The Elliott Wave Principle
The Wave Principle is unparalleled in providing an overall perspective on the position of the market most of the time. Most important to individuals, portfolio managers and investment corporations
is that the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between
success and failure in financial affairs.
Despite the fact that many analysts do not treat it as such, the Wave Principle is by all means an objective study, or as Collins put it, "a disciplined form of technical analysis."
Bolton used to say that one of the hardest things he had to learn was to believe what he saw. If the analyst does not believe what he sees, he is likely to read into his analysis what he thinks
should be there for some other reason. At this point, his count becomes subjective. Subjective analysis is dangerous and destroys the value of any market approach. What the Wave Principle
provides is an objective means of assessing the relative probabilities of possible future paths for the market.
At any time, two or more valid wave interpretations are usually acceptable by the rules of the Wave Principle. The rules are highly specific and keep the number of valid alternatives to a minimum.
Among the valid alternatives, the analyst will generally regard as preferred the interpretation that satisfies the largest number of guidelines, and so on. As a result, competent analysts applying
the rules and guidelines of the Wave Principle objectively should usually agree on the order of probabilities for various possible outcomes at any particular time. That order can usually be stated
with certainty. Let no one assume, however, that certainty about the order of probabilities is the same as certainty about one specific outcome. Under only the rarest of circumstances does the
analyst ever know exactly what the market is going to do.
One must understand and accept that even an approach that can identify high odds for a fairly specific outcome will be wrong some of the time. Of course,
such a result is a far better performance
than any other approach to market forecasting provides. Using Elliott, it is often possible to make money even when you are in error. For instance, after
a minor low that you erroneously consider
of major importance, you may recognize at a higher level that the market is vulnerable again to new lows. A clear-cut three-wave rally following the minor
low rather than the necessary five gives
the signal, since a three-wave rally is the sign of an upward correction. Thus, what happens after the turning point often helps confirm or refute the assumed
status of the low or high, well in advance
Even if the market allows no such graceful exit, the Wave Principle still offers exceptional value. Most other approaches to market analysis, whether fundamental, technical or cyclical, have no good
way of forcing a change of opinion if you are wrong. The Wave Principle, in contrast, provides a built-in objective method for changing your mind. Since Elliott Wave analysis is based upon price
patterns, a pattern identified as having been completed is either over or it isn't. If the market changes direction, the analyst has caught the turn. If the market moves beyond what the apparently
completed pattern allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately. Investors using the Wave Principle can prepare themselves psychologically for such
outcomes through the continual updating of the second best interpretation, sometimes called the "alternate count."
Because applying the Wave Principle is an exercise in probability, the ongoing maintenance of alternative wave counts is an essential part of investing with it. In the event that the market violates
the expected scenario, the alternate count immediately becomes the investor's new preferred count. If you're thrown by your horse, it's useful to land right atop another. Of course, there are often
times when, despite a rigorous analysis, the question may arise as to how a developing move is to be counted, or perhaps classified as to degree.
When there is no clearly preferred interpretation, the analyst must wait until the count resolves itself, in other words, to "sweep it under the rug until the air clears," as Bolton suggested.
Almost always, subsequent moves will clarify the status of previous waves by revealing their position in the pattern of the next higher degree. When subsequent waves clarify the picture,
the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.
[ Source: The Elliott Wave Principle,1990 Frost & Prechter
When investors first discover the Wave Principle, they're often most impressed by its ability to predict
where a market will head next. And it is impressive. But its real power doesn't end
there. The Wave Principle
also gives you a method for identifying at what points a market is most likely to turn. And that, in turn, gives
you guidance as to where you migth enter and exit positions for the
highest probability of success.
Step 1: At its most basic level, wave analysis is simply the identification of patterns in market
The idea that market prices are patterned was intensely controversial just a few years ago. But no
Recent discoveries have confirmed that patterns exist in many natural systems - even systems that
previously appeared to be random. Examples include the weather, botany, geography and even human
physiology. Generally, these systems unfold in patterns of "punctuated growth" - that is, periods of
alternating rowth and non-growth, or even decline. The patterns then build on themselves to form similar
designs at a larger size, then the next size up, and so on.
This emerging science is called "fractal geometry."
It is one of the most exciting branches of Chaos Theory.
And it is precisely the model identified by R.N.Elliott some 60years ago in the financial
[ Source: The Elliott Wave Principle, 1990 Frost & Prechter
Source: Elliottwave International
The Basic Pattern
Elliott's patterns consists of "motive waves" and "corrective waves." A motive wave is composed of five
It moves in the same direction as the trend of the next larger size. A corrective wave is divided into three subwaves.
It moves against the trend of the next larger size. As Figure 1 shows, these basic patterns build to form five- and
three-wave structures of increasingly larger size (larger "degree," as Elliott said.)
