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Characteristics of Corrective Waves

Every siginificant upmove in the market is followed by a correction. Corrective Wave forms are rather complicated, but basically we can categorize them into 3 wave structures : A, B and C. Their common behaviours can be formulated as the following :
  1. Wave A


    Corrections are typically harder to identify than impulse moves. In wave A of a bear market, the fundamental news is usually still positive. Most analysts see the drop as a correction in a still-active bull market. Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related futures markets.

    Many traders still consider the rise to make a sharp come-back. But there appear some traders sure of the contrary. Characteristics of this wave are often very much the same as those of Wave 1.

  2. Wave B


    Prices reverse higher, which many see as a resumption of the now long-gone bull market. Often resembles Wave 4 very much and is very difficult to identify. Shows insignificant movements upwards on the rests of optimism. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

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  1. Wave C


    Prices move impulsively lower in five waves. Volume picks up, and by the third leg of wave C, almost everyone realizes that a bear market is firmly entrenched. This wave is easily identified as a strong decreasing wave in the background of general persuasion that a new, descreasing trend has started. In the meantime, some investors start buying cautiously. This wave is characterized by high momentum (five waves). Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

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