Workbook 7 Complete

8/13/2019 Workbook 7 Complete

1/73

Elliott Wave Educational Video Series

Utility Manualfor the

Precision RatioCompass

Workbook 7


2/73

The Elliott Wave Educational Video Series Workbook 7: Utility Manual for the Precision Ratio Compass

2

WORKBOOKfor the

ELLIOTT WAVE EDUCATIONAL VIDEO SERIES

WORKBOOK 7

UTILITY MANUAL for the PRECISION RATIO COMPASS

Copyright 1985, 1987 and 1995

by Robert R. Prechter, Jr.

Printed in the United States of America

First Edition: June 1985Second Edition: September 1987

Third Edition: April 1995

For information, address the publishers:

Elliott Wave International

P.O. Box 1618

Gainesville, Georgia 30503

ISBN: 0-932750-25-7

Elliott Wave Educational Video Series10 Volume videotape set including workbooks

ISBN: 0-932750-13-3

Elliott Wave Educational Video Series

Tape 7 and Workbook 7:

Introduction to the Elliott Wave Principle

NOTICE

All charts are copyright Robert R. Prechter, Jr. 1990 or have been previously

copyrighted by Elliott Wave International, Robert R. Prechter, Jr., or other

entities. All rights are reserved. The material in this volume may not be reprinted

or reproduced in any manner whatsoever without the written permission of the

copyright holder. Violators will be prosecuted to the fullest extent of the law.


3/73


3

CONTENTS

Page

5 Introduction

7 PART 1: FIBONACCI AND THE COMPASS

9 What are Fibonacci Ratios?

13 Why Fibonacci Ratios?

15 Compass Terminology and Procedure

16 Compass Scales

16 What the Compass Does

17 Chart Scales

17 Price and Time

19 PART II: ELLIOTT WAVE APPLICATIONS

21 Typical Wave Structure

22 Using the Compass

25 Fibonacci Ratio Relationships

26 Contracting Fibonacci Ratios (for Retracements)

31 Expanding Fibonacci Ratios (for Multiples and extensions)

35 A Complete List of Known Reliable Relationships Within Patterns

35 Impulse Waves

35 Fifth Waves When Wave Three is Extended

35 Extensions in First or Fifth Waves


4/73


4

36 Corrective Waves36 Zigzag Corrections

37 B Waves in Zigzags

38 C Waves in Zigzags

38 Flat and Irregular Corrections

39 B Waves in Flats

40 C Waves in Flats

40 B Waves in Irregular Corrections

41 C Waves in Irregular Corrections

41 Subwaves in Double and Triple Threes

42 Subwaves in Contracting, Ascending and Descending Triangles

43 Subwaves in Expanding Triangles

44 Advanced Ratio Application A Comprehensive Forecasting Method

46 Real-Time Examples of Fibonacci Multiples and Retracements

46 The Bond Market

49 The Stock Market

53 The Gold Market

59 PART III: GANN ANALYSIS

61 Gann Analysis

61 The Gann-Blitz Approach

62 Squaring of Time and Price

64 1 x 1 lines

64 1 x 2 lines

64 2 x 1 lines

65 Unequal Chart Divisions

65 Gann Range Subdivisions

67 Erroneous Use of the Compass

67 Conclusion


5/73


5

INTRODUCTION

R.N. Elliott used a time-saving Fibonacci ratio

calculation device, and his mention of it in Natures

Law has prompted many requests for a similar tool.

Elliotts design necessitated a two-step recording proce-

dure, since he did not have access to a compass specifi-

cally made for his purposes. Rather than create a copy of

that more cumbersome tool, we decided to see if we could

find a compass which would suit our specific needs. A

long search finally turned up a company that produced a

Golden Ratio compass, but the construction was cheap

and the tolerated error much too great. As any trader

knows, a few cents difference on a stock or commoditychart can mean the difference between a perfect entry

and a missed opportunity.

After much additional searching, we found a

manufacturer which made compass tools for professional

draftsmen. We felt that any less quality was unacceptable.

Were extremely happy with the tool weve found and

hope you will be, too.

Your Precision Ratio Compass is constructed of

chromium plated solid brass, machine tooled to virtual

precision. The PRC is a slim, handsome professional

draftsmans tool, built for a lifetime of use. The spread

between points can be firmly locked so the compass wont

slip when being moved from one position on the chart to

another. The compass points are sharp and true, so their

position on the chart can be read with a minimum of

effort. In sum, the Precision Ratio Compass has been

thoughtfully designed to give you years of trouble-freeservice.

The uses of the Precision Ratio Compass are many

and varied. Fibonacci retracements, Fibonacci price and

time ratios, as well as all other ratios (from 1:10 to 10:1),

can all be marked on a chart with a quick movement and

a minimum of effort.


6/73


6

The following pages will show you in detail how to apply the

Compass. Undoubtedly there are uses for it which we have yet to

discover. If you find any, please let us know. Perhaps your ideas will

appear in the next edition of this manual.

Robert R. Prechter, Jr.

Elliott Wave International

ACKNOWLEDGEMENTS

This manual would not be here in its present form without the

effort and talents of David A. Allman. His editing and illustrative

skills, as well as his dedication to the project, were invaluable in

attaining the quality we required for the final product.

Background charts for some of the illustrations were provided

courtesy of the following sources:

Trendline (a division of Standard and Poors Corp.),345 Hudson St., New York, NY 10014

Daily Graphs (a division of William ONeil & Co., Inc.),

P.O. Box 24933, Los Angeles, CA 90024

Commodity Researach Bureau,

75 Montgomery Street, Jersey City, NJ 07302


7/73


7

PART I

FIBONACCI AND THE COMPASS


8/73


8


9/73


9

WHAT ARE FIBONACCI RATIOS?

