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A CAPSULE SUMMARY OF THE WAVE PRINCIPLE
The Wave Principle is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends
and reverses in recognizable patterns
...
He
named, defined and illustrated those patterns
...
In a nutshell, then, the Wave Principle is a
catalog of price patterns and an explanation of where these forms are likely to occur in the
overall path of market development
...
Some such systems
undergo "punctuated growth," that is, periods of growth alternating with phases of nongrowth or decline, building fractally into similar patterns of increasing size
...
N
...

The basic pattern Elliott described consists of impulsive waves (denoted by numbers) and
corrective waves (denoted by letters)
...
A corrective wave is
composed of three subwaves and moves against the trend of the next larger size
...

In Figure 1, the first small sequence is an impulsive wave ending at the peak labeled 1
...
It also signals the start
of a three-wave corrective sequence, labeled wave 2
...
Exactly as with
wave 1, the impulsive structure of wave (1) tells us that the movement at the next larger
degree is upward and signals the start of a three-wave corrective downtrend of the same
degree as wave (1)
...
Once again, a
three-wave correction of the same degree occurs, labeled wave [2]
...
Waves come in
degrees, the smaller being the building blocks of the larger
...

Within a corrective wave, waves A and C may be smaller-degree impulsive waves, consisting
of five subwaves
...
e
...
Wave B, however, is always a corrective wave,
consisting of three subwaves, because it moves against the larger downtrend
...
Most impulsive waves unfold between parallel lines except for fifth
waves, which occasionally unfold between converging lines in a form called a "diagonal
triangle
...
" Waves two and four typically "alternate" in that they take
different forms
...
If indeed markets are patterned, and if those
patterns have a recognizable geometry, then regardless of the variations allowed, certain
relationships in extent and duration are likely to recur
...
The most common and therefore reliable wave relationships are discussed in

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Elliott Wave Principle, by A
...
Frost and Robert Prechter
...
The Elliott Wave
Principle is especially well suited to these functions
...
At any time, two or
more valid wave interpretations are usually acceptable by the rules of the Wave Principle
...
Among the
valid alternatives, the analyst will generally regard as preferred the interpretation that satisfies
the largest number of guidelines and will accord top alternate status to the interpretation
satisfying the next largest number of guidelines, and so on
...
They are not "bad" or rejected wave
interpretations
...
They are an essential aspect of investing with the Wave Principle,
because in the event that the market fails to follow the preferred scenario, the top alternate
count becomes the investor's backup plan
...
), an additive sequence that
nature employs in many processes of growth and decay, expansion and contraction, progress
and regress
...

What the Wave Principle says, then, is that mankind's progress (of which the stock market is a
popularly determined valuation) does not occur in a straight line, does not occur randomly,
and does not occur cyclically
...
As a corollary, the Wave Principle reveals that
periods of setback in fact are a requisite for social (and perhaps even individual) progress
...
Since the Wave Principle reflects
social mood change, it has not been surprising to discover, with preliminary data, that the
trends of popular culture that also reflect mood change move in concert with the ebb and flow
of aggregate stock prices
...
At one-sided extremes of mood expression,
changes in cultural trends can be anticipated
...
As an example simply stated, prosperity ultimately breeds

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reactionism, while adversity eventually breeds a desire to achieve and succeed
...

Most important to individuals, portfolio managers and investment corporations is that the
Wave Principle indicates in advance the relative magnitude of the next period of social progress or regress
...
As the Easterners say, "Follow the Way
...
" In order to heed these nuggets of advice, however, it is necessary to know what is
the Way, and which way the tape
...

To obtain a full understanding of the Wave Principle including the terms and patterns, please
read Elliott Wave Principle by A
...
Frost and Robert Prechter, or take the free Comprehensive
Course on the Wave Principle on this website
...

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

Diagonal Triangle (Ending) - A wedge shaped pattern containing overlap that occurs only in
fifth or C waves
...

Diagonal Triangle (Leading) - A wedge shaped pattern containing overlap that occurs only
in first or A waves
...

Double Three - Combination of two simple sideways corrective patterns, 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
...

Failure - See Truncated Fifth
...
Subdivides 3-3-5
...


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

One-two, one-two - The initial development in a five wave pattern, just prior to acceleration
at the center of wave three
...
Not permitted in
impulse waves
...
Corrective patterns typically terminate in this area
...

Sideways Correction - Any corrective pattern that contains a price extreme meeting or
exceeding that of the prior impulse wave; alternates with sharp correction
...

Thrust - Impulsive wave following completion of a triangle
...
Occurs as a fourth, B, X (in sharp correction only) or Y wave
...

Triangle (expanding) - Same as other triangles but trendlines diverge as pattern progresses
...

Triple Zigzag - Combination of three zigzags, labeled W, Y and Z, each separated by a
corrective wave labeled X
...

Zigzag - Sharp correction, labeled A-B-C
...

Adapted from
Elliott Wave Principle
Key To Market Behavior
Copyright © 1978-1998 Robert Rougelot Prechter, Jr
...

"The Wave Principle" is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends and
reverses in recognizable patterns
...
From this discovery, he developed a rational system of
market analysis
...
He named,
defined and illustrated the patterns
...
In a nutshell, then, the Wave Principle is a catalog of price patterns and an
explanation of where these forms are likely to occur in the overall path of market development
...

Elliott claimed predictive value for The Wave Principle, which now bears the name, "The Elliott Wave
Principle
...
Nevertheless, that description does impart an
immense amount of knowledge about the market's position within the behavioral continuum and
therefore about its probable ensuing path
...
This context provides both a basis for disciplined thinking and a
perspective on the market's general position and outlook
...
Many areas of mass human activity
follow the Wave Principle, but the stock market is where it is most popularly applied
...
The level of
aggregate stock prices is a direct and immediate measure of the popular valuation of man's total
productive capability
...
That, however, is a discussion for another time
...
N
...
At that time, with the Dow in the 100s, Elliott predicted a great bull market for the next several
decades that would exceed all expectations at a time when most investors felt it impossible that the
Dow could even better its 1929 peak
...

Elliott had theories regarding the origin and meaning of the patterns he discovered, which we will
present and expand upon in Lessons 16-19
...

Often one will hear several different interpretations of the market's Elliott Wave status, especially when
cursory, off-the-cuff studies of the averages are made by latter day experts
...
Welcome to the
world of Elliott
...
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
...
As the forms are repetitive, they have predictive value
...
The reason is that the market has a

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law of its own
...
Nor is the market the cyclically rhythmic machine that some declare it to
be
...

That progression unfolds in waves
...
More specifically, a
wave is any one of the patterns that naturally occur under the Wave Principle, as described in Lessons
1-9 of this course
...
Three of these
waves, which are labeled 1, 3 and 5, actually effect the directional movement
...
The two
interruptions are apparently a requisite for overall directional movement to occur
...
N
...
At any time, the market may be identified as being somewhere in the
basic five wave pattern at the largest degree of trend
...

Wave Mode
There are two modes of wave development: motive and corrective
...
Motive mode is
employed by both the five wave pattern of Figure 1-1 and its same-directional components, i
...
, waves
1, 3 and 5
...
Corrective
mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1-1
...
Thus, the two modes are
fundamentally different, both in their roles and in their construction, as will be detailed throughout this
course
...
N
...
The pattern
of five waves up followed by three waves down is depicted in Figure 1-2
...
The sequence a, b, c corrects the sequence
1, 2, 3, 4, 5 in Figure 1-2
...
A third advance then develops, also consisting of
five waves up
...
The result is as shown in Figure 1-3 up to the peak labeled (5)
...
These three larger waves down "correct" the entire movement of five larger
waves up
...
As Figure 1-3
illustrates, then, each same-direction component of a motive wave, and each full-cycle component
(i
...
, waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself
...
In Figure 1-2, each subwave 1, 3 and 5 is a
motive wave that will subdivide into a "five," and
each subwave 2 and 4 is a corrective wave that will subdivide into an a, b, c
...
All
these figures illustrate the phenomenon of constant form within ever-changing degree
...
The Wave Principle, then, reflects the fact that waves of
any degree in any series always subdivide and re-subdivide into waves of lesser degree and
simultaneously are components of waves of higher degree
...

The Essential Design
Now observe that within the corrective pattern illustrated as wave [2] in Figure 1-3, waves (a) and (c),
which point downward, are composed of five waves: 1, 2, 3, 4 and 5
...
This construction discloses a crucial point: that
motive waves do not always point upward, and corrective waves do not always point downward
...
Aside
from four specific exceptions, which will be discussed later in this course, waves divide in motive mode
(five waves) when trending in the same direction as the wave of one larger degree of which it is a part,
and in corrective mode (three waves or a variation) when trending in the opposite direction
...
Wave (b) is corrective because it
corrects wave (a) and is countertrend to wave [2]
...

*Note: For this course, all Primary degree numbers and letters normally denoted by circles are shown
with brackets
...
This
illustration reflects the general principle that in any market cycle, waves will subdivide as shown in the
following table
...
As before, the
termination of yet another eight wave movement (five up and three down) completes a cycle that
automatically becomes two subdivisions of the wave of next higher degree
...
The reverse process of subdividing
into lesser degrees apparently continues indefinitely as well
...

Elliott himself never speculated on why the market's essential form was five waves to progress and
three waves to regress
...
Does the essential form
have to be five waves and three waves? Think about it and you will realize that this is the minimum
requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in
linear movement
...
The fewest subdivisions to create fluctuation is
three waves
...
To progress in one direction
despite periods of regress, movements in the main trend must be at least five waves, simply to cover
more ground than the three waves and still contain fluctuation
...

Variations on the Basic Theme
The Wave Principle would be simple to apply if the basic theme described above were the complete
description of market behavior
...

From here through Lesson 15, we will fill out the description of how the market behaves in reality
...

DETAILED ANALYTICS
WAVE DEGREE
All waves may be categorized by relative size, or degree
...
He chose the names listed below to label these degrees, from largest to smallest:
Grand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette
It is important to understand that these labels refer to specifically identifiable degrees of waves
...
S
...
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
...


Wave Degree

5s With the
Trend

3s Against the Trend

Supercycle

(I) (II) (III) (IV) (V) (A) (B) (C)

Cycle

I II III IV V

ABC

Primary

[1] [2] [3] [4] [5]

[A] [B] [C]

Intermediate

(1) (2) (3) (4) (5) (a) (b) (c)

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Minor

12345

ABC

Minute

i ii iii iv v

abc

Minuette

12345

abc

The above labels preserve most closely Elliott's notations and are traditional, but a list
such as that shown below provides a more orderly use of symbols:
Grand Supercycle

[I] [II] [III] [IV] [V]

[A] [B] [C]

Supercycle

(I) (II) (III) (IV) (V)

(A) (B) (C)

Cycle

I II III IV V

ABC

Primary

I II III IV V

ABC

Intermediate

[1] [2] [3] [4] [5]

[a] [b] [c]

Minor

(1) (2) (3) (4) (5)

(a) (b) (c)

Minute

12345

abc

Minuette

12345

abc

The most desirable form for a scientist is usually something like 11, 12, 13, 14, 15, etc
...
The above tables provide for
rapid visual orientation
...

