[The following is taken from p.12-43 to 12-45 of Mastering Elliot Wave by Glenn Neely. (1990)]
This is a completely new conceptual discovery by the author which, for the first time, helps you overcome the problem of alternate counts. When you are working with price action, there are time periods when the Elliot pattern forming is clear and no reliable alternatives to the interpreation exist. At other times, numerious possibilities exist which can leave many analysts in a quandary.
As remarkable as it may sound, this state of confusion can be exploited to aid you in deciphering the market's position; if not specifically, at least generally. This involves a process I call "Reverse Logic." Plainly, the rule states: When more than one, perfectly acceptable wave intepretation is possible from the same data series, the market must be near the center of a Corrective or Impulsive pattern. The more possibilities that exist the closer the market is to the center of a large Elliot formation (wave-b of wave-b; wave-3 of wave-3 or wave-x of a Non-Standard Complex Correction).
How can the Reverse Logic Rule be used to advantage? Whenever the market reaches a point in which careful study reveals numerous possibilites, you should automatically assume the market is toward the middle of a pattern. This knowledge will allow you to eliminate all alternate intepretations which indecate a pattern is about to complete. If you keep only the intepretations which indicate the market is in wave-b, wave-3 or wave-x (the middle section of each type of Elliot pattern), usually only one intepretation will remain.
This rule has additional significance and use in trading. If you are waiting to enter a market, but there are numerous intepretations possible, to not trade until the possibilities decrease to one. Obviously, if there are too many possibilities the market is halfway through its move. Entering at that time eould mean more risk and less potential. The only way to take advantage of such a situation is to work with a trend following technique until the count start to become clear and the possibilities diminish to only one. Another beneficial aspects of this Rule occurs when you are already positioned in a market. If you entered the market when only one logical intepretation of wave pattern is possible and you are currently in profit, do not be scared out the the number of possibilities increases. That is just a sign that the market has a lot further to go before it can top or bottom out.
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