Truncation
A truncation happens when Wave 5 fails to surpass the end of Wave 3. The five sub-waves of Wave 5 are all there, but the pattern falls short of making a new high (in a bull market) or new low (in a bear market). Truncations are rare and they carry a strong message. They occur after an exceptionally powerful Wave 3 that exhausts the trend's energy. When you see a truncation, it means the market has nothing left. The reversal that follows is usually sharp and significant. You spot a truncation by counting five sub-waves in Wave 5 that complete below Wave 3's extreme. Some analysts call this a "failure" or "truncated fifth." Do not confuse it with an incomplete wave. A truncation has a full five-wave structure. It just could not push past Wave 3. Always confirm with momentum indicators, which typically show heavy divergence between Wave 3 and the truncated Wave 5.
The Dow Jones rallies in an impulse. Wave 3 tops at 35,000 with massive momentum. Wave 4 corrects to 33,500. Wave 5 begins but only reaches 34,800, subdividing into five clear sub-waves on the hourly chart. The RSI shows extreme divergence, with Wave 3's RSI at 82 and Wave 5's RSI at 55. The truncation at 34,800, below Wave 3's 35,000 high, signals the bull market is exhausted. The subsequent decline is sharp, dropping 3,000 points in weeks.