In Elliott's suggested terminology, the term "Cycle" is used as a name denoting a specific degree of
wave and is not intended to imply a cycle in the typical sense
...
" The specific terminology is not critical to the identification of relative degrees,
and the authors have no argument with amending the terms, although out of habit we have become
comfortable with Elliott's nomenclature
...
Particularly at the start of a new wave, it can be difficult to
decide what degree the initial smaller subdivisions are
...
Waves are dependent upon form, which is a
function of both price and time
...

This relativity is one of the aspects of the Wave Principle that make real time interpretation an
intellectual challenge
...
Another challenging aspect of the Wave Principle is the
variability of forms, as described through Lesson 9 of this course
...
Specifically, a wave may either advance
the cause of the wave of one larger degree or interrupt it
...
An actionary or trend wave is any wave that trends in the same direction as the
wave of one larger degree of which it is a part
...
Actionary
waves are labeled with odd numbers and letters
...

All reactionary waves develop in corrective mode
...
Indeed, most actionary waves do subdivide into five

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waves
...
e
...
A detailed knowledge of pattern
construction is required before one can draw the distinction between actionary function and motive
mode, which in the underlying model introduced so far are indistinct
...

Next Lesson: Impulse Waves

Lesson 4: Motive Waves
Motive waves subdivide into five waves with certain characteristics and always move in the same
direction as the trend of one larger degree
...

Within motive waves, wave 2 never retraces more than 100% of wave 1, and wave 4 never retraces
more than 100% of wave 3
...
The goal of
a motive wave is to make progress, and these rules of formation assure that it will
...
As long as wave 3 undergoes a greater
percentage movement than either wave 1 or 5, this rule is satisfied
...
There are two types of motive waves: impulses and diagonal triangles
...
In an impulse, wave 4 does not enter the territory of
(i
...
, "overlap") wave 1
...
Futures markets, with
their extreme leverage, can induce short term price extremes that would not occur in cash markets
...
In addition, the actionary subwaves (1, 3 and 5) of an impulse are themselves motive,
and subwave 3 is specifically an impulse
...

As detailed in the preceding three paragraphs, there are only a few simple rules for interpreting
impulses properly
...
Typical, yet not
inevitable, characteristics of waves are called guidelines
...
A rule should never be disregarded
...
Analysts who
routinely break any of the rules detailed in this section are practicing some form of analysis other than
that guided by the Wave Principle
...

Extension
Most impulses contain what Elliott called an extension
...
The vast majority of impulse waves do contain an extension in one and only
one of their three actionary subwaves
...
In a nine-wave sequence,
it is occasionally difficult to say which wave extended
...
The
diagrams in Figure 1-5, illustrating extensions, will clarify this point
...
For instance, if the first and third waves are of about equal
length, the fifth wave will likely be a protracted surge
...
") Conversely, if wave three extends, the fifth should be simply constructed and resemble
wave one
...
This fact is of particular importance
to real time wave interpretation when considered in conjunction with two of the rules of impulse waves:
that wave 3 is never the shortest actionary wave, and that wave 4 may not overlap wave 1
...


14

Figure 1-6

Figure 1-7

Figure 1-8

In Figure 1-6, wave 4 overlaps the top of wave 1
...
According to the rules, neither is an acceptable labeling
...
In fact, it is almost
always to be labeled as shown in Figure 1-8, implying an extended wave (3) in the making
...
The exercise will
prove highly rewarding, as you will understand from the discussion under Wave Personality in Lesson
14
...

Extensions may also occur within extensions
...
Figure 1-10
illustrates a fifth wave extension of a fifth wave extension
...


Figure 1-9 Figure 1-10
Truncation
Elliott used the word "failure" to describe a situation in which the fifth wave does not move beyond the
end of the third
...
" A truncation can
usually be verified by noting that the presumed fifth wave contains the necessary five subwaves, as
illustrated in Figures 1-11 and 1-12
...


Figure 1-11

Figure 1-12
The U
...
stock market provides two examples of major degree truncated fifths since 1932
...
It followed the crash that
occurred as wave 3
...
It followed the
soaring and broad wave (3) that took place from October 1975 to March 1976
...
Diagonal triangles substitute for impulses at specific locations in the wave structure
...
However, diagonal triangles are the only five-wave structures in the
direction of the main trend within which wave four almost always moves into the price territory of (i
...
,
overlaps) wave one
...

Ending Diagonal
An ending diagonal is a special type of wave that occurs primarily in the fifth wave position at times
when the preceding move has gone "too far too fast," as Elliott put it
...
In double or triple threes (to be
covered in Lesson 9), they appear only as the final "C" wave
...

Ending diagonals take a wedge shape within two converging lines, with each subwave, including
waves 1, 3 and 5, subdividing into a "three," which is otherwise a corrective wave phenomenon
...


Figure 1-15

Figure 1-16

We have found one case in which the pattern's boundary lines diverged, creating an expanding wedge

17

rather than a contracting one
...
For these reasons, we do not include it as a valid variation
...
Figures 1-17 and 1-18 show two
of these periods, illustrating one upward and one downward "real-life" formation
...
Notice that in each case, an important change of
direction followed
...
e
...

Figures 1-17 and 1-19 show real life examples
...
On rare occasions, the fifth subwave will fall short of its resistance trendline
...
A falling diagonal by the same token is bullish, usually giving rise to an upward
thrust
...
At some turning points, two of these phenomena have occurred together at different
degrees, compounding the violence of the next move in the opposite direction
...
However, it has recently come to light that a variation on this pattern occasionally appears
in the wave 1 position of impulses and in the wave A position of zigzags
...
However, the subdivisions are different, tracing out a 5-3-5-3-5 pattern
...

Analysts must be aware of this pattern to avoid mistaking it for a far more common development, a
series of first and second waves
...
By contrast, in developing first and second
waves, short term speed typically increases, and breadth (i
...
, the number of stocks or subindexes
participating) often expands
...
This pattern was not originally
discovered by R
...
Elliott but has appeared enough times and over a long enough period that we are
convinced of its validity
...
Resistance from
the larger trend appears to prevent a correction from developing a full motive structure
...
As another result of this conflict between trends, corrective waves are quite a bit more
varied than motive waves
...
For all these reasons, it can be difficult at times to fit corrective
waves into recognizable patterns until they are completed and behind us
...

The single most important rule that can be gleaned from a study of the various corrective patterns is
that corrections are never fives
...
For this reason, an initial five-wave
movement against the larger trend is never the end of a correction, only part of it
...

Corrective processes come in two styles
...

Sideways corrections, while always producing a net retracement of the preceding wave, typically

20

contain a movement that carries back to or beyond its starting level, thus producing an overall
sideways appearance
...

Specific corrective patterns fall into four main categories:
Zigzags (5-3-5; includes three types: single, double, and triple);
Flats (3-3-5; includes three types: regular, expanded, and running);
Triangles (3-3-3-3-3; four types: three of the contracting variety (ascending, descending, and
symmetrical) and one of the expanding variety (reverse symmetrical);
Double threes and triple threes (combined structures)
...
The subwave
sequence is 5-3-5, and the top of wave B is noticeably lower than the start of wave A, as illustrated in
Figures 1-22 and 1-23
...
For this reason, a zigzag in a bear market is often referred to as an inverted zigzag
...
In these cases, each zigzag is separated by an intervening
"three," producing what is called a double zigzag (see Figure 1-26) or triple zigzag
...

The correction in the Standard and Poor's 500 stock index from
January 1977 to March 1978 (see Figure 1-27) can be labeled as a double zigzag, as can the
correction in the Dow from July to October 1975 (see Figure 1-28)
...


22

Figure 1-26

Figure 1-27

23

Figure 1-28
R
...
Elliott's original labeling of double and triple zigzags and double and triple threes (see later
section) was a quick shorthand
...
Unfortunately, this notation improperly indicated the degree
of the actionary subwaves of each simple pattern
...
We have eliminated this problem
by introducing a useful notational device: labeling the successive actionary components of double and
triple corrections as waves W, Y, and Z, so that the entire pattern is counted "W-X-Y (-X-Z)
...
Each subwave thereof (A, B or C, as well as D or E of a triangle — see later section) is
now properly seen as two degrees smaller than the entire correction
...

Next Lesson: Flats

Lesson 7: Flats (3-3-5)
A flat correction differs from a zigzag in that the subwave sequence is 3-3-5, as shown in Figures 1-29
and 1-30
...
Wave C, in turn, generally terminates
just slightly beyond the end of wave A rather than significantly beyond as in zigzags
...


24

Figure 1-31 Figure 1-32
Flat corrections usually retrace less of preceding impulse waves than do zigzags
...
The
more powerful the underlying trend, the briefer the flat tends to be
...

What might be called "double flats" do occur
...

The word "flat" is used as a catchall name for any A-B-C correction that subdivides into a 3-3-5
...
In a regular flat correction, wave B terminates about at the level of the beginning of
wave A, and wave C terminates a slight bit past the end of wave A, as we have shown in Figures 1-29
through 1-32
...
Elliott called this variation an "irregular" flat,
although the word is inappropriate as they are actually far more common than "regular" flats
...
The formation in the DJIA from
August to November 1973 was an expanded flat correction of this type in a bear market, or an
"inverted expanded flat" (see Figure 1-37)
...
Apparently in this case, the
forces in the direction of the larger trend are so powerful that the pattern becomes skewed in that
direction
...
If the supposed B wave, for instance, breaks
down into five waves rather than three, it is more likely the first wave up of the impulse of next higher
degree
...
We must issue a warning, however
...
Never label a correction prematurely this
way, or you'll find yourself wrong nine times out of ten
...


26

Figure 1-38 Figure 1-39

Figure 1-40 Figure 1-41
Next Lesson: Triangles

Lesson 8: Triangles
Triangles appear to reflect a balance of forces, causing a sideways movement that is usually
associated with decreasing volume and volatility
...
A triangle is delineated by connecting the termination
points of waves a and c, and b and d
...

There are two varieties of triangles: contracting and expanding
...
There are no
variations on the rarer expanding triangle
...


