NISM-Series-XV: Research Analyst · Technical Analysis

Elliott Wave, Fibonacci Retracement and Market Breadth Explained

Updated 11 October 2026 · Fact-checked

Elliott Wave theory says prices move in five-wave impulse moves with the trend and three-wave corrective moves against it. Fibonacci retracements mark likely pullback zones at 23.6%, 38.2%, 50%, 61.8% and 78.6%. Market breadth tools like the advance-decline line show how many stocks support an index move. Learn the rules and levels exactly.

Understand Other Theories: Elliott Wave, Fibonacci and Market Breadth

These tools sit outside basic chart patterns and moving averages. They try to read the structure of price moves and the mood of the whole market. NISM XV tests definitions and rules, not chart drawing.

Elliott Wave theory was developed by R. N. Elliott. It holds that market prices move in repeating waves driven by crowd psychology. A full cycle has two parts. The impulse phase moves in the direction of the main trend and has five waves, numbered 1 to 5. The corrective phase moves against the trend and has three waves, labelled A, B and C. So a full cycle is 5 + 3 = 8 waves.

In the impulse phase, waves 1, 3 and 5 move with the trend. Waves 2 and 4 are pullbacks. The standard rules are: wave 2 never retraces more than 100% of wave 1, wave 3 is never the shortest of waves 1, 3 and 5, and wave 4 does not overlap the price territory of wave 1. Wave 3 is often the longest and strongest. Waves are fractal, meaning each wave contains smaller waves of the same pattern.

Fibonacci retracement uses ratios from the Fibonacci number series. After a price move, you expect a pullback to reach one of these percentages of the move before the trend resumes. The common levels are 23.6%, 38.2%, 50% and 61.8%, with 78.6% also used. Strictly, 50% is not a Fibonacci ratio, but traders use it widely from Dow Theory. The 61.8% level is called the golden ratio. Retracement levels act as possible support in an uptrend and possible resistance in a downtrend.

Market breadth measures how many stocks take part in a move. The advance-decline line is a running total of advancing stocks minus declining stocks each day. If the index rises while the A-D line falls, few stocks are carrying the index. This is a negative divergence and warns of weakness. Related sentiment tools include the put-call ratio (PCR), which is put volume or open interest divided by call volume or open interest. A very high PCR is read as bearish sentiment and a very low one as bullish. Many analysts use PCR as a contrarian signal at extremes, so read the question's wording carefully.

Key formulas to remember

Elliott full cycle: 5 impulse waves (1-5) + 3 corrective waves (A-B-C) = 8 waves; Impulse moves with the trend. Corrective moves against it.
Elliott wave rules: Wave 2 ≤ 100% retracement of wave 1; wave 3 is never the shortest; wave 4 does not overlap wave 1; If a rule is broken, the wave count is considered wrong.
Fibonacci retracement levels: 23.6%, 38.2%, 50%, 61.8%, 78.6%; 50% is a traditional level, not a true Fibonacci ratio.
Retracement price in an uptrend: Level = High − (High − Low) × ratio; Use the swing low to swing high of the move.
Advance-decline line: A-D line = previous value + (advances − declines); Cumulative total. Divergence from the index is the signal.
Put-call ratio: PCR = put volume (or OI) ÷ call volume (or OI); High values suggest bearish sentiment, low values bullish. Often used as a contrarian indicator at extremes.

How to solve Other Theories: Elliott Wave, Fibonacci and Market Breadth questions

Most questions test a rule, a level or a reading of a signal. Use this order.

1Identify the tool: Elliott Wave, Fibonacci, A-D line or PCR.
2Recall its core definition and numbers before looking at the options.
3For Elliott, decide whether the move is with the trend (impulse, 5 waves) or against it (corrective, 3 waves).
4For Fibonacci, find the swing low and swing high, then compute the move and apply the ratio.
5For breadth or PCR, compare the index direction with the indicator direction to spot divergence.
6Eliminate options that swap numbers, such as 3 waves for impulse or 5 for corrective.
7Check the wording: 'always', 'never' and 'must' are traps unless the rule is absolute.

Quickest way: Memory anchors

When to use it: Use for definition and recall questions where you have under a minute.

Impulse = 5, corrective = 3, total = 8.
Wave 3 is never the shortest. Wave 4 never overlaps wave 1.
Fibonacci key levels: 38.2, 50, 61.8.
Index up but A-D line down means weak breadth, a warning.
PCR high means bearish reading, low means bullish, with contrarian use at extremes.

Common mistakes in Other Theories: Elliott Wave, Fibonacci and Market Breadth

Saying the impulse phase has three waves and the corrective phase has five.
The numbers are easy to swap under pressure.
Fix: Think 5 moves forward with the trend, 3 moves back against it.
Believing wave 3 must always be the longest.
Textbooks say it is often the longest.
Fix: The rule is only that wave 3 is never the shortest of waves 1, 3 and 5.
Calling 50% a Fibonacci ratio.
It appears in every list of retracement levels.
Fix: Say it is a commonly used level, but the ratios 23.6, 38.2, 61.8 and 78.6 come from the Fibonacci series.
Measuring a retracement from the wrong points.
Students use the start of the chart instead of the latest swing.
Fix: Use the swing low and swing high of the specific move being retraced.
Reading a rising A-D line with a rising index as a warning.
Confusing confirmation with divergence.
Fix: Both rising confirms the trend. Only opposite directions signal divergence.
Treating PCR as bullish whenever it is high.
More puts sound like pessimism, so students stop there.
Fix: A high PCR shows bearish sentiment, but at extremes it can be a contrarian bullish signal. Follow the question's framing.

Worked examples

Example 1

A stock rises from ₹200 to ₹300. Using Fibonacci retracement levels, at what price would a 38.2% retracement be expected?

Show the solution

Move = 300 − 200 = ₹100.
Retracement amount = 100 × 0.382 = ₹38.20.
In an uptrend the pullback is measured down from the high: 300 − 38.20 = ₹261.80.

Answer: ₹261.80

Example 2

The Nifty makes a new high, but the advance-decline line has been falling for two weeks. What does breadth analysis suggest?

Show the solution

The index is rising while the A-D line falls, so they move in opposite directions.
This is a negative divergence.
It means fewer stocks are participating in the rally, so the advance is narrow.

Answer: The rally is narrow and weak. It is a warning that the uptrend may not last.

Exam tips

Memorise the 5-3 wave structure and the three Elliott rules as a set.
Expect a numeric Fibonacci question: compute the move first, then apply the ratio, then subtract from the high in an uptrend.
Watch for absolute words like 'always' in Elliott statements.
For breadth, ask only one thing: do the index and the indicator agree or diverge?
Negative marking applies, so skip only if you cannot remove two options.

Practice questions from Technical Analysis

Other Theories: Elliott Wave, Fibonacci and Market Breadth: frequently asked questions

What is the difference between impulse and corrective waves?

Impulse waves move in the direction of the main trend and number five. Corrective waves move against the trend and number three, labelled A, B and C.

Which Fibonacci retracement levels should I remember for NISM XV?

Remember 23.6%, 38.2%, 50%, 61.8% and 78.6%. The most watched are 38.2%, 50% and 61.8%.

What does the advance-decline line show?

It is a cumulative count of advancing stocks minus declining stocks. It shows how broad a market move is. A divergence from the index warns that the trend may be weak.

How is the put-call ratio used as a sentiment indicator?

It divides put activity by call activity. A high value reads as bearish sentiment and a low value as bullish. Many analysts treat extreme readings as contrarian signals.