What Is A Wave 4 Correction?

A wave 4 correction would indicate that the final phase of this market cycle is nearing.

Is bitcoin nearing its final phase of the market cycle?

Bitcoin has experienced a nasty correction, dropping from its peak at almost $74,000 to a low of $63,000 at the time of publication: A fall of 15%. Such pullbacks are not unusual for bitcoin, which regularly sees 30-40% retracements in the course of a bull market.

Moreover, this is all part of a regular market cycle, whether we're talking about the crypto markets or otherwise. Markets "breathe": Nothing goes up in a straight line, and while markets are inherently unpredictable, there tend to be broad patterns we can identify.

Elliott Waves

Almost a hundred years ago, Ralph Nelson Elliott, an accountant by profession, developed the Elliott Wave Theory. He observed recurring patterns in stock market price movements and formulated the theory to explain them. He also noted that they were fractal: Similar patterns happened on all time frames.

Elliott's ideas were published in his seminal work, "The Wave Principle" in 1938. His theory is still widely studied and applied by traders and analysts in financial markets today.

Wave 4

Elliott identified five waves in a bull market. Waves 1, 3, and 5 are bullish, while 2 and 4 are corrective. It's likely that bitcoin is currently experiencing a Wave 4 correction.

TradingView chart, wave counts
A wave 4 correction would indicate that the market is nearing its final phase

In an uptrend, Wave 3 is typically the longest and most powerful wave in the sequence. Wave 4 is then a counter-trend movement that retraces a portion of the gains seen in Wave 3. Wave 4 usually does not retrace more than 100% of Wave 3's movement, as it is considered a corrective wave rather than a full reversal.

Wave 4 corrections can take various forms, including sideways consolidations, triangle patterns, or complex corrections, and they often exhibit choppiness and overlapping price action.

There are only a few rules by which wave counts are identified, but also various guidelines that are generally, but not always, the case. For example, if Wave 2 is a long and shallow corrective wave (as was the case for bitcoin), then Wave 4 is often sharper: A fast, deep correction. That is indeed what we have seen so far for bitcoin.

The wave count is only fully clear when the final wave is well under way, so it's uncertain how deep this retracement will be. $60-62k is a natural area to expect, but the next obvious target below that is $52k.

If this is a Wave 4, then the market will soon enter its final phase. This would be a surprise to many traders expecting a standard four-year cycle, and adds evidence that we might be seeing something different this time: A left-translated (early peak) cycle, or possibly a double-peak cycle, similar to 2013. Wave 5 can be longer than wave 3 (which lasted around 6 months), but stretching it out to 18 months seems less likely.


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