27

Figure 1-42
Figure 1-42 depicts contracting triangles as taking place within the area of preceding price action, in
what may be termed regular triangles
...
Despite their sideways appearance, all triangles, including running triangles, effect a net
retracement of the preceding wave at wave e's end
...
As you will notice, most of
the subwaves in a triangle are zigzags, but sometimes one of the subwaves (usually wave c) is more
complex than the others and can take the shape of a regular or expanded flat or multiple zigzag
...
Thus, triangles, like zigzags, occasionally display a development that is
analogous to an extension
...


28

Figure 1-44
Although upon extremely rare occasions a second wave in an impulse appears to take the form of a
triangle, triangles nearly always occur in positions prior to the final actionary wave in the pattern of one
larger degree, i
...
, as wave four in an impulse, wave B in an A-B-C, or the final wave X in a double or
triple zig-zag or combination (to be shown in Lesson 9)
...

In the stock market, when a triangle occurs in the fourth wave position, wave five is sometimes swift
and travels approximately the distance of the widest part of the triangle
...
The thrust is usually an impulse but can
be an ending diagonal
...
So if
a fifth wave following a triangle pushes past a normal thrust measurement, it is signaling a likely
protracted wave
...

On the basis of our experience with triangles, as the example in Figure 3-15 illustrates, we propose
that often the time at which the boundary lines of a contracting triangle reach an apex coincides
exactly with a turning point in the market
...

The term "horizontal" as applied to triangles refers to these corrective triangles in general, as opposed
to the term "diagonal," which refers to those motive triangular formations discussed in Lesson 5
...
The simpler terms "triangle" and "wedge" may be substituted, but keep in mind that technical
chart readers have long used these terms to communicate less specifically subdivided forms defined
only by overall shape
...

Next Lesson: Corrective Combinations

Lesson 9: Corrective Combinations

29

Double and Triple Threes
Elliott called sideways combinations of corrective patterns "double threes" and "triple threes
...
" A double or triple three, then, is a combination of simpler types of
corrections, including the various types of zigzags, flats and triangles
...
As with double and triple zigzags, each simple
corrective pattern is labeled W, Y and Z
...

Combinations of threes were labeled differently by Elliott at different times, although the illustrative
pattern always took the shape of two or three juxtaposed flats, as shown in Figures 1-45 and 1-46
...
For example, a flat followed by a
triangle is a more typical type of double three, as illustrated in Figure 1-47
...
Naturally, since the figures in
this section depict corrections in bull markets, they need only be inverted to observe them as upward
corrections in bear markets
...
Elliott indicated that the
entire formations could slant against the larger trend, although we have never found this to be the
case
...
Neither is
there more than one triangle
...
Combinations appear to recognize this character and sport triangles only as the final
wave in a double or triple three
...
However, double and triple threes are different from double and triple
zigzags, not only in their angle but in their goal
...
The doubling or tripling
of the initial form is typically necessary to create an adequately sized price retracement
...
The
doubling or tripling appears to occur mainly to extend the duration of the corrective process after price
targets have been substantially met
...
As the consolidation
continues, the attendant psychology and fundamentals extend their trends accordingly
...
, and the series 5 + 4 + 4 + 4, etc
...
Triangles appear to be an exception, although they
can be counted as one would a triple three, totaling 11 waves
...
A count of 9, 13 or
17 with few overlaps, for instance, is likely motive, while a count of 7, 11 or 15 with numerous overlaps
is likely corrective
...

Orthodox Tops and Bottoms
Sometimes a pattern's end differs from the associated price extreme
...
For example, in Figure 1-11, the end of wave 5 is the orthodox top despite
the fact that wave 3 registered a higher price
...
In Figures 1-33 and 1-34, the starting point of wave A is the
orthodox top of the preceding bull market despite the higher high of wave B
...

This concept is important primarily because a successful analysis always depends upon a proper
labeling of the patterns
...
Further, when applying the forecasting concepts that will be introduced in
Lessons 20 through 25, the length and duration of a wave are typically determined by measuring from
and projecting orthodox ending points
...
Now that we
have reviewed all types of waves, we can summarize their labels as follows:
— The labels for actionary waves are 1, 3, 5, A, C, E, W, Y and Z
...

As stated earlier, all reactionary waves develop in corrective mode, and most actionary waves develop
in motive mode
...
They are:
— waves 1, 3 and 5 in an ending diagonal,
— wave A in a flat correction,
— waves A, C and E in a triangle,
— waves W and Y in double zigzags and double corrections,

31

— wave Z in triple zigzags and triple corrections
...

As far as we know, we have listed all wave formations that can occur in the price movement of the
broad stock market averages
...
Indeed, since the hourly readings are a nearly perfectly matched filter for detailing waves of
Subminuette degree, the authors can find no examples of waves above the Subminuette degree that
cannot be counted satisfactorily by the Elliott method
...
Even
the few data points (transactions) per unit of time at this low a degree are enough to reflect accurately
the Wave Principle of human behavior by recording the rapid shifts in psychology occurring in the
"pits" and on the exchange floor
...
Its clear manifestation requires free market pricing
...
When the available price record differs from what
might have existed in a free market, rules and guidelines must be considered in that light
...
All rules and guidelines presented in this course presume that your price record
is accurate
...

Next Lesson: The Guideline of Alternation

Lesson 10: The guideline of alternation
The guidelines presented in Lessons 10-15 are discussed and illustrated in the context of a bull
market
...

Alternation
The guideline of alternation is very broad in its application and warns the analyst always to expect a
difference in the next expression of a similar wave
...

Although alternation does not say precisely what is going to happen, it gives valuable notice of what
not to expect and is therefore useful to keep in mind when analyzing wave formations and assessing
future possibilities
...
As
"contrarians" never cease to point out, the day that most investors "catch on" to an apparent habit of
the market is the day it will change to one completely different
...

Alternation Within Impulses
If wave two of an impulse is a sharp correction, expect wave four to be a sideways correction, and vice
versa
...
Sharp corrections never include a new price
extreme, i
...
, one that lies beyond the orthodox end of the preceding impulse wave
...

Sideways corrections include flats, triangles, and double and triple corrections
...
e
...
In rare
cases, a regular triangle (one that does not include a new price extreme) in the fourth wave position
will take the place of a sharp correction and alternate with another type of sideways pattern in the
second wave position
...


Figure 2-1
Diagonal triangles do not display alternation between subwaves 2 and 4
...
Extensions are an expression of alternation, as the motive waves alternate their lengths
...
Extensions, which normally
occur in wave 3, sometimes occur in wave 1 or 5, another manifestation of alternation
...
With a moment's thought, it is obvious
that this occurrence is sensible, since the first illustration reflects an upward bias in both subwaves
while the second reflects a downward bias
...

Sometimes wave C will be yet more complex, as in Figure 2-5
...


Figure 2-4

Figure 2-5
Next Lesson: Forecasting Corrective Waves

34

Lesson 11: Forecasting corrective waves
Depth of Corrective Waves (Bear Market Limitations)
No market approach other than the Wave Principle gives as satisfactory an answer to the question,
"How far down can a bear market be expected to go?" The primary guideline is that corrections,
especially when they themselves are fourth waves, tend to register their maximum retracement within
the span of travel of the previous fourth wave of one lesser degree, most commonly near the level of
its terminus
...
Its lows bottom within the area of the previous fourth
wave of Cycle degree, an expanding triangle (see chart below)
...


35

Figure 5-3
Example #3: The 1962 Bear Market Low
The wave [4] plunge in 1962 brought the averages down to just above the 1956 high of the five-wave
Primary sequence from 1949 to 1959
...
This narrow miss nevertheless illustrates why this
guideline is not a rule
...

Example #4: The 1974 Bear Market Low
The final decline into 1974, ending the 1966-1974 Cycle degree wave IV correction of the entire wave
III rise from 1942, brought the averages down to the area of the previous fourth wave of lesser degree
(Primary wave[ 4])
...

Our analysis of small degree wave sequences over the last twenty years further validates the
proposition that the usual limitation of any bear market is the travel area of the preceding fourth wave
of one lesser degree, particularly when the bear market in question is itself a fourth wave
...
For example, the decline into March 1978 in the DJIA bottomed exactly
at the low of the second wave in March 1975, which followed an extended first wave off the December
1974 low
...
Zigzags, on occasion, will cut deeply and move down
into the area of the second wave of lesser degree, although this almost exclusively occurs when the
zigzags are themselves second waves
...


36

Behavior Following Fifth Wave Extensions
The most important empirically derived rule that can be distilled from our observations of market
behavior is that when the fifth wave of an advance is an extension, the ensuing correction will be
sharp and find support at the level of the low of wave two of the extension
...
Although a limited number of real life examples exist, the
precision with which "A" waves have reversed at the level of the low of wave two of the preceding fifth
wave extension is remarkable
...
(For
future reference, please make a note of two real-life examples that we will show in charts of upcoming
lessons
...
As you
will see in Figure 5-3, wave A of (IV) bottoms near wave (2) of [5], which is an extension within wave V
from 1921 to 1929
...
It is notable for its precision, however
...
Their occurrence, then, is
an advance warning of a dramatic reversal to a specific level, a powerful combination of knowledge
...


Figure 2-6

Figure 2-7

Next Lesson: Channeling

Lesson 12: Channeling
Wave Equality
One of the guidelines of the Wave Principle is that two of the motive waves in a five-wave sequence
will tend toward equality in time and magnitude
...
If perfect
equality is lacking, a
...

When waves are larger than Intermediate degree, the price relationships usually must be stated in
percentage terms
...
618 times the 129% gain), in 40 months (see Figure 5-3), far

37

different from the 324% gain of the third Primary wave, which lasted 126 months
...
Thus, in the year-end
rally of 1976, we find that wave 1 traveled 35
...
40
points in 47 market hours
...

Charting the Waves
A
...
e
...
Elliott himself certainly followed the same practice, since in The Wave Principle he
presents an hourly chart of stock prices from February 23 to March 31, 1938
...
It is a
simple task that requires only a few minutes' work a week
...
Actual print figures must be used on all plots
...
Respectively, these figures represent a sum of the
opening prices, which can occur at different times, and of the daily highs or lows of each individual
stock in the average regardless of the time of day each extreme occurs
...
This exercise is easy as long as the wave counts are clear, as in fast-moving, emotional
markets, particularly in impulse waves, when minor movements generally unfold in an uncomplicated
manner
...
However, in
lethargic or choppy markets, particularly in corrections, wave structures are more likely to be complex
and slow to develop
...
With a proper reading of the Wave Principle, there are times
when sideways trends can be forecasted (for instance, for a fourth wave when wave two is a zigzag)
...
Nevertheless, they are part of the reality of the market and must be taken into account
...
You can't "wish" the market into action; it isn't listening
...