Fibonacci Ratios are the ratios between numbers

at a distance infinitely far along in any sequence which

is derived by adding a number to the previous number to

obtain the next. Like pi, these ratios are irrational num-

bers, i.e., they cannot be expressed precisely in either

fractional or decimal form. The Fibonacci Sequence is

the best known and the most basic additive sequence of

this type. It is derived by adding each number, starting

with the number 1, to the one just prior to it to obtain the

next number. Thus, 1 added to nothing gives a second 1.

1 + 1 gives 2, 2 + 1 gives 3, 3 + 2 gives 5, 5 + 3 gives 8,

and so on. The first sixteen terms in the sequence are 1,1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 and

987. A full mathematical description of the Fibonacci

sequence can be found in FIBONACCI NUMBERS by

N. Vorobev, and a description of its relevance to the fi-

nancial markets can be found in Chapters 3 and 4 of

ELLIOTT WAVE PRINCIPLE (New Classics Library,

$29).

Figure 1


10/73


10

Figure

2


11/73


11

As infinity is approached, the ratio between

adjacent Fibonacci numbers, smaller over larger, is

.6180339... (phi), commonly abbreviated as .618; the

inverse (larger over smaller), gives 1.618.

As infinity is approached, the ratio between

alternate Fibonacci numbers, smaller over larger, is

.382; the inverse (larger over samller), gives 2.618.

The ratios for second alternate Fibonacci

numbers are .236 and 4.236.

The ratios for third alternate Fibonacci numbers

are .146 and 6.854.

This progression can be continued forever, as

demonstrated in the bottom row and far right column

of Figure 2 (from Historical and Mathematical Back-

ground chapter of Elliott Wave Principle). Note that

each of the decreasing ratios is the result of multiply-

ing the preceding ratio by .618 and each of the increas-

ing ratios is the result of multiplying the preced-

ing ratio by 1.618. It is for this reason that any

Fibonacci ratio can be calculated with only one or

two quick and simple steps with the PRC.

The spiral-like form of market action is repeat-

edly shown to be governed by the Golden Ratio, and,

as has often been observed, even the Fibonacci num-

bers themselves appear in market statistics more often

than mere chance would allow. However, it is crucial

to understand that the numbers themselves have no

theoretic weight in the grand concept of the Wave Prin-ciple. It is the ratio which is the key to growth patterns

of this type because, although it is rarely pointed out

in the literature, the Fibonacci ratio results from this

type of additive sequence no matter what two numbers

start the sequence. Take, for instance, two randomly

selected numbers and add them to produce a third, con-

tinuing in that manner to produce additional numbers.


12/73


12

You will find that as this sequence approaches infinity,

the ratio between adjacent terms in the sequence will

approach .618... This relationship becomes obvious gen-

erally before the tenth term is produced (see Figure 3,

using the starting numbers 17 and 352). Thus, while spe-

cific numbers making up the Fibonacci sequence are not

necessarily important in markets, the Fibonacci ratio is a

basic law of geometric progression, and does govern

many relationships in data series relating to natural

phenomena of growth and decay.

Figure 3


13/73


13

WHY FIBONACCI RATIOS?

The occurrence of Fibonacci ratios in markets is

not coincidence, and it is not a mystical numerological

theory developed in an ivory tower and forced into real

life situations. When Elliott began to research the mar-

kets, he had no idea that the Fibonacci sequence would

be representative of his eventual discovery. What he

found initially was that the basic Dow Theory idea that

primary bull markets traveled in three upward phases

applied to all degrees of market trend, from hourly waves

to those lasting centuries. From this discovery, he devel-

oped a system of naming and labeling the different sizes

of waves, and soon realized that the total number of wavesin each degree turned out to be a different Fibonacci num-

ber. In fact, these totals not only produced the Fibonacci

sequence, but did so exactly, with no omissions and no

repetitions.

The discussion below is a reprint from the His-

torical and Mathematical Background chapter ofElliott

Wave Principle, and illustrates this concept.

We can generate the complete Fibonacci sequence

by using Elliotts explanation of the natural pro-

gression of markets. If we start with the simplest

expression of the concept of a bear swing, we get

one straight line decline. A bull swing, in its

simplest form, is one straight line advance. A

complete cycle is two lines. In the next degree

of complexity, the corresponding numbers are

3, 5 and 8. As illustrated, this sequence can be

taken to infinity.

Elliott came to the conclusion, and rightly so, that

the stock market, as a measure of the value of

mans productive capacity, is a direct recording of

changes in mankinds progress and regress through

history. The fact that this process is governed by

the Fibonacci sequence, furthermore, led to


14/73


14

Elliotts ultimate theory that mans progress

through history was following a natural law of

growth often found in natures growth/decay andexpansion/contraction phenomena.

The Fibonacci ratio enters the picture when we

realize that the number of waves in a correction ap-

proximates 61.8% of the number of waves in the pre-

ceding impulse wave of the same degree. The ideal

irrational number phi (.618...) is approached by

Figure 4


15/73


15

this method the further on breaks down the wave, that

is, the greater the number of subwaves one counts. Em-

pirical evidence reveals, moreover, that Fibonacci ratio

relationships occur throughout the price structure in mar-

kets. The following pages will give specific examples of

the most common occurrences.

COMPASS TERMINOLOGY AND PROCEDURE

For the purpose of this manual, we will refer to

the compass as having points AB (top, narrow end) and

points CD (bottom, wide end), as shown in Figure 5. The

procedure for setting the center guide is as follows: Closethe compass, loosen the center guide nut, set the scale as

desired, and tighten the nut. The ratio you have chosen

will remain fixed for whatever distance you now open

the compass. For the balance of this manual, all distances

will be designated by a bar underneath the points in ques-

tion. For example, the distance between points A and B

will be referred to as AB.


