The Elliott Wave Theory’s main pattern is that the market advances in five waves and corrects in three waves. The five waves advance is easy to identify. Most of the time the rally is well-defined and the subdivision is visible. Also, the powerful wave three creates separation making the sequence clear and easy to label.
An impulse sequence runs in 5-9-13-17-21, which is an increment of 4. When labelling, we need to count if the swing comes out with the correct number. The Theory allows traders to understand when a cycle is ending and consequently to take profit or stop chasing at the end. The following chart shows the 5 waves advance pattern:
The graph above is a representation of the classic five waves advance in the simplest way. As we can see, there are five waves off the lows, and each leg comes with a subdivision of five waves. After the 5 waves advance ends, we can see a pullback in three waves. Counting the swing is critical to identifying a nest and knowing how many more highs/lows should happen before a cycle ends.
A nest is a series of 1-2, 1-2 before an acceleration happens. Knowing how to count the swings and the rules which make a nest is important. As we explained above, the Impulse sequences run in 5-9-13-17, an increment of 4. The five waves can be an impulse, but 17 swings can also be an impulse. Many traders do not understand this concept. When you are in a double nest, the sequence extends to 9 swings and runs like 1-2-1-2-3-4-5-3-4-5. Consequently, we end at 9 swing. The following chart shows the nest structure:
It represents a nest within the Elliott Wave Theory. It’s something many wavers struggle. As we can see, there is a series of degrees off the lows before acceleration happens. Thus, knowing that a nest happens is the key.
The chart below shows Chevron (CVX). From the peak at 07.28.2022, Chevron did a seven swing lower into the Blue Box area and reacted higher in an impulse. The rally develops into a nest, as I-II, ((1)), ((2)), then a considerable acceleration takes place. Now we are in swing number 9, or wave V. The new high comes with a momentum divergence and there is enough number of swings in place to complete.
Chevron (CVX) Weekly Elliott Wave Chart
The chart above shows a fantastic reaction from the Blue Box area. It is a High-Frequency area in which both sides of the market agree to a reaction. You can watch this video (hyperlink directs to the video) to understand more. Right now, as shown in the chart, the number of swings are in place. At any moment, a wave (IV) pullback can start.
In conclusion: CVX is ending a perfect advance in nine swings. The price is still showing divergence against the peak of 06.03.2022. A huge wave (IV) should start soon, which can make the sector sideways and also Oil sideways for years. As of right now, let’s respect the advance, and be careful about chasing higher. Also let’s understand that while it stays above wave IV low, the stock can extend. So right now is a very critical stage for Chevron and the Energy sector.