Keep a 1-2-3 count only while zigzag, Fibonacci depth, and divergence still agree

What the 1-2-3 wave count marks

The 1-2-3 wave count describes a directional move as a first impulse, a smaller correction, and a third swing that continues past the first swing high or low.

Each labeled wave may contain a lower-degree 1-2-3. That fractal nesting also reuses a completed wave-3 extreme as a new wave-1 origin, so later extensions can be numbered 3.1, 3.2, and so on.

Mark swings with a high-low zigzag

Swings used for that count can be marked with a high-low zigzag whose reversal threshold is a percent change, an ATR-scaled factor, or the sum of both. That reversal amount is the HLPivot.

If the ATR factor is zero, the reversal threshold uses only the percent setting. If the percent setting is zero, it uses only ATR. Otherwise the two terms are added.

One illustrated zigzag example requires a 3 percent price change plus a three-period ATR multiplied by 1.5. Listed defaults include a 5 percent threshold, a 5-period ATR lookback, and a 1.5 ATR factor.

Judge wave 2 by Fibonacci depth

A smaller wave-2 correction is framed as a 23.6 percent to 50 percent Fibonacci retracement of wave 1. A larger correction may reach 76.4 percent. A deeper move is treated as a warning. A retrace beyond 100 percent of wave 1 invalidates the wave-2 label.

Read divergence as reversal or continuation

Regular price-indicator divergence at the start of a new 1-2-3 is treated as a reversal cue. Regular divergence is price making a new extreme while the indicator fails to confirm.

Hidden divergence at the start of wave 3 is treated as a continuation cue. Hidden divergence is price making a higher low or lower high while the indicator moves the other way.

Rewrite the count when the third swing fails

If wave 2 travels beyond the origin of the prior wave 1 or 3, the label is rewritten as a new wave 1. That invalid wave 2 is the 2>1 relabel: a failed correction becomes the first wave of a move in the opposite direction.

If an expected wave 3 fails to make a new extreme after the zigzag confirms a turn, the prior wave 2 becomes wave 1 and the failed third swing becomes wave 2. That incomplete wave 3 is rewritten rather than forced to fit the old count.

An exception keeps the prior swing as wave 2 when price then makes a new wave-3 extreme. That extreme is numbered as the next wave-3 sequence instead of locking in a reversal count.

Tell a small wave 2 from a larger 1-2-3

Checks used to decide whether a counter-move is only a small wave 2 or a larger 1-2-3 include a 161.8 percent projection of a completed 3.1 at the 3.2 extreme, a 261.8 percent projection from wave 2 near volatility-band support, and a negative price-indicator divergence.