Source: Elliottwave International
In the above illustration, waves 1,2,3,4 and 5 together complete a larger motive wave
sequence, labeled wave (1).
The structure of wave (1) tells us that the movement at the next larger degree of trend is also
It also warns us to expect a three-wave correction - in this case , a
downtrend. That correction, wave (2),
is followed by waves (3), (4) and (5) to complete a sequence of the next larger
degree, labeled as wave .
At that point, again, a three-wave correction of the same degree occurs, labeled as wave .
Note, that regardless of the size of the wave, each wave one peak leads to the same result - a wave two
Within a corrective wave, subwaves A and C are usually smaller-degree motive
waves. This means they too move
in the same direction as the next larger trend. Note that because they are
motive, they themselves are made up of
five subwaves. Waves labeled with a B, however, are corrective waves; they move in oppostion to the trend of
next larger degree. These corrective waves are themselves made up of three
subwaves. The analyst's first task is
to look at charts of market action and identify any completed five-wave and three-wave
structure. Only then can
he interpret where the market is and where it's likely to go. Say we're studying a market that has reached
the point shown in Figure 1 at wave . So far we've seen a five-wave move up, followed by a three-wave move
But this is not the only possible interpretation. It is also possible that wave  hasn't ended yet; it could develop
into a more complex three-wave structure before wave (3) gets underway. Another possibility is that the waves
labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger
downtrend. According to each of these interpretations though, the next imminent movement is likely to be upward.
This illustrates an important point concerning the Wave Principle. It does not provide certainty about any one market
outcome. Instead, it gives you an objective means of determining the probability of a future direction for the market.
At any time, two or more valid wave interpretations usually exist. So it's important for the investor to carefully assess
the probability of each interpretation. View the Wave Principle as your road map to the market and your investment
idea as a trip. You start the trip with a specific plan in mind, but conditions along the way may force you to alter
your course. Alternate counts are simply side roads that sometimes end up being the best path.
Elliott's highly specific rules keep the number of valid interpretations to a mininum. The analyst usually considers
as "prefered" the one that statisfies the largest number of guidelines. The top "alternate" is the one that satisfies
the next larger numbers of guidelines, and so on. Alternates are an essential part ot using the Wave Principle.
They are not "bad" or "rejected" wave interpretations. Rather, they are valid interpretations that are given lower
probability while the count works itself out. If the market doesn't follow the original prefered scenario, the top
alternate usually becomes the prefered. Elliott's rules give specific "make-or-break" levels for a given interpretation.
In figure 1 for example, if the move labeled wave (2) continues below the level of the beginning of wave (1), then
the originally prefered interpretation would be instantly invalidated .
Under the Wave Principle, every market decision is both produced by meaningful information and produces meaningful information.
Each transaction, while at once an effect, enters the fabric of the market and,
by communicating transactional data to investors, joins
the chain of causes of others' behavior. This feedback loop is
governed by man's social nature, and since he has such a nature,
the process generates forms. As the forms are repetitive, they
have predictive value. Sometimes the market appears to reflect outside
conditions and events, but at other times it is entirely detached from what most people assume are causal
conditions. The reason is that
the market has a law of its own. It is not propelled by the linear causality to which one becomes accustomed in the everyday experiences
of life. Nor is the market the cyclically rhythmic machine that some declare it to be. Nevertheless, its movement reflects a structured
formal progression. That progression unfolds in waves. Waves are patterns of directional movement.
More specifically, a wave is any
one of the patterns that naturally occur under the Wave Principle.
Source: The Elliott Wave Principle, 1990 Frost & Prechter
Source: Elliottwave International
The idea of wave personality is a
substantial expansion of the Wave Principle. It has the advantages of
bringing human behavior more personally into the equation
and even more important, of enhancing the utility of standard technical
The personality of each wave in the
Elliott sequence is an integral part of the reflection of the mass
psychology it embodies. The progression of mass emotions
from pessimism to optimism and back again tends to follow a similar path
each time around, producing similar circumstances at corresponding
points in the wave
structure. The personality of each wave type is usually manifest whether
the wave is of Grand Supercycle degree or Subminuette. These properties
not only forewarn
the analyst about what to expect in the next sequence but at times can
help determine one's present location in the progression of waves, when
for other reasons the
count is unclear or open to differing interpretations. As waves are in
the process of unfolding, there are times when several different wave
counts are perfectly admissible
under all known Elliott rules. It is at these junctures that a knowledge
of wave personality can be invaluable. If the analyst recognizes the
character of a single wave, he
can often correctly interpret the complexities of the larger pattern.
The following discussions relate to an underlying bull market picture,
as illustrated in Figures 2-14
and 2-15. These observations apply in reverse when the actionary waves
are downward and the reactionary waves are upward.