16/73


16

COMPASS SCALES

Generally, proportional dividers are used for di-

viding lines into equal parts, for enlarging or reducing

length by different ratios, or for dividing the circumfer-

ence of a circle into equal parts. The left hand scale of

this compass is used for length multiples while the right

hand scale is used for circle division.

To relate the two scales, notice that the sequence

of Fibonacci ratios, 1.618, 2.618, 4.236, 6.854, 11.090,

17.944, 29.034, 46.978, 76.012..., when multiplied by

pi, 3.1416..., yields the series 5 + .1, 8 + .2, 13 + .3, 21 +

.5, 34 + .8, 55 + 1.3, 89 + 2.1 +.1, 144 + 3.4 + .2, 233 +5.5 + .3... Notice that the numbers of the first sequence

on the left-hand (lines) scale of the PRC correspond to

the numbers of the second sequence on the right-hand

(circles) scale fo the PRC. One formula illustrating the

eternal relationship between pi and phi is as follows:

Fn!100 x 2x"(15-n), where"= .618..., n

represents the numerical position of the term in the

sequence and Fn represents the term itself. Thenumber 1 is represented only once. This F1!1,F2!2, F3!3, F4!5, etc.

For example, let n = 7. Then

F7 !100 x 3.14162x .6180339(15-7)

!986.97 x .61803398

!986.97 x .02129 !21.01 !21

WHAT THE COMPASS DOES

Very simply, the distance between points C and

D will be the multiple of the distance between points

A and B which is indicated on the left-hand scale of

the compass. For example, if the compass is set on

5, CD will be 5 times as long as AB. AB, in turn,

will be 1/5 as long as CD. Because of space


17/73


17

restrictions, the Golden section marking for length has

been placed on the right-hand scale.

When the left hand scale of the compass is set at

Fibonacci multiples, CD will be a Fibonacci multiple of

AB, while AB will equal the inverse Fibonacci multiple

of CD. For example, when the center guide reference is

placed at GS, Golden Section (on the right-hand scale

of the compass), the distance at the narrow end AB will

always equal .618 of the distance of the wide end CD.

Conversely, CD = 1.618 x AB. We frequently refer to the

right-hand scale under USING THE COMPASS be-

cause there is often a convenient equivalent marking

correspoinding to the Fibonacci ratio we wish to locateon the left-hand scale.

CHART SCALES

All the charts in this manual use arithmetic scale.

The difference between arithmetic and semi-logarithmic

chart scale is that equal vertical distances on arithmetic

charts reflect an equal number of points traveled whereas

equal vertical distances on semi-log charts reflect equalpercentage changes. Empirical research confirms that

Fibonacci relationships in markets, in almost all cases,

are based upon the number of actual points traveled, an

observation which is consistent with the theoretical basis

for the Wave Principle. To obtain true multiples, the PRC

must always be used on charts with arithmetic scale. For-

tunately, this requirement fits the industry standard since

9 out of 10 chart services use arithmetic scale.

PRICE AND TIME

All examples under USING THE COMPASS

refer to Fibonacci price relationships. These re-

lationships are always determined by the vertical


18/73


18

distance covered on a chart by a wave. In these

examples, do not measure from the actual beginning

of a wave to the actual end, a process which would

include time in the calculation, but rather vertically

to the price level of the end of the wave.

You will see that in each of the calculations, the

PRC is placed with one point at the origin of the wave

to be measured and the other point vertically equivalent

to the terminus of that same wave. (See Figure 6.)

Although experience reveals that Fibonacci time

realtionships are less commonly found in markets than

Fibonacci price relationships, the PRC can be used to

discover where in the past or future the Fibonacci time

multiples lie. Just apply the Compass in exactly the same

manner as described under USING THE COMPASS,

but do it along the horizontal axis instead of the vertical.

When reading the instructions, replace the word verti-

cal with the word horizontal and the word wave

with the words time segment.

Figure 6


19/73


19

PART II

ELLIOTT WAVE APPLICATIONS


20/73


21/73


21

TYPICAL WAVE STRUCTURE

This graph of one rendition of an ideal Elliott wave

has been created as a reference for this manual. It con-

tains all of the multiples and retracements discussed on

the following pages. The index numbers starting at 1000

are for an imaginary market. Actual real-time examples

begin on page 46.

The exercises under USING THE COMPASS

on the following pages involve ratio relationships which

are commonly found in real-life markets. They will show

you how to apply the PRC quickly and efficiently to

project targets based upon many of these measurements.

Once youve mastered the PRC, you should memorize

the complete list of known reliable wave relationships,

which begins on page 35.

Figure 7


22/73


22

USING THE COMPASS

1.00 (equality)

After closing the PRC, the center guide may be set at any

point on the scale and either end may be used depending

upon the length of the wave in question. Place point A

(or C) at one end and point B (or D) at a vertical equiva-

lent to the other end of a recently completed move to

determine its length. Then, transfer this distance to the

extreme point of the most recent move to project an

equivalent length.

Sample Objective: You wish to mark the level of a 1.00

multiple of wave (A) as an estimate for the low of wave(C). Refer to Figure 8.

Example: wave (A) = wave (C)

.50

Procedure: Close the PRC. Set the center guide at 2 on

the left hand scale. Place point C at one end and point D

at a vertical equivalent to the other end of a recently com-

pleted move. Flip the compass. AB = .50 x CD.

Sample Objective: You wish to mark a standard 50%

retracement of the entire advancing wave from ((0))

through5as an estimate for the next correction. A 50%

correction is likely since it is quite near the typicalretracement point marked by the previous fourth wave

low at4. Refer to Figure 9.