The correct method for tracking the stock market is to use semilogarithmic chart paper, since the
market's history is sensibly related only on a percentage basis
...
For instance, ten
points in the DJIA in 1980 meant nothing, a one percent move
...
For ease of charting, however, we suggest using
semilog scale only for long term plots, where the difference is especially noticeable
...
Thus, channeling
techniques work acceptably well on arithmetic scale with shorter term moves
...
The analyst should draw them in advance to assist in
determining wave targets and provide clues to the future development of trends
...
When wave
three ends, connect the points labeled "1" and "3," then draw a parallel line touching the point labeled
"2," as shown in Figure 2-8
...
(In most
cases, third waves travel far enough that the starting point is excluded from the final channel's touch
points
...
First connect the ends of waves two and four
...
If wave three is abnormally strong, almost vertical,
then a parallel drawn from its top may be too high
...
In some cases, it may be
useful to draw both potential upper boundary lines to alert you to be especially attentive to the wave
count and volume characteristics at those levels and then take appropriate action as the wave count
warrants
...
If volume is heavy as the fifth wave approaches its upper trendline, it indicates a possible
penetration of the upper line, which Elliott called "throw-over
...

Throw-overs are occasionally telegraphed by a preceding "throw-under," either by wave 4 or by wave
two of 5, as suggested by the drawing shown as Figure 2-10, from Elliott's book, The Wave Principle
...
Throw-overs also occur, with the
same characteristics, in declining markets
...
Examples of throw-overs shown earlier in this course can be found in Figures 1-17 and 1-19
...
On the other hand, the
virtually perfect channels that were formed by the 1921-1929 market on semilog scale (see Figure 211) and the 1932-1937 market on arithmetic scale (see Figure 2-12) indicate that waves of the same
degree will form the correct Elliott trend channel only when plotted selectively on the appropriate
scale
...
Aside from this difference in
channeling, these two waves of Cycle dimension are surprisingly similar: they create nearly the same
multiples in price (six times and five times respectively), they both contain extended fifth waves, and
the peak of the third wave is the same percentage gain above the bottom in each case
...


Figure 2-11

41

Figure 2-12
At most, we can state that the necessity for semilog scale indicates a wave that is in the process of
acceleration, for whatever mass psychological reasons
...

Thus, the question of whether to expect a parallel channel on arithmetic or semilog scale is still
unresolved as far as developing a definite tenet on the subject
...
To stay on top of all
developments, the analyst should always use both
...
He recognized
that in any bull market, volume has a natural tendency to expand and contract with the speed of price
change
...
A
low point in volume often coincides with a turning point in the market
...
If volume in an advancing fifth wave of
less than Primary degree is equal to or greater than that in the third wave, an extension of the fifth is in
force
...

At Primary degree and greater, volume tends to be higher in an advancing fifth wave merely because
of the natural long term growth in the number of participants in bull markets
...

Finally, as discussed earlier, volume often spikes briefly at points of throw-over at the peak of fifth
waves, whether at a trend channel line or the terminus of a diagonal triangle
...
) In addition to these few
valuable observations, we have expanded upon the importance of volume in various sections of this
course
...
Although any five-wave
sequence can be forced into a three-wave count by labeling the first three subdivisions as one wave
"A" as shown in Figure 2-13, it is incorrect to do so
...
A long wave three with the end of wave four terminating well above the top
of wave one must be classified as a five-wave sequence
...
While the internal count of a wave is a guide to its classification,
the right overall shape is, in turn, often a guide to its correct internal count
...
In our experience, we have found it extremely dangerous to allow our emotional involvement
with the market to let us accept wave counts that reflect disproportionate wave relationships or
misshapen patterns merely on the basis that the Wave Principle's patterns are somewhat elastic
...
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 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
...
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
...
It is at these junctures that a knowledge
of wave personality can be invaluable
...
The following discussions relate to an
underlying bull market picture, as illustrated in Figures 2-14 and 2-15
...


43

Figure 2-14
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
...
Plenty of short selling is in evidence as the majority has finally
become convinced that the overall trend is down
...
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
...

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
...
At this point, investors are
thoroughly convinced that the bear market is back to stay
...

3) Third waves — Third waves are wonders to behold
...
Increasingly favorable fundamentals enter the picture as confidence
returns
...
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
...
Virtually all stocks participate in third
waves
...


44

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
...
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
...

5) Fifth waves — Fifth waves in stocks are always less dynamic than third waves in terms of breadth
...
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
...
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
...
During fifth advancing waves, optimism runs extremely high, despite a narrowing of
breadth
...
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
...
5%, in the
history of the recorded figures despite that fifth wave's failure to make a new high!

Figure 2-15
6) "A" waves — During "A" waves of bear markets, the investment world is generally convinced that
this reaction is just a pullback pursuant to the next leg of advance
...
The "A" wave sets the
tone for the "B" wave to follow
...

7) "B" waves — "B" waves are phonies
...
They often
involve a focus on a narrow list of stocks, are often "unconfirmed" (Dow Theory is covered in Lesson
28) by other averages, are rarely technically strong, and are virtually always doomed to complete
retracement by wave C
...
"X" waves and "D" waves in expanding triangles, both of which
are corrective wave advances,

45

have the same characteristics
...

— The upward correction of 1930 was wave B within the 1929-1932 A-B-C zigzag decline
...
many observers took it to be a bull market signal
...
When the slow but
steady advance of January and February carried above [the previous high], I became panicky and
covered at considerable loss
...
Nearly everyone was proclaiming a new bull market
...

— The 1961-1962 rise was wave (b) in an (a)-(b)-(c) expanded flat correction
...
Cumulative breadth had already peaked along with the top of the third
wave in 1959
...
Emotionalism
had gripped the public and "cheapies" were skyrocketing in the speculative fever, unlike the orderly
and usually fundamentally justifiable participation of the secondaries within first and third waves
...

— In 1977, the Dow Jones Transportation Average climbed to new highs in a "B" wave, miserably
unconfirmed by the Industrials
...
Only the coal-carrying rails were
participating as part of the energy play
...

As a general observation, "B" waves of Intermediate degree and lower usually show a diminution of
volume, while "B" waves of Primary degree and greater can display volume heavier than that which
accompanied the preceding bull market, usually indicating wide public participation
...
They are third waves
and have most of the properties of third waves
...
The illusions held throughout waves A and B tend to evaporate and fear takes over
...
1930-1932 was a "C" wave
...
1969-1970
and 1973-1974 can be classified as "C" waves
...
The October 1973 rally (see Figure 1-37), for instance, was
a "C" wave in an inverted expanded flat correction
...

This is true probably because "D" waves in non-expanding triangles are hybrids, part corrective, yet
having some characteristics of first waves since they follow "C" waves and are not fully retraced
...
The rise from 1970 to
1973 was wave [D] within the large wave IV of Cycle degree
...

The area of participation again was narrow, this time the "nifty fifty" growth and glamour issues
...
Washington was inflating at full steam to
sustain the illusory prosperity during the entire advance in preparation for the election
...

10) "E" waves — "E" waves in triangles appear to most market observers to be the dramatic kickoff of
a new downtrend after a top has been built
...
That, in conjunction with the tendency of "E" waves to stage a false breakdown
through the triangle boundary line, intensifies the bearish conviction of market participants at precisely
the time that they should be preparing for a substantial move in the opposite direction
...

Next Lesson: Practical Application

46

Lesson 15: Practical Application
Because the tendencies discussed here are not inevitable, they are stated not as rules, but as
guidelines
...
For example, take a
look at Figure 2-16, an hourly chart showing the first four Minor waves in the DJIA rally off the March
1, 1978 low
...
It
might be worth noting that 914 would be a reasonable target in that it would mark a
...


Figure 2-16 (Click Image To Enlarge)
There are exceptions to guidelines, but without those, market analysis would be a science of
exactitude, not one of probability
...
In effect, you can use the market action to
confirm the wave count as well as use the wave count to predict market action
...
The result is that traditional technical analysis now has a
greatly increased value in that it serves to aid the identification of the market's exact position in the
Elliott Wave structure
...

Learning the Basics
With a knowledge of the tools in Lessons 1 through 15, any dedicated student can perform expert
Elliott Wave analysis
...
The best learning procedure is to keep an hourly chart
and try to fit all the wiggles into Elliott Wave patterns, while keeping an open mind for all the
possibilities
...

It is important to remember that while investment tactics always must go with the most valid wave
count, knowledge of alternative possibilities can be extremely helpful in adjusting to unexpected

47

events, putting them immediately into perspective, and adapting to the changing market framework
...
"
"When you have eliminated the impossible, whatever remains, however improbable, must be the
truth
...
Watson, in Arthur
Conan Doyle's The Sign of Four
...
The best approach is deductive reasoning
...

Applying all the rules of extensions, alternation, overlapping, channeling, volume and the rest, the
analyst has a much more formidable arsenal than one might imagine at first glance
...
However, this
kind of thinking, basically an elimination process, squeezes the best out of what Elliott has to offer and
besides, it's fun!
As an example of such deductive reasoning, take another look at Figure 1-14, reproduced below:

Figure 1-14
Cover up the price action from November 17, 1976 forward
...
But with the Wave Principle as a guide, the meaning of
the structures becomes clear
...
J
...
My argument is that the third Primary wave, begun in
October of 1975, has not completed its course as yet, and that the fifth Intermediate wave of that
Primary is now underway
...
However, the construction following that possible "failure" does not
satisfy me as correct, since the first downleg to 956
...
Therefore, I think that we have been in a fourth corrective wave since
March 24th
...
The trendlines concerned are uncannily
accurate, as is the downside objective, obtained by multiplying the first important length of decline
(March 24th to June 7th, 55
...
618 to obtain 89
...
89
...
96 gives a downside target of 922, which was hit last week
(actual hourly low 920
...
This would suggest now a fifth Intermediate back to
new highs, completing the third Primary wave
...
57 on February 17th, which of course has been broken on the
downside
...
The reverse symmetrical triangle
formation should be followed by a rally only approximating the width of the widest part of the triangle
...
Also,
within third waves, the first and fifth subwaves tend toward equality in time and magnitude
...
75-Dec
...


48

Now uncover the rest of the chart to see how all these guidelines helped in assessing the market's
likely path
...
It is the first way they learn to
guess what a man is going to do before he does it
...

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a
bicycle never forgets
...
Most important, in giving you a feeling of confidence as to where you are in the progress
of the market, a knowledge of Elliott can prepare you psychologically for the inevitable fluctuating
nature of price movement and free you from sharing the widely practiced analytical error of forever
projecting today's trends linearly into the future
...
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
...