Source: Elliottwave International
The Five-Wave Pattern
In markets, progress ultimately takes the form of five waves of a specific structure.Waves (1), (3) and (5) actually effect the directional
Waves (2) and (4) are countertrend interruptions. The two interruptions are apparently a requisite for overall directional movement to
Elliott noted three consistent aspects of the five-wave form. They are: Wave two never moves beyond the start of wave one, wave three is never
the shortest wave, and wave four never enters the price territory of waves one. The stock market is always somewhere in the basic five-wave
pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are
subsumed by it.
The chart of the DJIA of October 13,2007 shows an example of a five-wave move. Note the difference in their subdivisions, which reflect the
two modes of wave development: motive and corrective. The two modes are fundamentally different in both their roles and
A motive wave, (also called a "five") has a five-wave structure. Its subwaves are denoted by numbers (in this case, 1, 2, 3, 4 and 5) Both the
five-wave pattern and its same-directional components, i.e. waves (1), (3) and (5) employ motive mode. Their structures are called
because they powerfully impel the market.
Source: Elliottwave International
1) First waves — As a rough estimate, about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other fifty percent of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced.
2) Second waves — Second waves often retrace so much of wave one that most of the advancement up to that time is eroded away by the time it ends. This is especially true of call option purchases, as premiums sink drastically in the environment of fear during second waves. At this point, investors are thoroughly convinced that the bear market is back to stay. Second waves often produce downside non-confirmations and Dow Theory "buy spots," when low volume and volatility indicate a drying up of selling pressure.
3) Third waves — Third waves are wonders to behold. They are strong and broad, and the trend at this point is unmistakable. Increasingly favorable fundamentals enter the picture as confidence returns. Third waves usually generate the greatest volume and price movement and are most often the extended wave in a series. It follows, of course, that the third wave of a third wave, and so on, will be the most volatile point of strength in any wave sequence. Such points invariably produce breakouts, "continuation" gaps, volume expansions, exceptional breadth, major Dow Theory trend confirmations and runaway price movement, creating large hourly, daily, weekly, monthly or yearly gains in the market, depending on the degree of the wave. Virtually all stocks participate in third waves. Besides the personality of "B" waves, that of third waves produces the most valuable clues to the wave count as it unfolds.
4) Fourth waves — Fourth waves are predictable in both depth (see Lesson 11) and form, because by alternation they should differ from the previous second wave of the same degree.
More often than not they trend sideways, building the base for the final fifth wave move. Lagging stocks build their tops and begin declining during this wave, since only the strength of a third wave
was able to generate any motion in them in the first place. This initial deterioration in the market sets the stage for non-confirmations and subtle signs of weakness during the fifth wave.
5) Fifth waves — Fifth waves in stocks are always less dynamic than third waves in terms of breadth. They usually display a slower maximum speed of price change as well, although if a fifth wave
is an extension, speed of price change in the third of the fifth can exceed that of the third wave. Similarly, while it is common for volume to increase through successive impulse waves at Cycle degree
or larger, it usually happens below Primary degree only if the fifth wave extends. Otherwise, look for lesser volume as a rule in a fifth wave as opposed to the third. Market dabblers sometimes call for "blowoffs" at the end of long trends, but the stock market has no history of reaching maximum acceleration at a peak. Even if a fifth wave extends, the fifth of the fifth will lack the dynamism of what preceded it. During fifth advancing waves, optimism runs extremely high, despite a narrowing of breadth. Nevertheless, market action does improve relative to prior corrective wave rallies. For example, the year-end rally in 1976 was unexciting in the Dow, but it was nevertheless a motive wave as opposed to the preceding corrective wave advances in April, July and September, which, by contrast, had even less influence on the secondary indexes and the cumulative advance-decline line. As a monument to the optimism that fifth waves can produce, the market forecasting services polled two weeks after the conclusion of that rally turned in the lowest percentage of "bears," 4.5%, in the history of the recorded figures despite that fifth wave's failure to make a new high!
Source: Elliottwave International
Five Waves Structures
Source: Elliottwave International
Ralph Nelson Elliott
Ralph Nelson Elliott was of that rarest of breeds, a true scholar in the practical world of finance. Financial analyst Hamilton Bolton accurately
described the enormity of Elliott's feat when he said that "he developed his principle into a rational method of stock market analysis on a scale
never before attempted." Brilliant and persistent, Elliott reached his ultimate achievement late in life by a circuitous route that included fortune
in the disguise of disaster.
Elliott was born on July 28, 1871 in Marysville, Kansas, and later moved to San Antonio, Texas. Around 1896, he entered the accounting field,
and for twenty-five years held executive positions primarily with railroad companies in Mexico and Central America. By rescuing numerous
companies from financial difficulty, Elliott earned a reputation as an expert business organizer. Finally, in early 1920, he moved to New York City.