Example: Next major correction = .50 x entire wave

0


23/73


23

Figure 8

Figure 9


24/73


24

As you may have already deduced, all desired ra-

tios from 1:10 to 10:1 may be obtained by simply adjust-

ing the setting on the left-hand scale (or the right-hand

scale equivalent) of the PRC. For orientation, if you were

to set the center guide at 1 on the left-hand scale (lowest

hash mark), the distance between points A and B, AB,

and points C and D, CD, would be identical (AB = CD).

The compass settings for AB/CD relationships most use-

ful for market analysis are listed below.

.50/2.00. Set PRC at 2.00 on the left-hand scale.AB = .50 x CD, and CD = 2.00 x AB.

.618/1.618. Set PRC at GS on the right-hand scale.

AB = .618 x CD, and CD = 1.618 x AB.

.382/2.618. Set PRC at 8.2 on the right-hand scale.

AB = .382 x CD, and CD = 2.618 x AB.

.236/4.236. Set PRC at 13.3 on the right-hand scale.

AB = .236 x CD, and CD = 4.236 x AB.

.146/6.854. Set PRC at 6.854 on the left-hand scale.

AB = .146 x CD, and CD = 6.854 x AB.

For the most precise application of all Fibonacci

ratios using the Precision Ratio Compass, however, keep

the setting on GS. To understand why, take a few min-utes to study the unique properties of the Fibonacci ratio,

phi, as presented in the following tables.


25/73


25

FIBONACCI RATIO RELATIONSHIPS

Multiplicative

.618 x .618 = .382

.382 x .618 = .236

.236 x .618 = .146

.146 x .618 = .090, etc.

Additive

1.000 - .618 = .382

.618 - .382 = .236

.382 - .236 = .146.236 - .146 = .090, etc.

These properties of the Fibonacci ratio are also

true with regard to the inverse of phi, 1.618:

Multiplicative

1.618 x 1.618 = 2.618

2.618 x 1.618 = 4.236

4.236 x 1.618 = 6.854, etc.

Additive

1.000 + 1.618 = 2.618

1.618 + 2.618 = 4.236

2.618 + 4.236 = 6.854, etc.

Once you understand these tables, you will quickly

see why all Fibonacci multiples and retracements canbe obtained with the PRC without ever changing the

setting. As a matter of fact, the most common multiples

and retracements which are found in everyday markets

can be marked on your charts in a matter of seconds

after a bit of practice with the PRC. Simply set the center

guide at GS on the right-hand scale and use the compass

as described in the section beginning on page 26.


26/73


26

Contracting Fibonacci Ratios

(for Retracements)

Use the wide end of the PRC (points C and D) to

measure the vertical distance of the move for which you

desire Fibonacci retracements points. See Figure 10a

Step #1) For .618 retracements: Keeping CD fixed, flipthe compass. Now, AB is a .618 retracement of your origi-

nal distance. Measure from the top down and mark this

point W. See Figure 10b.

Figure 10a

Figure 10b


27/73


27

Step #2) For .382 retracements: Keeping the PRC fixed,

measure from the bottom up and mark a second point, X.

The remaining length is a .382 retracement of your origi-

nal distance. See Figure 10c.

Set #3) For .236 retracements: Contract the PRC, plac-

ing compass points A and B on points W and X. This

length is a .236 retracement of your original distance.Keeping the PRC fixed, measure from the top down and

mark point Y. See Figure 10d.

Figure 10c

Figure 10d


28/73


29/73


29

Lets apply this method to our textbook graph:

.618

Sample Objective: You wish to mark the level of a .618

retracement of wave1as an estimate for the low of wave2. Refer to Step #1 and Figure 11.

Example: wave2= .618 x wave1

.382


retracement of wave3as an estimate for the low of wave4. Refer to Step #2 and Figure 12.

Example: wave4= .382 x wave3

Figure 11

Figure 12


30/73


30

.236


retracement of wave (1) as an estimate for the low of

wave (2). Refer to Steps #2-3 and Figure 13.

Example: wave (2) = .236 x wave (1)

.146


retracement of wave (3) as an estimate for the low of

wave (4). Refer to steps #2-4 and Figure 14.

Example: wave (4) = .146 x wave (3)

Figure 13

Figure 14


31/73


31

Expanding Fibonacci Ratios

(for Multiples and extensions)

Use the narrow end of the PRC (points A and B)

to measure the vertical distance of the move for which

you desire Fibonacci multiples.

Step 1) For 1.618 multiples: Flip the compass, keeping

the spread fixed. CD now measures 1.618 times the origi-

nal distance. Place point C on the chart at the point from

which you wish to project a longer wave. Place point D

vertically above or below it. Make a small mark where

point D touches the paper. See Figure 15.

Figure 15


32/73


32

Step 2) For 2.618 multiples: After following the above

steps, flip and expand the PRC so that the narrow end

fits the 1.618 multiple distance. Now, CD = 2.618 times

your original distance. Flip the compass again and mark

the 2.618 multiple. See Figure 16.

Step 3) For 4.236 multiples: The sum of the 1.618 and

2.618 multiples yields 4.236 times the original distance.

Just flip the compass and add AB (which is now the 1.618

multiple length) to the 2.618 multiple distance. See

Figure 16.

Lets again apply this method to our textbook graph:

Figure 16


33/73


33

1.618


multiple of wave (1) as an estimate for the length of wave

(3). Refer to Step #1 and Figure 17.

Example: wave (3) = 1.618 x wave (1)

2.618


multiple of wave1as an estimate for the length of wave

3. Refer to Steps #1-2 and Figure 18.

Example: wave3= 2.618 x wave1

Figure 17

Figure 18


34/73


34

4.236

Sample Objective: You wish to corroborate your

preferred count by finding additional internal

Fibonacci relationships between waves. Refer to Steps

#1-3 and Figure 19.