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
...
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
...
Subjective analysis is dangerous and destroys the
value of any market approach
...
At any time, two or more valid wave interpretations are usually
acceptable by the rules of the Wave Principle
...
Among the valid alternatives, the analyst will generally regard as
preferred the interpretation that satisfies the largest number of guidelines, and so on
...
That order can
usually be stated with certainty
...
Under only the rarest of
circumstances does the analyst ever know exactly what the market is going to do
...
Of course, such a result is a far better performance than any other
approach to market forecasting provides
...
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
...
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
...
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
...
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 moves beyond what the apparently completed pattern
allows, the conclusion is wrong, and any funds at risk can be reclaimed immediately
...
" 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
...
If you're thrown by your
horse, it's useful to land right atop another
...
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
...
When subsequent waves clarify the picture, the
probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%
...
Many of these guidelines are specific and can occasionally yield results of
stunning precision
...
In fact, real world experience shows that they do
...
One
advantage of setting a target is that it gives a sort of backdrop against which to monitor the market's
actual path
...
If you then learn
the reasons for your mistakes, the market will be less likely to mislead you in the future
...
Although prediction of target levels well in advance can be done surprisingly
often, such predictions are not required in order to make money in the stock market
...
All one really needs
to know at the time is whether to be bullish, bearish or neutral, a decision that can sometimes be
made with a swift glance at a chart
...
If you keep an hourly chart, the fifth of
the fifth of the fifth in a primary trend alerts you within hours of a major change in direction by the
market
...
Elliott may not be the perfect formulation since the
stock market is part of life and no formula can enclose it or express it completely
...

Next Lesson: Introducing Fibonacci
Lesson 16: Introducing Fibonacci

50

Statue of Leonardo Fibonacci, Pisa, Italy
...
Leonardo Fibonacci, Insigne
Matematico Piisano del Secolo XII
...
Prechter, Sr
...
We will outline the
historical background of this amazing man and then discuss more fully the sequence (technically it is a
sequence and not a series) of numbers that bears his name
...
It is
sufficient to state at this point that the stock market has a propensity to demonstrate a form that can
be aligned with the form present in the Fibonacci sequence
...

White, in New Classics Library's forthcoming book
...
This system, which included the familiar symbols 0, 1, 2, 3, 4, 5, 6, 7, 8 and 9, became
known as the Hindu-Arabic system, which is now universally used
...
e
...
Though thousands of years earlier the Babylonians and
Mayas of Central America separately had developed digital or place-value systems of numeration,
their methods were awkward in other respects
...
Addition, subtraction, multiplication and division in a
system using these non-digital symbols is not an easy task, especially when large numbers are
involved
...
Because this instrument is digitally based and contains the zero principle, it
functioned as a necessary supplement to the Roman computational system
...
Fibonacci,
after expressing the basic principle of the abacus in Liber Abacci, started to use his new system during
his travels
...
Gradually the old usage of Roman numerals was replaced with the Arabic
numeral system
...
Fibonacci not only
kept mathematics alive during the Middle Ages, but laid the foundation for great developments in the
field of higher mathematics and the related fields of physics, astronomy and engineering
...
His
fame was such that Frederick II, a scientist and scholar in his own right, sought him out by arranging a
visit to Pisa
...
His
ideas were those of an absolute monarch, and he surrounded himself with all the pomp of a Roman
emperor
...
D
...
The Emperor rode at the head of a long procession of trumpeters,
courtiers, knights, officials and a menagerie of animals
...
Fibonacci apparently solved the
problems posed by the Emperor and forever more was welcome at the King's Court
...
D
...

It is almost an understatement to say that Leonardo Fibonacci was the greatest mathematician of the
Middle Ages
...
The admiring
citizens of Pisa documented in 1240 A
...
that he was "a discreet and learned man," and very recently
Joseph Gies, a senior editor of the Encyclopedia Britannica, stated that future scholars will in
time "give Leonard of Pisa his due as one of the world's great intellectual pioneers
...
For those interested, the book
entitled Leonard of Pisa and the New Mathematics of the Middle Ages, by Joseph and Frances Gies,
is an excellent treatise on the age of Fibonacci and his works
...
It seems strange that so few visitors to the 179-foot marble Tower of
Pisa have ever heard of Fibonacci or seen his statue
...
D
...

The Fibonacci Sequence
In Liber Abacci, a problem is posed that gives rise to the sequence of numbers 1, 1, 2, 3, 5, 8, 13, 21,
34, 55, 89, 144, and so on to infinity, known today as the Fibonacci sequence
...
The number of pairs is the same at the
beginning of each of the first two months, so the sequence is 1, 1
...
Of
these, the older pair begets a third pair the following month so that at the beginning of the fourth
month, the sequence expands 1, 1, 2, 3
...
The next month, three pairs reproduce so
the sequence expands to 1, 1, 2, 3, 5, 8 and so forth
...
Continue the sequence for a few years and the
numbers become astronomical
...
The Fibonacci sequence resulting from the rabbit
problem has many interesting properties and reflects an almost constant relationship among its
components
...
, 1 plus 1 equals 2, 1 plus 2 equals 3, 2 plus 3 equals 5, 3 plus 5 equals 8, and so on to infinity
...
618 to 1 and to the next lower number approximately 1
...
The further along the
sequence, the closer the ratio approaches phi (denoted f) which is an irrational number,
...

Between alternate numbers in the sequence, the ratio is approximately
...
618
...


Figure 3-2
Phi is the only number that when added to 1 yields its inverse:
...
618
...
6182 = 1 -
...
6183 =
...
6182,

...
6182 -
...
6185 =
...
6184, etc
...
6182 = 1 + 1
...
6183 = 1
...
6182,
1
...
6182 + 1
...
6185 = 1
...
6184, etc
...
618 -
...
618 x
...
618 =
...
618 x
...
382,
5) 2
...
618 = 1,
6) 2
...
382 = 1,
7) 2
...
618 = 1
...
618 x 1
...
618
...

As the new sequence progresses, a third sequence begins in those numbers that are added to the 4x
multiple
...
236, where
...
This continuous seriesbuilding property is reflected at other multiples for the same reasons
...
618 (or
...
Its proportions are pleasing to the eye
and an important phenomenon in music, art, architecture and biology
...
the proportion of
...
The Greeks based much of their art and architecture upon this proportion
...
"
Fibonacci's abracadabric rabbits pop up in the most unexpected places
...

Music, for example, is based on the 8-note octave
...
It is no accident that the musical harmony that seems to give the ear its
greatest satisfaction is the major sixth
...
62500 to the note C
...
006966 away from the exact golden mean, the proportions of the major sixth set off good vibrations in
the cochlea of the inner ear — an organ that just happens to be shaped in a logarithmic spiral
...
618034 to 1 is so pleasing in art
...

Nature uses the Golden Ratio in its most intimate building blocks and in its most advanced patterns, in
forms as minuscule as atomic structure, microtubules in the brain and DNA molecules to those as
large as planetary orbits and galaxies
...
Science is rapidly
demonstrating that there is indeed a basic proportional principle of nature
...

Next Lesson: Fibonacci Geometry
Lesson 17: FIBONACCI GEOMETRY
The Golden Section
Any length can be divided in such a way that the ratio between the smaller part and the larger part is
equivalent to the ratio between the larger part and the whole (see Figure 3-3)
...
618
...
In fact, the human body is a tapestry of Golden
Sections (see Figure 3-9) in everything from outer dimensions to facial arrangement
...
" In the sixteenth century, Johannes Kepler, in writing about the Golden, or "Divine
Section," said that it described virtually all of creation and specifically symbolized God's creation of
"like from like
...
The statistical average is
approximately
...
The ratio holds true separately for men, and separately for women, a fine symbol
of the creation of "like from like
...
618 to 1
...


55

Figure 3-4
Triangle EDB is a right-angled triangle
...
C
...
In this
case, therefore, X2 = 22 + 12, or X2 = 5
...

The next step in the construction of a Golden Rectangle is to extend the line CD, making EG equal to
the square root of 5, or 2
...
When completed, the sides of
the rectangles are in the proportion of the Golden Ratio, so both the rectangle AFGC and BFGD are
Golden Rectangles
...

Works of art have been greatly enhanced with knowledge of the Golden Rectangle
...
Leonardo da Vinci attributed great meaning to the Golden Ratio
...
"
Many of his paintings had the right look because he used the Golden Section to enhance their appeal
...
Experimenters have
determined that people find the
...
For instance, subjects have
been asked to choose one rectangle from a group of different types of rectangles with the average
choice generally found to be close to the Golden Rectangle shape
...
Windows, picture frames, buildings, books and cemetery crosses often approximate
Golden Rectangles
...
Among numerous examples, the most striking is that the double helix of DNA itself
creates precise Golden Sections at regular intervals of its twists (see Figure 3-9)
...

The Golden Spiral
A Golden Rectangle can be used to construct a Golden Spiral
...
This process
then theoretically can be continued to infinity
...


Figure 3-6

57

Figure 3-7
The dotted lines, which are themselves in golden proportion to each other, diagonally bisect the
rectangles and pinpoint the theoretical center of the whirling squares
...
As the squares whirl inward and outward, their connecting points
trace out a Golden Spiral
...

At any point in the evolution of the Golden Spiral, the ratio of the length of the arc to its diameter is
1
...
The diameter and radius, in turn, are related by 1
...


Figure 3-8

58

The Golden Spiral, which is a type of logarithmic or equiangular spiral, has no boundaries and is a
constant shape
...
The center is never met, and the outward reach is unlimited
...
As David Bergamini, writing for Mathematics (in Time-Life Books' Science Library series)
points out, the tail of a comet curves away from the sun in a logarithmic spiral
...
Bacteria grow at an accelerating rate that can be plotted along a
logarithmic spiral
...
Pine cones, sea horses, snail shells, mollusk shells, ocean waves,
ferns, animal horns and the arrange- ment of seed curves on sunflowers and daisies all form
logarithmic spirals
...
Even
the human finger, which is composed of three bones in Golden Section to one another, takes the
spiral shape of the dying poinsettia leaf when curled
...
Eons of time and light years of space separate the pine cone and the
spiraling galaxy, but the design is the same: a 1
...
Thus, the Golden Spiral spreads before us in symbolic form as one of nature's
grand designs, the image of life in endless expansion and contraction, a static law governing a
dynamic process, the within and the without sustained by the 1
...


