Elliot Wave Oscillator
The Elliott Oscillator, or 5/34 Oscillator, is a 34 period simple moving average of prices subtracted
from a 5 period simple moving average of prices displayed as a histogram above and below a zero line.
After Elliot's passing, much research and advancement was done on Elliot Wave Theory during the 1950's - 1970's by Hamilton Bolton, Robert Prechter, and A.J. Frost. However, the basic concepts of Elliot Wave Theory are outlined below:
● Action is followed by reaction
● The basic Elliot Wave pattern consists of 8 waves which are often labeled as 1, 2, 3, 4, 5, a, b, c
● There are 5 waves in the direction of the main trend followed by 3 corrective waves (a.k.a. "5-3" count); Waves 1, 3, and 5 are called "impulse" waves while waves 2 and 4 are called "corrective" waves; Waves 1-5 can be either up or down; Waves a, b, and c correct the main trend and always travel in the opposite direction of waves 1 - 5.
● A 5-3 count completes a cycle; this completed count then becomes 2 subdivisions of the next higher 5-3 wave; The cycles are as follows: The largest wave count is called the Grand Supercycle which consists of Supercycles which consist of Cycles. This process continues into Primary, Intermediate, Minute, Minuette, and Sub-minuette wave cycles.
● The underlying 5-3 pattern remains constant, but the time frame required to complete the pattern may vary
EWO (i) = SMA(close, 5) - SMA(close, 35)
SMA = Simple Moving Average
● The most important single concept about the Elliott Oscillator is that the highest/lowest point of the Oscillator is connected to the bullish/bearish Wave 3 of the swing.
● The highest/lowest value of the oscillator identifies a potential bullish/bearish wave 3
● Wave 4 almost always pulls back to or crosses over the zero line in the opposite direction of the main trend
● Wave 5 usually makes a new high or low price for the swing, but often diverges from the Elliot Oscillator; if Wave 5 makes a new high/low price, but doesn't diverge from the indicator, alternate analysis may conclude that the wave was not wave 5, but instead an extended wave 3.