Example: wave3= 4.236 x wave2

Smaller or larger multiples can be obtained

with the PRC by adding or subtracting multiples of

first generation ratios. For example, .236 - .146 = .090,while 2.618 + 4.236 = 6.854. Note: While these

methods can be followed infinitely, we have found

little evidence that the extremely large or extremely

small Fibonacci ratios are of any practical value.

Figure 19


35/73


36/73


36

CORRECTIVE WAVES

Zigzag Corrections

The most common retracement is 61.8% of the

previous impulse wave and is most likely when the

correction itself is in the wave 2 position. Follow

Step #1 under Retracements to project this target.

See Figure 21.

Figure 20

Figure 21


37/73


37

The next most common retracement is 50%. See

page 22 to project this target.

The least common retracement is 38.2%. Follow

Step #2 under Retracements to project this target.

B Waves in Zigzags

(See Figure 22)

The most common retracement of wave A is

38.2%. Follow Step #2 under Retracements to project

this target.

The next most common retracement is 61.8% of

wave A. Follow Step #1 under Retracements to project

this target.

The next most common retracement is 50%. See

page 22 to project this target.

These same relationships also apply in regard to

X waves as retracements of first or second zigzags in a

double or triple zigzag formation. (See Figure 23).

Figure 22


38/73


38

C Waves in Zigzags

(See Figure 23)

By far the most common multiple is 1.00 times

the length of wave A. Transfer the fixed length for wave

A to the end of wave B to project the end of wave C.

The next most common multiple is 1.618 times

the length of A. Follow step #1 under multiples to

project this target.

The least common multiple is .618 times the length

of A. Follow Step #1 under Retracements to project

this target.

These same relationships apply to second zigzags

relative to first zigzags in a double zigzag pattern.

Flat and Irregular Corrections

By far the most common retracement is 38.2% of

the previous impulse wave. Follow Step #2 under

Retracements to project this target. See Figure 24.

Figure 23


39/73


39

The next most common retracement is 23.6%.

Follow Steps #2-3 under Retracements to project this

target.

The least common retracements are 50% and

61.8%, which occur only when the correction itself is in

the wave B or wave 2 position. See page 22 or followStep #1 under Retracements respectively to project

these targets.

B Waves in Flats

The only retracement is 100% of the preceding A

wave. Expect wave B to end at the same level from which

wave A began. See Figure 25.

Figure 24

Figure 25


40/73


40

C Waves in Flats

By far the most common multiple is just over 1.00

times the length of A. Transfer the fixed length for wave

A to the end of wave B to project the end of wave C.

Then look for the market to turn slightly beyond that point.

See Figure 25.

B Waves in Irregular Corrections

The most reliable multiple with respect to irregu-

lar corrections is the relationship between the lengths of

waves A and C (see Figure 26). However, often B waveswill fit one of these two cases:

The most common Fibonacci multiple for the

length of wave B is 1.236 times the preceding A wave.

Follow Steps #2-3 under Retracements and add this

length to the beginning of wave A to project a 1.236

multiple.

Figure 26


41/73


41

The next most common Fibonacci multiple is

1.382 times the preceding A wave. Follow Step #2 under

Retracements and add this length to the beginning of

wave A to project a 1.382 multiple.

C Waves in Irregular Corrections

By far the most common multiple is 1.618 times

the length of wave A. Follow Step #1 under Multiples

to project this target. See Figure 26.

The next most common multiple is 2.618 times

the length of A. Follow Steps #1-2 under Multiples to

project this target.

Subwaves in Double and Triple Threes

(See Figures 27, 28)

The most common relationship is that each three

is 1.00 times the length of the adjacent threes. Expect

the second and third three each to end just beyond the

level at which the first three ended.

Figure 27

Figure 28


42/73


42

The next most common relationship is that

alternate threes are related by 1.618. Follow Step

#1 under Multiples to project this target.

The least common relationship is that adjacent

threes are related by 1.618. Follow Step #1 under

Multiples to project this target.

Subwaves in Contracting, Ascending

and Descending Triangles

(See Figure 29)

The most common relationship is that each

subwave is .618 times the length of the previous

alternate subwave, i.e., wave e = .618 x wave c =

.382 x wave a; wave d = .618 x wave b. Follow Step #1under Retracements to project these targets.

The next most common relationship is that each

subwave is .618 times the length of the previous

adjacent subwave, i.e., wave e = .618 x wave d = .382

x wave c = .236 x wave b = .146 x wave a. Follow

Step #1 under Retracements to project these targets.

Figure 29


43/73


43

Subwaves in Expanding Triangles

(See Figure 30)

The most common relationship is that each

subwave is 1.618 times the length of the previous

alternate subwave, i.e., wave e = 1.618 x wave c =

2.618 x wave a; wave d = 1.618 x wave b. Follow

Step #1 under Multiples to project these targets.

The next most common relationship is that each

subwave is 1.618 times the length of the previous

adjacent subwave, i.e., wave e = 1.618 x wave d =

2.618 x wave c = 4.236 x wave b = 6.854 x wave a.

Follow Step #1 under Multiples to project these

targets.

Figure 30


44/73


44

ADVANCED RATIO APPLICATION

A COMPREHENSIVE FORECASTING METHOD

Keep in mind that all degrees of trend are always

operating on the market at the same time. Therefore, at

any given moment the market will be full of Fibonacci

ratio relationships, all occurring with respect to the vari-

ous wave degrees unfolding. It follows that points which

are found to be in Fibonacci relationship to several

market lengths have a greater likelihood of marking a

turning point in the future than a point which is in

Fibonacci relationship to only one length.