Elliott’s specialty made him the perfect choice for one of the U.S. government’s international projects. In 1924, the U.S. State Department chose
him to become the Chief Accountant for Nicaragua, which was under the control of the U.S. Marines at the time. In February 1925, Elliott began
applying his experience in corporate reorganization to reorganizing the finances of an entire country. When the U.S. extricated itself from
Nicaragua, Elliott moved to Guatemala City to assume another corporate executive position: general auditor of the International Railway of Central
America. During this time, Elliott wrote two books: Tea Room and Cafeteria Management, published in August 1926 by Little, Brown & Company,
and The Future of Latin America, an analysis of the economic and social problems of Latin America and a proposal for creating economic stability
and lasting prosperity in the region.
With one book sold and the second one under consideration, Elliott decided to return to the United States to set up an independent management
consulting business. It was around this time that he began to feel the symptoms of an alimentary tract illness caused by the organism amoeba
histolytica that he contracted Central America.
Elliott's reputation, built upon a distinguished career, his new book, and a long list of references, was soaring. Book reviews were favorable, he was
in demand as a speaker, and his consulting business was beginning to grow. Just when Elliott's future appeared its brightest, however, his illness
suddenly worsened. By 1929, it had developed into a debilitating case of pernicious anemia, leaving him bedridden. The adventurous and productive
R.N. Elliott was forced into an unwanted retirement at the age of 58. Several times over the next five years, he came extremely close to death.Elliott
needed something to occupy his mind while recuperating between the worst attacks of his illness. It was around this time that he turned his full
attention to studying the behavior
of the stock market.
Investigating the possibility of form in the marketplace, Elliott examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various
indexes covering 75 years of stock market behavior. In doing so, he was fulfilling a mission that he had enunciated for all responsible men in his
manuscript on Latin America: "There is a reason for everything, and it is [one's] duty to try to discover it."
In May 1934, two months after his final brush with death, Elliott's observations of stock market behavior began coming together into a general set
of principles that applied to all degrees of wave movement in the stock price averages. Today's scientific term for a large part of Elliott's observation
about markets is that they are "fractal," coming under the umbrella of chaos science, although he went further in actually describing the component
patterns and how they linked together. The former expert organizer of businesses had uncovered, through meticulous study, the organizational principle
behind the movement of markets. As he got more proficient in the application of his principles and corrected initial errors in their formulation, their accuracy
began to amaze him. By November 1934, R.N. Elliott's confidence in his ideas had developed to the point that he decided to present them to at least one
member of the financial community: Charles J. Collins of Investment Counsel, Inc. in Detroit.
Collins had traditionally put off the numerous correspondents who offered him systems for beating the market by asking them to forecast the market for awhile,
assuming that any truly worthwhile system would stand out when applied in current time. Not surprisingly, the vast majority of these systems proved to be
dismal failures. Elliott's principle, however, was another story.
The Dow Jones averages had been declining throughout early 1935, and Elliott had pinpointed hourly turns by telegram with a fair degree of accuracy. In the
second week of February, the Dow Jones Rail Average, as Elliott had previously predicted, broke below its 1934 low of 33.19. Advisors were turning negative
and memories of the 1929-32 crash were immediately rekindled as bearish pronouncements about the future course of the economy proliferated.
The Dow Industrials had fallen about 11% and were approaching the 96 level while the Rails (a more important average then) had fallen 50% from their 1933
peak to the 27 level.On Wednesday, March 13, 1935, just after the close of trading, with the Dow Jones averages finishing near the lows for the day, Elliott
sent a telegram to Collins and flatly stated the following:
Source: Elliottwave International
"NOTWITHSTANDING BEARISH (DOW) IMPLICATIONS ALL AVERAGES ARE MAKING FINAL BOTTOM."
Collins read the telegram on the morning of the next day, Thursday, March 14, 1935, the day of the closing low for the Dow Industrials that year.
The day prior
to the telegram, Tuesday, March 12, marked the 1935 closing low for the Dow Jones Rails. The thirteen month “correction” was over, and the market immediately
turned to the upside.Two months later, as the market continued on its upward climb, Collins, "impressed by [Elliott's] dogmatism and accuracy," agreed
to collaborate on a book on the Wave Principle suitable for public distribution. The Wave Principle was published on August 31, 1938. The first chapter makes
the following statements:
No truth meets more general acceptance than that the universe is ruled by law. Without law, it is self-evident there would be chaos, and where chaos is, nothing is....
Very extensive research in connection with... human activities indicates that practically all developments which result from our social-economic processes follow
a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern...
The stock market illustrates the wave impulse common to social-economic activity... It has its law, just as is true of other things throughout the universe.
