Let us have a look at an interesting situation on the Gbp/Aud pair.
The daily chart has the makings of a possible bearish Elliot wave.

As we can see, wave2 was a sharp correction to 78.6 of wave1, and it was a classic 3 wave corrective pattern.
So far, we seem to have completed the wave3 and we can expect a pullback/correction towards the upside for a wave4.
Now, price may still continue towards the down side, thus negating the Elliot wave, but we seem to have a couple of factors pointing to a possible upside correction.
The stochastic indicator has been showing a bullish regular divergence, which indicates an upside move.
We seem to looking a possible bearish Butterfly pattern in the making within the corrective wave4.
So, if the low of EW3 holds, then we can expect some moves to the upside to complete the wave4.
We can estimate the possible levels of resistance of this up move as-
a.) The reversal level “D” of the harmonic pattern.
b.) As per the rules of the Elliot wave, the wave4 should never go into the territory of wave2; hence this could also act as a resistance level. (The red line shown in the chart)

Let us have a detailed look at the harmonic pattern – the bearish butterfly

The point B has formed precisely at the 78.6 of X-A and we are looking for some more down moves to form the point ‘C’.
If price does find support at a fib level (at ‘C’) then we can expect a rally to complete the wave ‘C-D’….which should support the wave4 of the Elliot wave.
Thus the target of this bearish butterfly would be the Fib projection 127.2 of A-D…..which would be the wave5 of the Elliot wave.

When we have 2 different factors pointing to a similar setup, then it becomes a high probability trade.
But again, coming back to our ‘Mantra”.
We don’t assume anything and we don’t predict anything. We wait for price to confirm.
So, if the low of EW3 (the point A of the harmonic pattern) holds, then we can expect a corrective move up – the Elliot wave4 and subsequently the wave5.
If price breaks this low, then it becomes a bearish 123 pattern (as shown in the chart) and we can estimate the targets of this bearish move.
Sunil.
“Act….don’t React”

A Wolfe wave is a reversal pattern and a very successful one at that. It is basically a 5 point structure, and like the other 5 point pattern – the harmonic pattern – It is precisely defined, very specific in structure and gives excellent Risk-to-Reward ratios.

We had a look at a Wolfe wave setup in a previous post – http://blogs.fxstreet.com/forexology/2009/03/15/wolfe-waves/
and  am enclosing 2 Wolfe waves that we traded in our live trading room.
The rules remain the same – (for a bearish Wolfe wave)
1.) Once the points 1, 2 & 3 have been identified, we wait for the point 4 of the pattern to confirm to the conditions.
2.) Once point 4 forms, we can expect price to rally up for a last thrust to point 5, which usually forms at the Fib projection 127.2 / 161.8 (of 3-4)
Thus one can trade this up move with confidence as the price objectives are precisely set.
3.) Once price finds resistance at this fib level, thus completing the last leg of the pattern, we can expect price to change trend to the downside with great momentum.
For the price objective of this down move, we plot a line from the high of point 1 to the low of point 4.
Price will often come down to meet this line which becomes a very precise target.

One can simply reverse the rules for a bullish pattern and as we can see, this pattern is quite accurate

Sunil.