The group-ratio approach works best when theguidelines of the Elliott Wave Principle are kept in mind.

For instance, if a .618 retracement of a Primary wave1by a Primary wave2gives a particular target, and withinit, a 1.618 multiple of Intermediate wave (A) in an ir-

regular correction gives the same target for Intermediate

wave (C), and within that, a 1.00 multiple of Minor wave

1 gives the same target yet again for Minor wave 5, then

you have a most powerful argument for expecting a turn

at that calculated price level. Figure 31 illustrates this

example.

At the target market by the arrow,

2= .6181, (C) = 1.618 (A), and 5=1

Figure 31


45/73


45

If one of the above calculations were to yield

one level, but two of them were to yield another level,

the level supported by two calculations is more likely

the valid one.

Years of experience have proved this to be

the most valid, reliable and useful approach to price

forecasting in markets. The graph on page 21 is full

of such confirming ratios, and serves as a good

illustration of how markets often build an inter-

locking grid of Fibonacci relationships.


46/73


46

REAL-TIME EXAMPLES OF

FIBONACCI MULTIPLES AND RETRACEMENTS

Rather than give the reader doctored-up examples

and charts of what might transpire with regard to

Fibonacci multiples and retracements, we have chosen

real-time examples of how Fibonacci relationships were

actually applied in forecasting future market turning

points. The following paragraphs are excerpted from past

issues of The Elliott Wave Theorist:

THE BOND MARKET

November 1983Now its time to attempt a more precise

forecast for bond futures prices. Wave (a) in

December futures dropped 11 3/4 points, so

a wave (c) equivalent subtracted from the

wave (b) peak at 73 1/2 last month projects

a downside target of 61 3/4. It is also the

case that alternate waves within symmetri-

cal triangles are usually related by .618. As

it happens, wave Bfell 32 points. 32 x .618

= 19 3/4 points, which should be a goodestimate for the length of wave D. 19 3/4points from the peak of wave Cat 80projects a downside target of 60 1/4. There-

fore, the 60 1/4 - 61 3/4 area is the best

point to be watching for the bottom of the

current decline. This target zone fits the fact

that futures contracts lose premium, and if

the 10 3/8 bond projects an equivalent of 63

on a cash basis, an additional point or two

would probably be lost in the price of thefutures contract over the time period of the

decline. [See Figure 32.]


47/73


47

April 3, 1984 [adjusting and confirming the

target after (b) ended in a triangle itself]

...the ultimate downside target will probably

occur nearer the point at which wave Dis.618 times as long as wave B, which tookplace from June 1980 to September 1981 and

traveled 32 points basis the weekly continua-

tion chart. Thus, if wave Dtravels 19 3/4points, the nearby contract should bottom at

60 1/4. In support of this target is the five

wave (A), which indicates that a zigzag

decline is in force from the May 1983 highs.

Within zigzags, waves (A) and (C) are typi-

cally of equal length. Basis the June contract,

Figure 32


48/73


48

wave (A) fell 11 points. 11 points from the

triangle peak at 70 3/4 projects 59 3/4,

making the 60 zone (+ or - 1/4) a point of

strong support and a potential target. As a

final calculation, thrusts following triangles

usually fall approximately the distance of the

widest part of the triangle. Based on the

accompanying chart, that distance is 10 1/2

points, which subtracted from the triangle

peak gives 60 1/4 as a target.

June 4, 1984

The bond market ended a one-year decline

on May 30, hitting the long-standing Elliotttarget of 59 3/4-60 1/4 basis the nearby

futures with a dramatic reversal off [an

intraday] spike low at 59 1/2 on the June

contract [closing that day at 59 31/32]. In the

2 1/2 days following that low, bonds have

rebounded two full points. [See Figure 33].

Figure 33


49/73


49

THE STOCK MARKET

November 7, 1983 [See Figure 34.]

A break of Dow 1206 will virtually confirm

that Primary1has peaked and assure a con-tinuation of the decline. If 1158 is broken, the

next point of support is 1090, which marks a

.382 retracement of Primary1.

March 5, 1984

Downside Targets

As the correction progresses, we should be

able to get closer and closer to estimating

where the final bottom will actually occur.

Here are the calculations:

1) Primary wave2will retrace .382 of

Primary wave1at 1094.20.2) Within the ABC decline, wave C will be

.618 times as long as wave A at 1089.19.

June 4, 1984 [See Figures 35, 36.]

In terms of price, the downside target of 1090

was first computed seven months ago in the

November 7, 1983 issue. That basic target was

reiterated in the March and April issues,

Figure 34


50/73


51/73


52/73


52

August 6, 1984

The leap out of that bottom (as if you hadnt

heard) has been one for the record books, and

is powerful enough virtually to confirm that

Primary wave 3has begun. The firstimportant level of resistance is Dow

1290-1340. [See Figure 37.]

Figure 37


53/73


53

THE GOLD MARKET

The quotes presented below detail 5 consecutive

forecasts, which were made in The Elliott Wave Theorist

between November 1979 and January 1982, as follows:

1) Gold should drop to $477.

Outcome: Dropped to $474.

2) Gold should rise to $710.

Outcome: Rose to $710.

3) Gold should drop to $388.

Outcome: Dropped to $388.

4) Gold should undergo a rise to new highs.

Outcome: Short 3-month rise followed by

renewed decline. But because of stop

placement, the loss on the erroneous

forecast was only $10.

5) Gold going lower. Move back to the short side.

Outcome: Gold dropped another $90 to $296.75.

Here are the exact comments which appeared:

November 18, 1979

London gold appears to be in its final blowoff

rally on a long term basis. One all-important

question, in Elliott terms, is whether the

1967-68 rise in gold stocks was actually wave I

of the long term gold bull market. If the true

first wave was masked by the artifical price

controls on gold at $34 per ounce, then we arewitnessing the peak of the final fifth wave

advance in gold from a true low in 1967! [For

the time being, I will proceed under the

assumption that only wave III is peaking.]


