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4. The back-then-front divergence signal
According to Elliott wave theory, trends can have either 5 waves or 3 waves. 5 waves are defined as primary trends, and 3 waves are defined as correction waves (please review Elliott wave theory for more information). In practice these waves do occur but rarely in any ideal sense. However, the AO can help to spot 5 waves with the back-then-front divergence signal.
The back-then-front divergence signal appears as shown above. Considering the past two articles, one on the back divergence, and then the other on the front divergence, you can see this is a combination of the two. Specifically, notice the back divergence between the lower price highs at 1 and 2 on the downtrend and the higher AO highs on 5 and 6. For the front divergence, notice the lower price lows at 3 and 4 on the downtrend and the higher AO lows on 7 and 8. Note also the special case of low the AO makes at point 7. This new low indicates downward strength of this trend and suggests more down to come. And indeed in this case more downward pressure appeared until the final front divergence appeared for a buy signal. This completes the 5-wave Elliott pattern.
Now, in this case, a larger time frame came into play for even more down moves but this individual primary trend at this time frame came to an end. What came after was different market behavior, though on a larger time frame the AO signals continue to hold fast.
Can you spot the back-then-front divergence signal on the uptrend previous to the downtrend analyzed? It is there!
The back-then-front divergence signal appears as shown above. Considering the past two articles, one on the back divergence, and then the other on the front divergence, you can see this is a combination of the two. Specifically, notice the back divergence between the lower price highs at 1 and 2 on the downtrend and the higher AO highs on 5 and 6. For the front divergence, notice the lower price lows at 3 and 4 on the downtrend and the higher AO lows on 7 and 8. Note also the special case of low the AO makes at point 7. This new low indicates downward strength of this trend and suggests more down to come. And indeed in this case more downward pressure appeared until the final front divergence appeared for a buy signal. This completes the 5-wave Elliott pattern.
Now, in this case, a larger time frame came into play for even more down moves but this individual primary trend at this time frame came to an end. What came after was different market behavior, though on a larger time frame the AO signals continue to hold fast.
Can you spot the back-then-front divergence signal on the uptrend previous to the downtrend analyzed? It is there!
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