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  • I used letter X to denote the peak before the decline. Note decline extends below the price gap, then the subsequent rally fails to get back above the gap, then goes into a triangle pattern. Triangles normally don't occur in wave 2, rather they usually occur in wave 4 or in wave b, so one might surmise that this wave b. Traders would probably short the break of the triangle's lower trend line, then assume that wave to be wave c. Wave c or 3 often extends, it is the most likely assumption to make. The wave does indeed extend 261.8 based on the widest point of the triangle and 423.6 based on subwave e of the triangle....wave 4 is a shallow retracement, about 23.6 of the distance measured from X. .382 is also a common retracement objective of wave 4. Then wave 4:5 is roughly the length of wave X:1.......If one wave extends, the other two waves tend toward equality...another common relationship is for wave 5 to go 127.2 the lenght of wave 3:4, which also happens and you get a postive momentum divergence. That is also typical of wave 5. So if you draw a trend line down from the top of triangle sub wave 3 over the top of wave 4, that is your stop out point on the short position...aggressive traders might also choose to buy the break above that trend line. However, most traders would wait for a retracement and a higher low to initiate a long position..
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