54/73


54

March 9, 1980

Fibonacci support levels for gold are $565,

$477 and $388. An ideal Elliott scenario for

gold over the next year or two would be an A

wave down to $477, forming the first

retracement of the extended fifth wave within

wave III. Then a strong rally would ensue

forming wave B, followed by a declining

wave C down to the final target of $388. The

$388 level would correspond with a .618

retracement of wave III and with the area of

the previous fourth wave of lesser degree, a

normal Elliott support level. The $388 level is

the most reasonable target for the eventual

end to the large wave IV correction. [See

Figure 38.]

Figure 38


55/73


55

April 6, 1980

Gold has since declined to a low of $474 on

March 18. [See Figure 39.]

May 12, 1980

There is nothing to add to my expectations

for gold. ...a .618 retracement of the decline

to just over $700 should be the maximumpotential of any intermediate rally.

July 6, 1980

I still feel that the $710 level is a very likely

target for this rally.

Figure 39


56/73


56

September 23, 1980 (the day of the high)

Gold has now hit its minimum target of $710

per ounce London fixing. From here on out,

Id rather let the other guy have the profits.

The guaranteed part of the rise is behind us.

[See Figure 40.]

Figure 40


57/73


57

August 5, 1981

Yesterday the Fibonacci ratio target of $388

per ounce computed a year and a half ago was

satisfied quite closely, and the time zone of

mid-1981, refined last May to August

1981, is upon us. [See Figures 41, 42.]

Figure 41

Figure 42


58/73


58

September 8, 1981

The exact low on the COMEX nearby futures

contract was $388.00 and the lowest price for

a cash bullion sale was $388.00 by the Bank

of Nova Scotia, both on the same date.

January 11, 1982

[The a-b-c rally into the September 1981

high] in gold is indicating that a break of the

$388 level is now extremely likely. If gold

fixes below $380, I suggest reinstating your

short position. The net result will be as if we

had never exited the short side at all.

While most commodities wave structures clearly indi-

cated that wave I began in 1967, some uncertainty had

existed in bullions pattern due to government-imposed

price controls. The subsequent break of the $388 level

conclusively resolved this matter, confirming the wave

count shown below.

Figure 43


59/73


59

PART III

GANN ANALYSIS


60/73


60


61/73


61

GANN ANALYSIS

The PRC is ideally suited for many of the

methods pracaticed by the late W.D. Gann. We do

not attempt to evaluate Gann theory in this manual,

rather to illustrate the usefulness of the PRC to those

already convinced of the benefits of Gann analysis.

THE GANN-BLITZ APPROACH

Those researchers with either computers or a

good deal of spare time may wish to explore a method

similar to that used by Gann. Of course, the basis of

Ganns choice of important numbers is strictly numero-logical, and the long list of numbers he considered im-

portant leaves almost no number untouched. However,

his idea of finding groups of such numbers to reveal high-

reliability future turning points can be applied success-

fully to Fibonacci ratios. This method is essentially a

shotgun approach, in which the analyst takes every ap-

plicable Fibonacci ratio (2.618, 1.618, 1.00, .618, .382,

... etc.), applies it to each discernible market swing on

the chart, and plots every one of these points in order to

find clusters which might reveal magnets for priceturning points.

This approach is not as useful as that which takes

into account the guidelines of the Elliott Wave Principle

(see ADVANCED RATIO APPLICATION). However,

for those who have no desire to learn or apply the tenets

of the Wave Principle, this exercise will certainly reveal

price levels which are worth watching for changes in

trend. Any single price level or time zone which were to

come up repeatedly during a long series of Fibonaccicalculations is one that an analyst should not fail to watch

closely.


62/73


62

Procedure:

1) Choose the most recent swing in the market of the

largest degree in which you are interested and apply all

the functions under USING THE COMPASS to that

swing. Add (and subtract) each of the results to (and from)

both the beginning and end of that swing and of

the preceding swing of the same degree. Lightly

mark all resulting price levels on the chart.

2) Choose the most recent swing of the next smaller size

and repeat the process.

3) Continue this process until the computations have beenperformed on the smallest applicable swing from the

available data.

4) Mark with heavy lines the boundaries around those

price levels which cluster, or which appear a greater than

average number of times in your calculations. Look for

these areas to coincide with turning points. Experience

shows that Fibonacci relationships are generally quite

precise, so clusters should be tight where market turns

are indeed likely.

This method is best accomplished using a

computer.

SQUARING OF TIME AND PRICE

By far the most widely used Gann approach is

that of squaring time and price. This approach is based

upon the concept that lines determined by certain points

of intersection of time and price will provide supportand resistance for future activity. Once a top or bot-

tom has been identified, measure forward x time units

(i.e., hours, days, weeks, months, years) and up or down

x price units (i.e., cents, dollars, points), tracing out

the top (or bottom) and right side of a square. The

diagonal of the square, moving forward in time is,

in theory, significant in determining turning points in the


63/73


63

market. This line is referred to as a 1x1 line (1 time

unit by 1 price unit).

Other frequently drawn lines regarded by

Gannophiles as having significance are 2x1 lines (2 timeunits by 1 price unit) and 1x2 lines (1 time unit by 2

price units).

An alternate method of squaring is accom-

pli shed by measur ing forward in time a number

of time units equal to the number of price units

represented by the levels of prior significant turning

points. For example, a square for a stock with a peak at

$100 per share would occur at 100 hours, days, weeks,

month, years, etc. from that peak, and allegedly indicatea turning point in price at that point in time.