Within weeks after the publication of his ground-breaking book, Elliott packed up his belongings and moved to an apartment hotel in Columbia Heights, Brooklyn,
a short subway stop from Manhattan's financial district. On November 10, he published the first in a long series of Interpretive Letters that analyzed and forecasted
the path of the stock market. Ralph Elliott was finally back in the saddle, and as independently in business as he had planned eleven years before. In early 1939,
Elliott was commissioned to write twelve articles on the Wave Principle for Financial World magazine. These articles established Elliott's reputation with the investment
community, and led to his publishing a series of "Educational Bulletins." One of these was a ground-breaking work that lifted the Wave Principle from a comprehensive
catalog of the market's behavioral patterns to a broad theory of collective human behavior that was new to the fields of economics and sociology. By the early 1940s,
Elliott had fully developed his concept that the ebb and flow of human emotions and activities follow a natural progression governed by laws of nature. He tied the patterns
of collective human behavior to the Fibonacci, or "golden" ratio, a mathematical phenomenon known for millennia by mathematicians, scientists, artists, architects and
philosophers as one of nature's ubiquitous laws of form and progress.
Elliott then put together what he considered his definitive work, Nature's Law -- The Secret of the Universe. This rather grandly titled monograph, which Elliott published
at age 75, includes almost every thought he had concerning the theory of the Wave Principle. The book was published June 10, 1946, and the reported 1000 copies sold
out quickly to various members of the New York financial community. Less than two years before his death, Elliott had finally made his mark upon
As a result of Elliott’s pioneering research, today, thousands of institutional portfolio managers, traders and private investors use the Wave Principle in their investment
decision making. Ralph Elliott undoubtedly would be gratified to see it.
This article was excerpted from a detailed 64-page biography in R.N. Elliott's Masterworks (New Classics Library, 1994).
This book contains all of R.N. Elliott’s books and articles, plus highlights from his market letters.
Source: Elliottwave International
The Elliott Wave Principle
In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets
and observed that certain patterns repeat themselves. He offered evidence
of his discovery by making a number of accurate
stock market forecasts. What appears random and unrelated, Elliott said, is actually tracing out a recognizable pattern once
you learn what to look for. Elliott called his discovery "The Wave Principle,"
and its implications were huge.
He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics
to popular culture.
Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976
when he located copies of R.N. Elliott's books in the
New York Public Library. Robert Prechter, Jr. and A.J. Frost
published Elliott Wave Principle in 1978. The book received enthusiastic
reviews and became a Wall Street bestseller.
In the late 1970s, gloom was pervasive, but in Elliott Wave Principle, Prechter and Frost called for a roaring bull market
akin to that of the 1920s, to be followed by a record bear market. As the stock market rose, knowledge of the Wave Principle
among private and professional investors grew
When investors and traders first discover the Elliott Wave Principle, there are several reactions:
Disbelief that markets are patterned and largely predictable. Joy at having found a “crystal ball” to foretell the future .
And finally the correct, and useful response – “Wow, here is a valuable model I should learn to use.”
Just like any system in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured,
because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal
patterns in botany, geography, physiology and the things humans create, such as roads, residential subdivisions…
and - as recent discoveries have confirmed – in market prices.
The first step in Elliott wave analysis is to identify patterns in market prices. At their core, wave patterns are simple; there
are only two types: “impulse waves,” and “corrective
Impulse waves are composed of five subwaves (labeled as 1, 2, 3, 4, 5) and move in the same direction as the trend of the
larger size. Impulse waves are so named because they powerfully impel the market.
A corrective wave follows, composed of three subwaves (labeled as a, b, c), and it moves against the trend of the next larger
size. Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding
impulse wave. As the figure above shows, one complete Elliott wave consists of eight waves and two phases: five-wave
impulse phase, whose subwaves are denoted by numbers, and the three-wave corrective phase, whose subwaves are
denoted by letters.
R.N. Elliott was not an ivory tower theorist. He set out to observe and then describe how the market actually behaves.
Later he realized that his model had an important theme of self-similarity and a relationship to nature. There are a number
variations on the underlying pattern, which Elliott meticulously described and illustrated.
He also noted the important fact that each
pattern has identifiable certainties as well as tendencies. From these observations,
he was able to formulate numerous rules and
guidelines for proper wave identification. A thorough knowledge of such
details is helpful in understanding what a market can do,
and at least as important, what it will not do.
You have just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education
Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle
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There are two modes of wave development: motive and corrective. Motive waves have a five-wave structure, while corrective waves
have a three-wave structure or a variation thereof. Motive modeis employed by both the five-wave pattern and its same-directional
components, i.e. waves 1, 3 and 5. Their structures are called "motive" because they powerfully impel the
market. Corrective mode
is employed by all countertrend interruptions, which include waves 2 and 4. Their structures are called "corrective" because they
can accomplish only a partial retracement, or "correction," of the progress achieved by any preceding motive wave. Thus, the two
modes are fundamentally different, both in their roles and in their construction. The five-wave motive phase has subwaves denoted
by numbers, and the three-wave corrective phase has subwaves are denoted by letters . Every motive wave is followed by a correctiv
e wave. Just a wave 2 corrects wave 1, the sequence a-b-c corrects the sequence ,1,2,3,4 and 5.