Figure 3-9a

59

Figure 3-9b

Figure 3-9c

60

Figure 3-9d

61

Figure 3-9e

62

Figure 3-9f
Next Lesson: The Meaning of Phi

Lesson 18: The Meaning Of Phi
The value of this ubiquitous phenomenon was deeply understood and profoundly appreciated by the
greatest intellects of the ages
...
Pythagoras chose the five-pointed star, in
which every segment is in golden ratio to the next smaller segment, as the symbol of his Order;
celebrated 17th century mathematician Jacob Bernoulli had the Golden Spiral etched into his
headstone; Isaac Newton had the same spiral carved on the headboard of his bed (owned today by
the Gravity Foundation, New Boston, NH)
...

Egyptian engineers consciously incorporated the Golden Ratio in the Great Pyramid by giving its faces
a slope height equal to 1
...
618 times half its base
...
" Furthermore, using these proportions, the Egyptian scientists (apparently in order to build a
scale model of the Northern Hemisphere) used pi and phi in an approach so mathematically
sophisticated that it accomplished the feat of squaring the circle and cubing the sphere (i
...
, making
them of equal area and volume), a feat which was not duplicated for well over four thousand years
...
Those who designed and built the pyramid were likewise
demonstrably brilliant scientists, astronomers, mathematicians and engineers
...
That such a caliber
of people, who were later joined by some of the greatest minds of Greece and the Enlightenment in
their fascination for this ratio, undertook this task is itself important
...
Yet that conjecture, however obtuse, curiously pertains to our own
observations
...
Only those who could rise above the crude acceptance of things as they seemed to discover
what, in actuality, they were, could be instructed in "the mysteries," i
...
, the complex truths of eternal
order and growth
...
To them it represented `the fire of life, the male action of sperm,
the logos [referenced in] the gospel of St
...
'" Logos, a Greek word, was defined variously by
Heraclitus and subsequent pagan, Jewish and Christian philosophers as meaning the rational order of
the universe, an immanent natural law, a life-giving force hidden within things, the universal structural
force governing and permeating the world
...
They did not have graphs and the Wave Principle to make nature's growth pattern
manifest and were doing the best they could to describe an organizational principle that they
discerned as shaping the natural world
...
e
...
The stock market is not a
random, formless mess reacting to current news events but a remarkably precise recording of the
formal structure of the progress of man
...
" The Wave Principle explains the great cycles of man's evolution and
reveals how and why they unfold as they do
...

It is this form that gives structure and unity to the universe
...
The word "universe" means "one order
...
By
extension, the stock market, which values man's productive enterprise, will have order and form as
well
...
Elliott's theory, however, goes beyond all others
...

Elliott, in his second monograph, used the title Nature's Law — The Secret of the Universe in
preference to "The Wave Principle" and applied it to all sorts of human activity
...
Nevertheless, some of history's
greatest scientists, mentioned earlier, would probably have agreed with Elliott's formulation
...
Even this grandiose claim at first may appear to be only so much tall talk to practically-

64

minded investors, and quite understandably so
...
First we must ask, can
we both theorize and observe that there is indeed a principle that operates on the same mathematical
basis in the heavens and earth as it does in the stock market?
The answer is yes
...
The idealized Elliott concept of the progression of the stock market is an excellent base
from which to construct the Golden Spiral, as Figure 3-10 illustrates with a rough approximation
...


Figure 3-10
This result is possible because at every degree of stock market activity, a bull market subdivides into
five waves and a bear market subdivides into three waves, giving us the 5-3 relationship that is the
mathematical basis of the Elliott Wave Principle
...
If we start with
the simplest expression of the concept of a bear swing, we get one straight line decline
...
A complete cycle is two lines
...
As illustrated in Figure 3-11, this sequence can
be taken to infinity
...
Figures 3-12 and 3-13 show two charts, one reflecting the
hourly fluctuations in the Dow over a ten day period from June 25th to July 10th, 1962 and the other a
yearly plot of the S&P 500 Index from 1932 to 1978 (courtesy of The Media General Financial
Weekly)
...
The long term formulation is still unfolding, as wave V from the 1974 low has not run its full
course, but to date the pattern is along lines parallel to the hourly chart
...
Under Elliott's rules, both short and long term plots
reflect a 5-3 relationship that can be aligned with the form that reflects the properties of the Fibonacci
sequence of numbers
...


66

Figure 3-12

Figure 3-13

Now compare the formations shown in Figures 3-14 and 3-15
...
Each wave relates to the
previous wave by
...
In fact, the distances in terms of the Dow points themselves reflect Fibonacci
mathematics
...
618, 1
...
00,
...
382
...
The total net gain from beginning to end is
13 points, and the apex of the triangle lies exactly on the level of the correction's beginning at 930,
which is also the level of the peak of the subsequent reflex rally in June
...
618 ratio between each successive wave is not coincidence
...

Fibonacci Mathematics in the Structure of the Wave Principle
Even the ordered structural complexity of Elliott Wave forms reflects the Fibonacci sequence
...
There are 2 modes of waves: motive (which subdivide into the
cardinal class of waves, numbered) and corrective (which subdivide into the consonant class of
waves, lettered)
...
There are 5 families of simple patterns: impulse,
diagonal triangle, zigzag, flat and triangle
...

The corrective mode has two groups, simple and combined, bringing the total number of groups to 3
...
Allowing only one triangle per combination and one zigzag per
combination (as required), there are 8 families of corrective combinations in all: zig/flat, zig/tri
...
, zig/flat/flat, zig/flat/tri
...
, which brings the total number of families to
13
...

Figure 3-16 is a depiction of this developing tree of complexity
...
, may serve to keep this
progression going
...
Still, that a principle about Fibonacci appears to
reflect Fibonacci is itself worth some reflection
...
However, it is crucial to understand that while the numbers themselves
do have theoretic weight in the grand concept of the Wave Principle, it is the ratio that is the
fundamental key to growth patterns of this type
...
The Fibonacci sequence is the basic additive sequence of its type since it begins
with the number "1" (see Figure 3-17), which is the starting point of mathematical growth
...
As this sequence progresses, the ratio
between adjacent terms in the sequence always approaches the limit phi very quickly
...
Thus, while
the specific numbers making up the Fibonacci sequence reflect the ideal progression of waves in
markets, the Fibonacci ratio is a fundamental law of geometric progression in which two preceding
units are summed to create the next
...


Figure 3-17

69

Figure 3-18
In its broadest sense, the Elliott Wave Principle proposes that the same law that shapes living
creatures and galaxies is inherent in the spirit and activities of men en masse
...
It is a nearly perfect recording of man's social psychological states and
trends, which produce the fluctuating valuation of his own productive enterprise, making manifest its
very real patterns of progress and regress
...
Rather, progress takes shape in a "three steps
forward, two steps back" fashion, a form that nature prefers
...
On the balance of probabilities, we have come to the conclusion that there is a principle,
everywhere present, giving shape to social affairs, and that Einstein knew what he was talking about
when he said, "God does not play dice with the universe
...
The briefest way to express
this principle is a simple mathematical statement: the 1
...

The Desiderata, by poet Max Ehrmann, reads, "You are a child of the Universe, no less than the trees
and the stars; you have a right to be here
...
" Order in life? Yes
...

Next Lesson: Introduction to Ratio Analysis

In 1939, Financial World magazine published twelve articles by R
...
Elliott entitled "The Wave Principle
...
Some of them appeared to work for a
while
...
All have been looked upon by
The Financial World with great skepticism
...
R
...
Elliott's Wave Principle,
The Financial World became convinced that a series of articles on this subject would be interesting and
instructive to its readers
...

— The Editors of The Financial World
In the rest of this course, we reverse the editors' suggested procedure and argue that economic considerations at
best may be thought of as an ancillary tool in checking market forecasts based entirely upon the Elliott Wave
Principle
...
In discerning the working of the Golden Ratio in the five up and three down movement of
the stock market cycle, one might anticipate that on completion of any bull phase, the ensuing
correction would be three-fifths of the previous rise in both time and amplitude
...
However, the underlying tendency of the market to conform to relationships suggested
by the Golden Ratio is always present and helps generate the right look for each wave
...

Although Fibonacci time ratios are far less common, years of plotting the averages have convinced the
authors that the amplitude (measured either arithmetically or in percentage terms) of virtually every
wave is related to the amplitude of an adjacent, alternate and/or component wave by one of the ratios
between Fibonacci numbers
...

The first evidence we found of the application of time and amplitude ratios in the stock market comes
from, of all suitable sources, the works of the great Dow Theorist, Robert Rhea
...

He had this to say about why he felt it was necessary to present the data despite the fact that no use
for it was immediately apparent:
Whether or not [this review of the averages] has contributed anything to the sum total of
financial history, I feel certain that the statistical data presented will save other students many
months of work
...
The figures presented
under this heading probably have little value as a factor in estimating the probable extent of
future movements; nevertheless, as a part of a general study of the averages, the treatment is
worthy of consideration
...

Bull markets were in progress 8,143 days, while the remaining 4,972 days were in bear
markets
...
1
percent of the time required for bull periods
...
It is obvious
that such a figure is considerably greater than the net difference between the highest and
lowest figures of any bull market
...
64 and ended at 76
...
40
points
...
44, 17
...
97, and 24
...
The sum of these advances is 75
...
If the net advance, 46
...
22, the result is 1
...
Assume that two investors were infallible in their
market operations, and that one bought stocks at the low point of the bull market and retained
them until the high day of that market before selling
...
Now assume
that the other investor bought at the bottom, sold out at the top of each primary swing, and
repurchased the same stocks at the bottom of each secondary reaction — his profit would be
162
...
Thus the total of secondary reactions
retraced 62
...
[Emphasis added
...
Fortunately, he felt that there was value in presenting
data that had no immediate practical utility, but that might be useful at some future date
...


71

Ratio analysis has revealed a number of precise price relationships that occur often among waves
...

Retracements
Occasionally, a correction retraces a Fibonacci percentage of the preceding wave
...
8% or 50% of the previous wave,
particularly when they occur as wave 2 of an impulse wave, wave B of a larger zigzag, or wave X in a
multiple zigzag
...
2% of the previous impulse wave,
particularly when they occur as wave 4, as shown in Figure 4-2
...
The ratios shown in Figures 4-1 and 4-2 are merely tendencies, yet
that is where most analysts place an inordinate focus because measuring retracements is easy
...

Next Lesson: Motive and Corrective Wave Multiples

Lesson 21: Motive and Corrective Wave Multiples
WAVE MULTIPLES
Motive Wave Multiples
Lesson 12 mentioned that when wave 3 is extended, waves 1 and 5 tend towards equality or a
...
Actually, all three motive waves tend to be related by
Fibonacci mathematics, whether by equality, 1
...
618 (whose inverses are
...
382)
...
For instance, wave I from 1932
to 1937 gained 371
...
7%, or 2
...