(Note: The method described on page 64 requires the

use of chart paper where equal units are used for

time and price. An alternate method is described on

page 65 for paper with unequal units.)

Figure 44


64/73


64

1x1 lines

Procedure: Place point C at the beginning or end of the

move from which the line will be drawn. Place point D

forward in time at a price equivalent to point C. Keeping

point D fixed, pivot the PRC so that point C is at a time

equivalent to point D (above D for bottoms, below D for

tops). Make a small mark. Connect the extreme point of

the move to the mark, and extend the line into the future.

You have just drawn a 1x1 (45 degree) line to your initial

point.

1x2 lines

Procedure: Set the center guide at 2 on the left-hand

scale. Place point A at the beginning or end of the move

from which the line will be drawn. Place point B forward

in time at a price equivalent to point A. Make a small

mark. Flip the compass. Place point C at the mark you

have just made. Keeping point C fixed, pivot the PRC so

that point D is at a time equivalent to point C (above C

for bottoms, below C for tops). Make another small mark.

Connect the extreme point of the move to the second

mark, and extend the line into the future. You have justdrawn a 1x2

2x1 lines

Procedure: Set the center guide at 2 on the left-hand

scale. Place point C at the beginning or end of the move

from which the line will be drawn. Place point D for-

ward in time at a price equivalent to point C. Make a

small mark. Flip the compass. Place point A at the mark

you have just made. Keeping point A fixed, pivot the PRCso that point B is at a time equivalent to point A (above A

for bottoms, below A for tops). Make another small mark.

Connect the extreme point of the move to the second

mark, and extend the line into the future. You have just

drawn a 2x1 line to your initial point.


65/73


65

UNEQUAL CHART DIVISIONS

For chart paper where the price units and the

time units are not equal, Gann lines are still easily

drawn with the PRC by adjusting the center guide on

the PRC to correspond with the ratio of time to price

on your chart paper. As an example, suppose your time

units are twice the size of your price units (i.e., the

height of paper used for 2 points is equal to the length

of paper used for 1 day). Your objective is to draw a

1x1 line. Set the center guide at 2 on the left-hand scale.

Place point C at the beginning or end of the move from

which the line will be drawn. Place point D forward in

time at a price equivalent to point C. Make a smallmark. Flip the compass. Place point A at the mark you

have just made. Keeping point A fixed, pivot the PRC

so that point B is at a time equivalent to point A (above

A for bottoms, below A for tops). Make another small

mark. Connect the extreme point of the move to the

second mark, and extend the line into the future. You

have just drawn a 1x1 line to your initial point,

squaring time and price. For 2x1 lines, you can

then multiply the setting chosen by 2. for 1x2

lines, multiply the setting chosen by 1/2. Thistechnique can be applied to various scales of chart

paper by set ting the center guide on the left hand

scale at the ratio of the number of price units in a

certain height of chart paper to the number of time

units in the same length of chart paper.

GANN RANGE SUBDIVISIONS

Another Gann assertion is that certain equal

subdivisions of any important move will providelevels of support and resistance for subsequent

market action. According to Gann, many fractions

were found to be important in this regard, with 1/4,

1/3, 1/8, and 1/16 respectively having the most

significance. For example, if the previous range was

100 units, then a 1/4 subdivision would result in the


66/73


66

conclusion that every 25 unit demarcation would

represent a potential area of support or resistance.

The most widely used range subdivision by Gann

practicioners is that of eighths. The usefulness of

the PRC to believers in this method is illustrated

in Figure 45.

Step 1) Set the center guide at 2. AB = .50 x CD.

Step 2) Measure the wave length with the wide

end of the PRC. Flip the compass. Place point A at one

end and point B at an equivalent point in time to point A.

Mark this point.

Step 3) Flip and contract the PRC so that points C

and D fit on the smaller length you have marked. Flip the

compass again. Now AB = .25 x the original length.

Step 4) Flip and contract the PRC so that points C

and D fit on the smallest length you have marked. Flip

the compass again. Now AB = .125 x the original length.

The subdivisions can be projected into new high

or low price territory for levels of resistance or supportas illustrated.

Figure 45


67/73


67

ERRONEOUS USE OF THE COMPASS

Some people have attempted to find value in

measuring the physical length of waves on chart

paper, taking into account both price and time. The

problem with this approach lies in the fact that a

physical length as defined above is subject to the

time and price scales of the chart paper which is

used, and thus a retracement or multiple will not

transfer from one type of chart paper to another. If

a method is to have significance, it should certainly

not be dependent on chart scale.

CONCLUSION

The Precision Ratio Compass is the perfect tool

for projecting ratio-based price and time targets in

the financial markets. The foremost advantage is a

tremendous saving of time, since you will not have to

calculate price or time distances, write down figures,

and then transfer the result to your chart. In fact,

you wont even have to check your records to make

sure of exactly what the price levels at the turning

points are. The Compass knows that when you placeit on the chart. The second important advantage is

that you will now have time to investigate all the

relevant ratio relationships, not just one or two. You

can even experiment with your own special ratio

theories (pi multiples have been suggested). And last

but not least, you will eliminate any possibility of

miscalculation in hitting a wrong button on a

calculator or reading and transferring the wrong

number from a chart to the keys. The final result

is a quicker and more accurate analysis, leaving youmore time to make trades, with greater confidence

that theyll be based on complete and accurate

information.


68/73


68

ADDITIONAL CHARTS PRESENTED DURING

CALCULATING FI BONACCI RELATIONSHIPS

Using the PRECISION RATIO COMPASS


69/73


69


70/73


70


71/73


71


72/73


72


73/73


1-770-536-0309 (outside the U.S.)

or 1-800-336-1618 (inside the U.S.)

Documents

Workbook 7 Complete