Expanded Flat
An expanded flat is the most common type of flat correction and one you'll encounter frequently in Wave 4 positions. The structure is 3-3-5: Wave A subdivides into three waves, Wave B also subdivides into three waves but exceeds the start of Wave A (making a new high in an uptrend correction), and Wave C is a five-wave impulse that drops well beyond Wave A's endpoint. The fact that Wave B makes a new extreme is what makes it "expanded" and what makes it so deceptive. During Wave B, traders think the trend has resumed. Volume picks up, sentiment turns bullish again, and it looks like the correction is over. Then Wave C drops hard and fast, often reaching 138.2% to 161.8% of the Wave A distance. This shakeout traps the Wave B buyers and creates excellent entry points for the next motive wave. Recognizing an expanded flat in progress, particularly after Wave B exceeds the prior high and the reversal begins, gives you a high-probability short-term trade on Wave C and a chance to position for the larger trend resumption once C completes.
In a bull market, Wave 4 corrects as an expanded flat. Wave A drops from $100 to $90. Wave B rallies back to $103, exceeding the start of Wave A and fooling traders into thinking Wave 5 has begun. Then Wave C crashes to $82, which is 161.8% of Wave A's $10 range measured from Wave B's high. The $82 level becomes an excellent entry for the real Wave 5 advance.