consolidation Patterns

Great Straddle Chart Entries – Triangles

Lower Highs Same Highs Lower Highs

Higher Lows Higher Lows Same Lows
“Symmetric” “Ascending” “Descending”
134
Cheap Options – Platinum IV Search

135
136
137
138
139
 Strangle Review
Profit without forecasting market
direction
Buy OTM Calls and buy OTM Puts with
the same expiration—creating a Delta
Neutral Spread.
The net result is a debit
 Delta Curve

Straddle ATM
 Delta Curve

Option Makes
Money Faster

Strangle

Option Loses OTM

Money Slower

Profits Faster!
GOOG
Straddle
Strangle
GOOG
 Straddle

5% Return
 Strangle

19% Return
GOOG
 Straddle

3.8% Return
 Strangle

19.6%Return
GOOG
 Straddle

11% Return
 Strangle

38.25% Return!
FXI
Straddle
Strangle
FXI
 Straddle

7% Return
 Strangle

23% Return
FXI
 Straddle

22% Return
 Strangle

56% Return!
 Strangle Entry Rules:
Enter with 45 to 60 Days to Expiration

IV on the individual options should be in the low 25 percentile

over the previous year (use the IV charts tab in Platinum)

Place each option with a Delta between 25 and 35. The Net Delta
should be between -5 and +5

The stock is expected to breakout 80% of the price difference of

the high and the low of the mouth of the triangle

The expected breakout move should be 10% of the stock price

itself to generate a nice gain
 Strangle Exit Rules:
Exit once the price target is reached or when happy with
the gain

Exit at 50% Loss if the breakout does not occur OR

Consider  placing  a  position  that’s  half  of  the  usual  

amount of risk, that leaves room so that if the stock
hasn’t  broken  out  yet,  the  position  can  be  rolled  out  to  
the next month giving more time for the breakout
Elliott Wave and
Fibonacci Ratios

Chapter 8
 Pattern Implications

• Post pattern market action must follow

specific types of behavior predicated on the
pattern just completed
 Corrective Patterns

• The largest price moves occur after

Corrective action.

• Understanding the implications of a

Correction is far more important than
learning those of an Impulse pattern
 Corrective Patterns

• If a pattern is the last part of a larger

formation, the larger formation will have the
highest impact on the future market action

(Always pay attention to the bigger picture as

the larger pattern takes precedent)
 Corrective Patterns
Triple Zigzag - The most powerful corrective pattern

• If its movement is downward, it indicates market

weakness

• If its movement is up, it indicates market strength

 Corrective Patterns
Triple Combinations

• A combination of Zigzags, Flats and Triangles

• Virtually always terminates with a Triangle

• The first two corrections should not be Triangles

 Corrective Patterns

Triple Flat (Very rare)

• The pattern following should not retrace

completely unless it is the 5th wave of a
Terminal Impulse
 Corrective Patterns

Double Zigzag

• This pattern should not be completely

retraced unless it is the 5th wave of a
Terminal Impulse
Corrective Patterns – Double Combination

• Will almost always end with a Triangle

or a c-wave failure

• This pattern can be completely retraced

if it completes a larger formation, but
usually will not be
Corrective Patterns – Double Flat
• The pattern following will probably not
completely retrace unless it concludes a
larger formation like a Terminal Impulse
 Corrective Patterns – Elongated Zig-Zag
• It will usually not be completely retraced by
the pattern following.
 Corrective Patterns – Zig Zags
• Wave-c Longest – not likely to be completely
retraced

• Wave-c Equal (to Wave a) – the most common

occurring corrective pattern, not likely to be
completely retraced

• Wave-c Shortest – almost always completely

retraced
 Corrective Patterns – C-Failure
• Must be completely retraced by the
succeeding move
 Corrective Patterns – Double Three

• The longer this pattern takes, the more

powerful the succeeding move will be

• Implies a great deal of strength of the

trend of one higher degree
 Corrective Patterns – Contracting Triangles

• A powerful, violent thrust almost always

follows

• The thrust should always exceed the

highest or lowest price obtained during
formation of the Triangle
 Corrective Patterns – Expanding Triangles

• Expanding patterns imply the opposite

attributes of contracting patterns

• The  “thrust”  should  be  less  than  the  widest  

point of the Triangle
 Impulsive Patterns
• It is very difficult to predict what type of a
Correction will take place after the Impulsion

• The only predictable action is in regard to

how much the next move of the same degree
should retrace
Homework Examples of
Properly Labeling Charts
Elliott Wave and
Fibonacci Ratios
Manual

By Rob Roy