Semilog scale is required to reveal these relationships
...


Figure 4-3

Figure 4-4

Figure 4-5

Another typical development is that wave 5's length is sometimes related by the Fibonacci ratio to the
length of wave 1 through wave 3, as illustrated in Figure 4-4, which illustrates the point with an
extended fifth wave
...
618 relationships occur when wave five is not extended
...

As a generalization that subsumes some of the observations we have already made, unless wave 1 is
extended, wave 4 often divides the price range of an impulse wave into the Golden Section
...
382 of the total distance when wave 5 is not extended, as shown in Figure
4-6, and
...
This guideline is somewhat loose in that the exact
point within wave 4 that effects the subdivision varies
...
Thus, it provides, depending on the circumstances, two or three closely-clustered targets for the
end of wave 5
...
382 retracement point

73

Figure 4-7

Figure 4-6

Corrective Wave Multiples
In a zigzag, the length of wave C is usually equal to that of wave A, as shown in Figure 4-8, although it
is not uncommonly 1
...
618 times the length of wave A
...


Figure 4-8

Figure 4-9

In a regular flat correction, waves A, B and C are, of course, approximately equal, as shown in Figure
4-10
...
618 times the length of wave A
...
618 times the length of wave A
...
In rare cases, wave C is 2
...

Wave B in an expanded flat is sometimes 1
...
382 times the length of wave A
...
618
...
e
...
618c, wave c =
...
618b
...
618
...

In double and triple corrections, the net travel of one simple pattern is sometimes related to another by
equality or, particularly if one of the threes is a triangle, by
...

Finally, wave 4 quite commonly spans a gross and/or net price range that has an equality or Fibonacci
relationship to its corresponding wave 2
...

Next Lesson: Applied Ratio Analysis

Lesson 22: APPLIED RATIO ANALYSIS
Elliott himself, a few years after Rhea's book, was the first to realize the applicability of ratio analysis
...
8% of the number of points in the fifth wave from 1926 to 1928 (1928 is the orthodox
top of the bull market according to Elliott)
...

A
...

Then, in The Elliott Wave Principle — A Critical Appraisal, reflecting on examples cited by Elliott,
Bolton stated,
Should the 1949 market to date adhere to this formula, then the advance from 1949 to 1956
(361 points in the DJIA) should be completed when 583 points (161
...
Alternatively, 361 over 416 would
call for 777 in the DJIA
...

The year 1966 proved those statements to be the most accurate prediction in stock market history,

75

when the 3:00 p
...
hourly reading on February 9th registered a high at 995
...
11)
...
18 DJIA points, less than
one third of one percent error
...
Indeed,
when undertaking a ratio analysis, it is essential that one understand and apply the Elliott counting and
labeling methods to determine from which points the measurements should be made in the first place
...

The authors themselves have used ratio analysis, often with satisfying success
...
J
...
Then, in 1970, in a
supplement to The Bank Credit Analyst, he determined that the bear market low for the Cycle wave
correction in progress would probably occur at a level
...
Four years later, the DJIA's hourly reading in December 1974 at the exact
low was 572
...

Ratio analysis has value at smaller degrees as well
...
618 ratio to determine the maximum expected low for the eight month
pattern to be 922 on the Dow
...
63 at 11:00 on November 11,
launching the year-end fifth wave rally
...
Prechter computed a probable level for the 1978 major
bottom as "744 or slightly lower
...
30
...
the 740 area marks the point at which the 1977-78 correction, in terms of Dow points, is exactly
...
Mathematically we can state that
1022 - (1022-572)
...
618 =
737)
...
618 times the
length of the preceding correction in 1975 from July to October, so that 1005 - (885-784)2
...

Third, in relating the target to the internal components of the decline, we find that the length of wave C
= 2
...
Even the wave factors as researched in
the April 1977 report mark 740 as a likely level for a turn
...
30 on March 1st
...
"
The three charts from that report are reproduced here as Figures 4-12 (with a few extra markings to
condense comments from the text), 4-13 and 4-14
...
Even at this early date, 740
...


76

Figure 4-12

Figure 4-13

77

Figure 4-14
Next Lesson: Multiple Wave Relationships

Lesson 23: MULTIPLE WAVE RELATIONSHIPS
We have found that predetermined price objectives are useful in that if a reversal occurs at that level
and the wave count is acceptable, a doubly significant point has been reached
...
As the next level is often a good distance away, this can be extremely valuable information
...
Thus, if they are not met or are
exceeded by a significant margin, in many instances you will be forced in a timely manner to
reconsider your preferred count and investigate what is then rapidly becoming a more attractive
interpretation
...
It is a good idea to
keep all reasonable wave interpretations in mind so you can use ratio analysis to obtain additional
clues as to which one is operative
...

Therefore, at any given moment the market will be full of Fibonacci ratio relationships, all occurring
with respect to the various wave degrees unfolding
...

For instance, if a
...
618 multiple of Intermediate wave (a) in an irregular correction gives the same
target for Intermediate wave (c), and within that, a 1
...
Figure 4-15 illustrates this example
...
It has been created as an example of how ratios are often present throughout the market
...
618 x [1];
[4] =
...
618 x [1];
[5] =
...
618 x [4];
in [2], (a) = (b) = (c);
in [4], (a) = (c);
in [4], (b) =
...
It will always remain an exercise of
probability, however, not certainty
...
All
that can be said about ratio analysis at this point is that comparing the price lengths of waves
frequently confirms, often with pinpoint accuracy, the applicability to the stock market of the ratios
found in the Fibonacci sequence
...
8% of the preceding 1973-74 bear
slide, or that the 1976-78 market decline traced exactly 61
...
Despite the continual evidence of the importance of the
...
Bolton's counsel with respect to ratio analysis was, "Keep it simple
...
We are hopeful that those who
labor with the problem of ratio analysis will add worthwhile material to the Elliott approach
...
This lesson provides an example of how the ratio was
applied in an actual market situation, as published in Robert Prechter's Elliott Wave Theorist
...
If studied carefully, it can satisfy even the most
cynical researcher
...
The reason that a
study of the Fibonacci ratio is so compelling is that the 1
...
It was this property that led early mathematicians to
dub 1
...
"
The Wave Principle is based on empirical evidence, which led to a working model, which subsequently
led to a tentatively developed theory
...

b) The numbers of waves in each degree of trend correspond to the Fibonacci sequence
...

d) The Fibonacci ratio has reason to be evident in the market
...
The purpose of this Lesson is merely to present evidence that the
Fibonacci ratio expresses itself often enough in the averages to make it clear that it is indeed a
governing force (not necessarily the governing force) on aggregate market prices
...
Interest rates, after all, are
simply the price of an important commodity: money
...

The Elliott Wave Theorist
November 1983
Now it's time to attempt a more precise forecast for bond prices
...
It is also the case that alternate waves within symmetrical triangles
are usually related by
...
As it happens, wave [B] fell 32 points
...
618 = 19¾ points, which
should be a good estimate for the length of wave [D]
...
Therefore, the 60¼ - 61¾ area is the best point to be watching for
the bottom of the current decline
...
]

80

Figure B-14
April 3, 1984 [after (b) ended in a triangle]
The ultimate downside target will probably occur nearer the point at which wave [D] is
...
Thus, if wave [D] travels 19¾ points, the nearby contract should bottom
at 60¼
...
Within zigzags, waves "A" and "C" are typically of equal length
...
11 points from the triangle peak at 70¾ projects 59¾, making
the 60 zone (+ or - ¼) a point of strong support and a potential target
...
Based on [Figure B-15], that distance is 10½ points, which subtracted from
the triangle peak gives 60¼ as a target
...

Investors were cautioned to hold off buying until bonds reached the 59¾-60¼ level
...
It stopped cold
right there and closed at 59 31/32, just 1/32 of a point from the exact center of our target zone
...


Figure B-16
July 11, 1984
The background of investor psychology is very suggestive of an important bond market low [see
Figure B-18]
...
The news media, which all but ignored the rise in interest rates until May 1984, has been
flooding the pages of the press with "higher interest rate" stories
...
During second waves, investors typically relive
the fears that exited at the actual bottom, while the market demonstrates an understanding, by holding
above the previous low, that the worst has passed
...


82

Figure B-18
On June 11, the Wall Street Journal headline read, "Fed Move to Tighten Credit is Expected During
the Summer by Many Economists
...
" On June 22, the WSJ featured an incredible five-page in-depth report entitled
"World Debt in Crisis," complete with a picture of falling dominoes and quotes like these: from a
congressman, "I don't think we're going to make it to the 1990s"; from a V
...
at Citicorp, "Let's be clear
— nobody's debts are going to be repaid"; and from a former assistant Secretary of State for economic
affairs, "We are living on borrowed time and borrowed money
...
Their forecasts for higher rates now extend halfway into
next year! The headline read, "Higher Interest Rates Are Predicted for Rest of Year And Further Rises
Are Seen for 1985's First Six Months
...
" The WSJ is not alone in taking the pulse of economists
...
Every single one of
them has raised his forecast in a linear-logic reaction to the rise in rates that has already occurred
...
This overwhelming consensus based on fundamental analysis is no
guarantee that rates have peaked, but history shows that this type of analysis will rarely result in
market success
...

____________end of quote____________
As further developments proved, that low marked the last buying opportunity prior to the start of a
historical advance in bond prices
...

Next Lesson: Fibonacci Time Sequences

Lesson 25: FIBONACCI TIME SEQUENCES

83

There is no sure way of using the time factor by itself in forecasting
...
Elliott said that the time
factor often "conforms to the pattern" and therein lies its significance
...

In Nature's Law, Elliott gave the following examples of Fibonacci time spans between important
turning points in the market:

1921 to 1929

8 years

July 1921 to November 1928

89 months

September 1929 to July 1932

34 months

July 1932 to July 1933

13 months

July 1933 to July 1934

13 months

July 1934 to March 1937

34 months

July 1932 to March 1937

5 years (55
months)

March 1937 to March 1938

13 months

1929 to 1942

13 years

In Dow Theory Letters on November 21, 1973, Richard Russell gave some additional
examples of Fibonacci time periods:
1907 panic low to 1962 panic low

55 years

1949 major bottom to 1962 panic low

13 years

1921 recession low to 1942 recession low

21 years

January 1960 top to October 1962 bottom

34 months

Taken in toto, these distances appear to be a bit more than coincidence
...
White, in his 1968 monograph on the Elliott Wave Principle, concluded that "the next
important low point may be in 1970
...
May 1970, of
course, marked the low point of the most vicious slide in thirty years
...
2 and 4
...
" Despite this reservation, he successfully indicated within the same book,
which was published in 1960, that 1962 or 1963, based on the Fibonacci sequence, could produce an
important turning point
...