In summary, the essential underlying tendency of the Wave Principle is that action in the same direction as the one larger trend
develops in five waves, while reaction against the one larger trend develops in three waves, at all degree of
The Wave Principle would be simple to apply if the basic theme described above were the complete description of market
However, the real world, fortunately or unfortunately, is not so simple. Cycle waves subdivide into Primary waves that subdivide into
Intermediate waves that in turn subdivide into Minor and Sub-Minor waves. It is important to understand that these labels refer to
specifically identifiable degrees of waves. By using this nomenclature, the analyst can identify precisely the position of a wave in the
overall progression of the market, much as longitude and latitude are used to identify a geographical location. To say, "the Dow Jones
Industrial Average is in Minute wave v of Minor wave 1 of Intermediate wave (3) of Primary wave  of Cylce wave I of Supercycle
wave (V) of the current Grand Supercycle" is to identify a specific point along the progression of market
Source: Elliottwave International
Depth of Corrective Waves
No market approach other than Elliott gives as satisfactory an answer to the
" How far down can a bear market be expected to go?"
The answer to this quesstion alone
is of sufficient importance to entitle Elliott to a special place in market
analysis, as only
the Wave Principle
can tell the investor what reasonable to expect. The guideline is that
corrections, especially when they themselves are fourth waves, tend
to register their maximum retracement within the span of the travel of the previous fourth
wave correction of one lesser degree, most
commonly near the level of its terminus. (EWP , 1990 Frost & Prechter jr., p.57-58)
Linear Extrapolation: "Predicting" the Present
Trend extrapolation is the crudest form of technical analysis, and it is employed by nearly all conventional analysts, thought they rarely realize it.
Mainstream social and economic forecasting has forever been a practice of extrapolating present and recent conditions and trends into the future.
More specifically, apparent predictions are simply description of present conditions multiplied by unconsciously calculated moving averages of the
trends of those conditions. Obviously, in a changing world, this approach is doomed to fail. Because of this practice, both economists and futurists
in general have always been notoriously optimistic at tops and pessimistic at bottoms, producing highly inaccurate forecasts
of coming events. (HSB p. 371, 1999, Prechter jr.)
The idea of wave personality is a substantial expansion of the Wave
Principle. It has the advantages of bringing human behavior more personally into
the equation and even more important, of enhancing the utility of standard technical
analysis. The personality of each wave in the Elliott sequence is an
integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends
to follow a similar path each time around, producing similar circumstances at corresponding points in the wave
structure. The personality of each wave
type is usually manifest whether the wave is of Grand Supercycle degree or
Subminuette. These properties not only forewarn the analyst about what to
expect in the next sequence but at times can help determine one's present location in the progression of
waves, when for other reasons the count is unclear
or open to differing interpretations. As waves are in the process of
unfolding, there are times when several different wave counts are perfectly admissible
under all known Elliott rules. It is at these junctures that a knowledge of wave personality can be
If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger
pattern. The following discussions relate
to an underlying bull market picture, as illustrated in Figures 2-14 and 2-15. These observations apply in reverse when the actionary waves are downward
and the reactionary waves are upward.
Self-Similarity and Degree
When the motive wave ends (Figure 3), a corrective wave of corresponding size
follows, so that overall, the result looks like on the chart of March 20,2012.
[Please note, this is a 10-minute chart.] Observe that the overall form of figure 1
is the same as that of its own subwaves (1) and (2), as in figure 2. The only
difference is that figure 1 represents a pattern of one degree (i.e., relative
larger than the waves of which it is composed. The word "degree" has a specific
meaning and does not mean
Component waves vary in
size, but it always takes a certain number of them to create a wave of the next higher
degree. Thus, each degree is identifiable
its relationship to higher and lower degrees. As figure 1
illustrates, then, each same-direction component of a motive wave
(i.e., wave one, three or five) and each
full-cycle component (i.e., waves one + two, or waves three + four) of a complete cycle is a smaller version of
itself. In figure 2, each subwave 1, 3 or 5 is a motive
wave that must subdivide into a "five", and each subwave 2 and 4 is a corrective wave that must subdivide into
a "three". Waves 1 and 2 if examined under a
"microscope", would take the
same form as waves (1) and (2) and in further detail, wave [1 and 2] .
Regardless of degree, the form is constant.
We can use Figure 1-3 to illustrate two waves, eight waves or
thirty four waves, depending upon the degree to which we are refering.
"This Time It's Different"
At market turns, the most naive people say, "This time is different." Long time stock market watchers have often
commented, "It's never different."
