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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 
of danger.

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 jr.]

 

 

The Concept

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 prices. 
The idea that market prices are patterned was intensely controversial just a few years ago. But no longer. 

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 markets. 

[ Source: The Elliott Wave Principle, 1990 Frost & Prechter jr.]


Source: Elliottwave International





The Basic Pattern

Elliott's patterns consists of "motive waves" and "corrective waves." A motive wave is composed of five subwaves.
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 upward. 
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 [1].  
At that point, again, a three-wave correction of the same degree occurs, labeled as wave [2]. 

Note, that regardless of the size of the wave, each wave one peak leads to the same result - a wave two correction.
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 the 
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 [2]. So far we've seen a five-wave move up, followed by a three-wave move 
down. 

But this is not the only possible interpretation. It is also possible that wave [2] 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 Jr.

Source: Elliottwave International

 

 

 

 

 

 

 

 

Wave personality

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 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 movement. 
Waves (2) and (4) are countertrend interruptions. The two interruptions are apparently a requisite for overall directional movement to occur. 

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 constructions. 
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 "motive" 
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

 

 

FiveWaves


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 history. 
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 dramatically.

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 waves.”

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 
next  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 
of specific  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 
end here.  

Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle 
and learn how to use this valuable tool in your own trading and investing.

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Source: Elliottwave International

 

 

 

 


Wave Mode

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 trend. 

The Wave Principle would be simple to apply if the basic theme described above were the complete description of market behavior. 
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 [5] of Cylce wave I of Supercycle
wave (V) of the current Grand Supercycle" is to identify a specific point along the progression of market history. 


Source: Elliottwave International


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Corrections

 

Zigzag

 

 

 


 

Zigzags, Elliott Wave Principle (Frost & Prechter Jr., 1990, p.35)

A zigzag in a bull market is a simple three-wave declining pattern labeled A-B-C.
It subdivides into a 5-3-5 affair with the top of wave B noticeably lower than the start 
of wave A. In a bear market, an A-B-C zigzag correction will take place in the 
opposite direction. For this reason, a zigzag in a bear market is often referred to an
inverted zigzag. 

 

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Flat

 

 

 

 

 

 

Flat, Elliott Wave Principle (Frost & Prechter Jr., 1990, p.37)

 

A flat correction differs from a zigzag in that the subwave sequence is a 3-3-5
affair. Since the first decline, wave A, lacks sufficient downward force to unfold
into a full five waves as it does in a zigzag, the B wave seems to inherit this lack
of countertrend pressure and, not surprisingly, terminates near the start of wave A.
Wave C, in turn, generally terminates just slightly beyond the end of wave A rather
than significantly beyond as in zigzags. 

 

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Expanded Flat

 

 

 

 

 

 

Expanded Flat, Elliott Wave Principle (Frost & Prechter Jr., 1990, p.38)

 

Flats can be what we call "expanded,"  and contain a price extreme beyond that 
of the preceding impulse wave. Elliott called this variation an "irregular"  flat,
although the word is inappropriate as they are actually more common than 
"regular"  flats.  

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Combinations

 

 

 


 

Double Threes and Triple Threes, Elliott Wave Principle (Frost & Prechter Jr., 1990, p.44)

 

 

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Ending Diagonal Triangle

 

 

 

 

 

Diagonal Triangle - Elliott Wave Principle (Frost & Prechter Jr., 1990, p.31)

 

 

 

 

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Depth of Corrective Waves 

No market approach other than Elliott gives as satisfactory an answer to the question, " 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.) 




Wave Personality

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 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. 

 

 

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 size) larger than the waves of which it is composed. The word "degree" has a specific
meaning and does not mean "scale". 

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 in terms
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 comparable. 

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 diminish." 

"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 sunshine? 

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 import.

 

 

 




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 bitcoin.

(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

By 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 nature.

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 versa.

Apex - Intersection of the two boundary lines of a contracting triangle.

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 overlap.

Impulsive Wave - A five-wave pattern that makes progress, i.e., any impulse or diagonal triangle.

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 progresses.

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

 

 

 

 

 

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