Dow Jones Industrial - DJI - is creating a ending diagonalEnding Diagonal Overview
An Ending Diagonal is a pattern that signifies the exhaustion of a larger movement. It occurs at the final stages of a trend, either at the end of a five-wave impulse or at the end of an A-B-C corrective structure. Typically, ending diagonals take longer to unfold compared to standard impulses, indicating a slowdown and an imminent trend reversal.
Key Rules for Ending Diagonals
• Where they appear: Ending diagonals can occur in either Wave 5 of an impulse or Wave C of a corrective structure.
• Wave count: An ending diagonal subdivides into five waves.
• Wave structure: Each of the five waves in an ending diagonal consists of three smaller waves.
• Wave overlap: In an ending diagonal, Wave 1 and Wave 4 overlap, unlike a standard impulse.
Guidelines for Identifying an Ending Diagonal
• Wave size: Wave 1 is typically the largest among Waves 1, 3, and 5.
• Contracting vs. Expanding Diagonals:
• In a contracting diagonal, Wave 5 often terminates slightly beyond the trendline connecting Wave 1 and Wave 3.
• In an expanding diagonal, Wave 5 typically ends before the trendline connecting Wave 1 and Wave 3.
• Wave 3 extension: If Wave 5 is an ending diagonal, Wave 3 is most likely to be extended.
• Implication of extensions: Wave 5 extensions, truncated fifths, and ending diagonals all suggest a significant reversal is approaching.
• Sub-wave structure: Unlike typical impulses, the sub-waves Wave 2 and Wave 4 do not alternate in terms of structure. Both corrections are usually simple ZigZag patterns.
• Throw-over phenomenon: Often, prices may briefly shoot beyond the trendline connecting Wave 1 and Wave 3 in a phenomenon known as a throw-over, indicating extreme exhaustion. This is followed by a sharp reversal.
• Trading opportunity: A strong buying opportunity usually emerges when prices break above the diagonal trendline connecting Wave 2 and Wave 4.
Internal Wave Structure
The internal structure of an ending diagonal follows a 3-3-3-3-3 pattern. Each of the five waves in the diagonal subdivides into three smaller waves, typically following an A-B-C ZigZag pattern. This differs from a typical impulse, which subdivides into a 5-wave structure.
Conclusion
Ending diagonals mark the completion of major trends and serve as powerful reversal signals. Recognizing their internal wave structure and the key characteristics such as the overlap of Waves 1 and 4, the throw-over, and their 3-wave subdivisions can help traders identify impending reversals and take advantage of new trend opportunities.