Obviously I sympathize more with the latter view than the former, as long as the degree of the trend and turn are
However, there is in fact a basis for saying "This time it's different" that ultimately pertains to the degree of the turn. Compared to previous bull markets of the past
fifty years, this one, because it marks the end of a trend at least two degrees larger than the others during this time, is different. The real
question, even if you do not
know anything about the Wave Principle, is how do you interpret that fact?
The fast majority of analysts today improperly interpret the difference as
bullish. Sentiment indicators have been crying "wolf" for a
while, so the majority of
professionals believes that the indicators should therefore be ignored. "Stock prices have been historically high relative to dividends and book value for eight years
now, and the market hasn't fallen, so the indiator must be irrelevant."
"There has been no bear market for eight years, so the likelihood of one occurring continues to
"The momentum indicators have given several sell signals over the course of the past eight
years, and none of them have been right. They obviously don't work."
Are these sensible conclusions? Hardly. If it suddenly looks like rain, you take your
umbrella, right? If it spends all day getting darker and more threatening, do
you conclude therefore that rain is unlikely? Do you throw out your umbrella and dress for
Or do you head for a storm
shelter? Multiple signals are not evidence of ineffectiveness; they convey a higher-degree
message. Bearish indicators readings are
extending because what is being created is the most negative technical condition in 275 years . It might be said that the indicators were crying
"wolf" in 1987,
they yelled "grizzly" in 1989, and today are shouting
"Gozilla!" When the market is building a Grand Supercycle
top, such conditions are normal.
The longer that bearish factors remain in place, the greater is their ultimate
from Elliottwave International:
The Fibonacci Sequence: New Research Surprises Scientists
Fibonacci ratios appear throughout nature
by Bob Stokes
Updated: February 10, 2014
The structure of the DNA molecule, the shape of galaxies, financial markets and even the creative peak of Picasso all appear to share something in common -- namely,
the Fibonacci ratio.
The Fibonacci sequence begins with 0 and 1, and each subsequent number is the sum of the previous two: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55 and so on.
Elliott Wave Principle: Key to Market Behavior observes:
After the first several numbers in the sequence, the ratio of any number to the next higher is approximately .618 to 1 and to the next lower number approximately 1.618 to 1.
The further along the sequence, the closer the ratio approaches phi ...
Phi (1.618 or .618) is also known as the Golden Ratio.
The Wave Principle of Human Social Behavior also says, "The DNA molecule...spirals in Fibonacci proportion."
Now, new research shows that human creativity itself may reflect the Fibonacci ratio.
Academics who have studied the works of 200 of the world's most famous artists have calculated that they created their best art at a little before two thirds -- 0.6198 to be
precise -- through their lifespan.
The scientists were surprised that the figure is nearly identical to the so-called "golden ratio" or Fibonacci code -- 0.6180 -- which has long been associated with optimal
proportions in science and art.
Sunday Financial Times, Jan. 5, 2014
Fibonacci proportions also show up in financial markets. In the August 1999 Elliott Wave Theorist, Robert Prechter remarked:
Stock market analyst Robert Rhea undertook a statistical study of bull and bear markets between from 1896 to 1932. He knew nothing of Fibonacci. ... To generalize his
findings, the stock market on average advances by 1s and retreats by .618s ... ."
Along with phi, the market's trends and turns include other Fibonacci-related ratios.
In the December 2013 Elliott Wave Theorist, we showed Fibonacci at work in a chart of the digital currency
(Source: Elliottwave International]
Fibonacci in Nature: The Golden Ratio and the Golden Spiral
The more you learn about Fibonacci, the more amazed you will be at its importance
Elliott Wave International
If you've studied the financial
markets, even for a short time, you've probably heard the term
"Fibonacci numbers." The ratios and relationships derived from
this mathematical sequence are applied to the markets to help determine
targets and retracement levels.
Did you know that Fibonacci
numbers are found in nature as well? In fact, we can see examples of the
Fibonacci sequence all around us, from the ebb and flow of ocean tides
to the shape of a seashell. Even our human bodies are examples of
Fibonacci. Read more about the fascinating phenomenon of Fibonacci in
Let's start with a refresher on Fibonacci numbers. If we start at 0
and then go to the next whole integer number, which is 1, and add 0 to
1, that gives us the second 1. If we then take that number 1 and add it
again to the previous number, which is of course 1, we have 1 plus 1
equals 2. If we add 2 to its previous number of 1, then 1 plus 2 gives
us 3, and so on. 2 plus 3 gives us 5, and we can do this all the way to
infinity. This series of numbers, and the way we arrive at these numbers,
is called the Fibonacci sequence. We refer to
a series of numbers derived this way as Fibonacci numbers.
We can go back to the beginning and divide one number by its adjacent
number - so 1÷1 is 1.0, 1÷2 is .5, 2÷3 is .667, and so on. If we keep
doing that all the way to infinity, that ratio approaches the number
.618. This is called the Golden Ratio, represented by the Greek letter phi
(pronounced "fie"). It is an irrational number, which means
that it cannot be represented by a fraction of whole integers. The
inverse of .618 is 1.618. So, in other words, if we carry the series
forward and take the inverse of each of these numbers, that ratio also
approaches 1.618. The Golden Ratio, .618, is the only number that will
also be equal to its inverse when added to 1. So, in other words, 1 plus
.618 is 1.618, and the inverse of .618 is also 1.618.
This is a diagram of the Golden Spiral. The Golden Spiral is a type
of logarithmic spiral that is made up of a number of Fibonacci
relationships, or more specifically, a number of Golden Ratios. For
example, if we take a specific arc and divide it by its diameter, that
will also give us the Golden Ratio 1.618. We can take, for example, arc
WY and divide it by its diameter of WY. That produces the multiple
1.618. Certain arcs are also related by the ratio of 1.618. If we take
the arc XY and divide that by arc WX, we get 1.618. If we take radius 1
(r1), compare it with the next radius of an arc that's at a
90° angle with r1, which is r2, and divide r2
by r1, we also get 1.618.
Now here are some pictures of this Golden Spiral in various aspects
of nature. For example, on the left is a whirlpool that displays the
Golden Spiral and, therefore, these Fibonacci mathematical properties.
We also see the Golden Spiral in the formation of hurricanes (center)
and in the chambered nautilus shell (right), which also happens to be a
common background that Elliott Wave International uses for a number of
its presentations and graphics.
We can also see the Golden Ratio in the DNA molecule. Research has
shown that if you look at the height of the DNA molecule relative to its
length, it is in the proportion of .618:1. If we look at the components
of the DNA molecule, there is a major groove in the left section and a
minor groove in the right section. The major groove is equal to .618 of
the entire length of the DNA molecule, and the minor groove is equal to
.382 of the entire length.
This graphic of the human body also shows how the Golden Ratio exists
in certain relationships of the human anatomy.
(Source: Elliottwave International]
Glossary of Elliott Wave Principle Terms
Alternation (guideline of) - If wave two is a sharp
correction, wave four will usually be a sideways correction, and vice
Apex - Intersection of the two boundary lines of a contracting
Corrective Wave - A three-wave pattern, or combination of three wave
patterns, that moves in the opposite direction of the trend
of one larger degree.
Diagonal Triangle (Ending) - A wedge-shaped pattern containing overlap that occurs only in fifth or C
waves. Subdivides 3-3-3-3-3.
Diagonal Triangle (Leading) - A wedge-shaped pattern containing overlap that occurs only in first or A
waves. Subdivides 5-3-5-3-5.
Double Three - Combination of two simple sideways corrective
patterns, labeled W and Y, separated by a corrective wave labeled X.
Double Zigzag - Combination of two zigzags, labeled W and Y, separated by a corrective wave labeled X.
Equality (guideline of) - In a five-wave sequence, when wave three is the
longest, waves five and one tend to be equal in price length.
Expanded Flat - Flat correction in which wave B enters new price territory relative to the preceding impulse wave.
Failure - See Truncated Fifth.
Flat - Sideways correction labeled A-B-C. Subdivides 3-3-5.
Impulse Wave - A five-wave pattern that subdivides 5-3-5-3-5 and contains no
Impulsive Wave - A five-wave pattern that makes progress, i.e., any impulse or diagonal
Irregular Flat - See Expanded Flat.
One-two, one-two - The initial development in a five-wave
pattern, just prior to acceleration at the center of wave three.
Overlap - The entrance by wave four into the price territory of wave
one. Not permitted in impulse waves.
Previous Fourth Wave - The fourth wave within the preceding impulse wave of the same
degree. Corrective patterns typically terminate
in this area.
Sharp Correction - Any corrective pattern that does not contain a price extreme meeting or exceeding that of the ending level of the prior
impulse wave; alternates with sideways correction.
Sideways Correction - Any corrective pattern that contains a price extreme meeting or exceeding that of the prior impulse wave;
alternates with sharp correction.
Third of a Third - Powerful middle section within an impulse wave.
Thrust - Impulsive wave following completion of a triangle.
Triangle (contracting, barrier) - Corrective pattern, subdividing 3-3-3-3-3 and labeled A-B-C-D-E. Occurs as a
fourth, B, X (in sharp correction
only) or Y wave. Trendlines converge as pattern progresses.
Triangle (expanding) - Same as other triangles, but trendlines diverge as pattern
Triple Three - Combination of three simple sideways corrective patterns labeled W, Y and Z, each separated by a corrective wave labeled X.
Triple Zigzag - Combination of three zigzags, labeled W, Y and Z, each separated by a corrective wave labeled X.
Truncated Fifth - The fifth wave in an impulsive pattern that fails to exceed the price
extreme of the third wave.
Zigzag - Sharp correction, labeled A-B-C. Subdivides 5-3-5