In addition to this type of time sequence analysis, the time relationship between bull and bear as
discovered by Robert Rhea has proved useful in forecasting
...
618 times the 3124 market hours in the advance of waves (1), (2) and (3)
...
5 million shares
...

Benner's Theory
Samuel T
...
He turned to wheat farming in Ohio and took up the statistical study of price
movements as a hobby to find, if possible, the answer to the recurring ups and downs in business
...
The
forecasts contained in his book are based mainly on cycles in pig iron prices and the recurrence of
financial panics over a fairly considerable period of years
...
Even today, Benner's charts are of interest to students of cycles and are occasionally seen
in print, sometimes without due credit to the originator
...
If we apply
this pattern to high points in the Dow Jones Industrial Average over the past seventy-five years
starting with 1902, we get the following results
...


Year

Interval

1902
1910

Market Highs
April 24, 1902

8

January 2, 1910

85

1919

9

November 3, 1919

1929

10

September 3, 1929

1937

8

March 10, 1937

1946

9

May 29, 1946

1956

10

April 6, 1956

1964

8

February 4, 1965

1973

9

January 11, 1973

With respect to economic low points, Benner noted two series of time sequences indicating that
recessions (bad times) and depressions (panics) tend to alternate (not surprising, given Elliott's rule of
alternation)
...
Although he applied a 20-18-16 series to recessions,
or "bad times," less serious stock market lows seem rather to follow the same 16-18-20 pattern as do
major panic lows
...


Figure 4-17
Note that the last time the cycle configuration was the same as the present was the period of the
1920s, paralleling the last occurrence of a fifth Elliott wave of Cycle degree
...
Whether the pattern will always reflect future highs is another
question
...
Nevertheless, in our search for the reason for its
satisfactory fit with reality, we find that Benner's theory conforms reasonably closely to the Fibonacci
sequence in that the repeating series of 8-9-10 produces Fibonacci numbers up to the number 377,
allowing for a marginal difference of one point, as shown below
...
+ 8=

89

89

0


...
+ 9=

233

233

0


...
Had we no experience with the approach, we might not have mentioned it, but it has
proved useful in the past when applied in conjunction with a knowledge of Elliott Wave progression
...
J
...
A letter sent by Forst
to Hamilton Bolton at the time is reproduced here
...
As the letter was dated December 10, 1964, it represents yet another long
term Elliott prediction which turned out to be more fact than fancy
...
A
...
Bolton
Bolton, Tremblay, & Co
...
In
appraising trends, I have every confidence in your bank credit approach except when the atmosphere becomes
rarefied
...
My feeling is that all fundamental tools are for the most part low pressure
instruments
...
For this reason, I have kept my eye cocked on the Wave Principle and what I see now causes me
some concern
...


...

The third wave of the long rise from 1942, namely June 1949 to January 1960, represents an extension of
primary cycles
...


...
It will be interesting to see if this develops
...
No self-

87

respecting analyst other than an Elliott man would do such a thing, but then that is the sort of thing this unique
theory inspires
...
J
...
The
approaches suggested here are merely carrots to whet the appetite of prospective analysts and set
them on the right track
...
Additional detailed examples are
presented in the Lessons 32 through 34
...
All that remains is to discover
how many doors it will unlock
...
H
...
Hopkins of Oxford University as saying,

88

For a century or more, it seems, prices will obey one all-powerful law; it changes and a new
law prevails
...
Do we yet know what are the factors that set this stamp on
an age, and why, after they have held on so long through such shakings, they give way
quickly and completely to others?
Brown and Hopkins state that prices seem to "obey one all-powerful law," which is exactly what R
...

Elliott said
...
As Mr
...
We agree with Mr
...

To introduce another expansion on the idea, we suggest that these shocks themselves are part of the
clockwork
...
Quite likely the logarithmic spiral of
man's progress is propelled in a similar manner, though with the jolts tied not to time periodicity, but to
repetitive form
...
Any rejection of the Wave Principle on the grounds that it is
deterministic leaves unanswered the how and why of the social patterns we demonstrate in this book
...
Most important, understand that the form we describe is primarily
social, not individual
...
It is not easy to act and think
contrarily to the crowd and to your own natural tendencies, but with discipline and the aid of
experience, you can certainly train yourself to do so once you establish that initial crucial insight into
the true essence of market behavior
...

We suppose the average investor has little interest in what may happen to his investments when he is
dead or what the investment environment of his great-great-great-great grandfather was
...
However, long term waves must be assessed,
first because the developments of the past serve greatly to determine the future, and secondly
because it can be illustrated that the same law that applies to the long term applies to the short term
and produces the same patterns of stock market behavior
...
Moreover, as we shall see,
because of the position of the current Millen nium wave and the pyramiding of "fives" in our final
composite wave picture, this decade could prove to be one of the most exciting times in world history
to be writing about and studying the Elliott Wave Principle
...
The Millennium Wave from the Dark Ages
Data for researching price trends over the last two hundred years is not especially difficult to attain, but
we have to rely on less exact statistics for perspective on earlier trends and conditions
...
H
...
Hopkins and further enlarged by
David Warsh is based on a simple "market basket of human needs" for the period from 950 A
...
to
1954
...
Figure 5-1 shows approximate general
price swings from the Dark Ages to 1789
...


89

Strangely enough, this diagram, while only a very rough indication of price trends, produces an
unmistakable five-wave Elliott pattern
...
Rome, whose great culture at one time may have coincided with the
peak of the previous Millennium wave, finally fell in 476 A
...
For five hundred years afterward, during
the ensuing Millennium degree bear market, the search for knowledge became almost extinct
...
The leveling of prices from 1350 to 1520 forms wave two
and represents a "correction" of the progress during the Commercial Revolution
...
Elizabeth I (1533-1603) came to the throne of England just after an
exhausting war with France
...
This was the age of Shakespeare, Martin Luther, Drake and Raleigh, truly a glorious epoch
in world history
...

By 1650, prices had reached a peak, leveling off to form Grand Supercycle wave two
...
However, as a study
by Gertrude Shirk in the April/May 1977 issue of Cycles magazine points out, trends in commodity
prices have tended to precede similar trends in stock prices generally by about a decade
...
This third Grand
Supercycle upwave within the current sub-Millennium wave Three coincides with the burst in
productivity generated by the Industrial Revolution (1750-1850) and parallels the rise of the United
States of America as a world power
...
If the 200-year
Grand Supercycle wave has almost run its full course, it stands to be corrected by three Supercycle
waves (two down and one up), which could extend over the next one or two centuries
...
This broad hint of long term trouble does not preclude that technology will
mitigate the severity of what might be presumed to develop socially
...
Nevertheless, the end of the
current Supercycle (V) should usher in an era of economic and social stagnancy or setback in
significant portions of the world
...
S
...
In Figure 5-2, the Supercycle subdivisions have been marked
(I), (II), (III), (IV) and (V)
...

Especially striking is the trend channel, the baseline of which connects several important Cycle and
Supercycle wave lows and the upper parallel of which connects the peaks of several advancing
waves
...
Wave (II) is a
flat, which neatly predicts a zigzag or triangle for wave (IV), by rule of alternation
...
Wave (IV), from 1929 to 1932, terminates
within the area of the fourth wave of lesser degree
...
S
...
In wave A of the decline, daily charts
show that the third subwave, in characteristic fashion, included the Wall Street crash of October 29,
1929
...
Wave C finally bottomed at 41
...
382 times the length of
wave A, and completed an 89 (a Fibonacci number) percent drop in stock prices in three (another
Fibonacci number) years
...

The Supercycle Wave from 1932
Supercycle wave (V) has been in progress since 1932 and is still unfolding (see Figure 5-3)
...
The breakdown of Cycle waves is as follows:
Wave I: 1932 to 1937 — This wave is a clear cut five-wave sequence according to the rules
established by Elliott
...
618 of the market decline from the 1928 and 1930 highs and, within
it, the extended fifth wave travels 1
...

Wave II: 1937 to 1942 — Within wave II, subwave [A] is a five, and wave [C] is a five, so the entire
formation is a zigzag
...
Thus, there is great strength in the
structure of the entire corrective wave, much beyond what we would normally expect, as wave [C]
travels only slightly into new low ground for the correction
...
A wave of this construction can have the power of a flat
...
Its principal features are as follows:
1) Wave [4] is a flat, alternating with a zigzag, wave [2]
...


92

3) Wave [4] corrects to near the top of the preceding fourth wave of one lesser degree and holds well
above the peak of wave [1]
...
618), as is often the case between two nonextended waves
...
Two possible interpretations are shown: a five-wave expanding
triangle from February 1965 and a double three from January 1966
...
No other Elliott evidence, however,
suggests that such a weak wave is in the making
...
Our
technical objections to a five-wave count are that the supposed third subwave is too short, and the first
wave is then overlapped by the fourth, thereby offending two of Elliott's basic rules
...


Figure 5-3
Wave V: 1974 to ? — This wave of Cycle degree is still unfolding
...
The last chapter will cover in somewhat more detail our analysis and
expectations with respect to the current market
...
Figure 5-4 gives the composite picture
and speaks for itself
...
The cultural rise of Europe and North America, and before
that the rise of the Greek city-states and the expansion of the Roman Empire, and before that the
thousand year wave of social progress in Egypt, might be termed waves of Cultural degree, each of
which was separated by Cultural degree waves of stagnation and regress, each lasting centuries
...

Of course, the theory of the spiraling Wave Principle suggests that there exist waves of larger degree
than Epochal
...
Perhaps Homo sapiens himself is one stage in the development of hominids, which in
turn are one stage in the development of even larger waves in the progress of life on Earth
...
On
this basis, Rome dominated the Western world for a total of five seconds
...

Next Lesson: Individual Stocks

94

Lesson 28: Individual Stocks
The art of managing investments is the art of acquiring and disposing of stocks and other securities so
as to maximize gains
...
Stock selection is of secondary importance compared to timing
...
To be a winner in the stock market, one must know the direction of the primary
trend and proceed to invest with it, not against it, in stocks that historically have tended to move in
unison with the market as a whole
...
U
...
Steel in 1929 was selling at $260 a share and was considered a sound investment for
widows and orphans
...
00 a share
...
The stock market is usually a bull or a
bear, seldom a cow
...
As we shall illustrate, while the Wave Principle has some
application to individual stocks, the count for many issues is often too fuzzy to be of great practical
value
...
For the
most part, basic technical analysis with regard to individual stocks is probably more rewarding than
trying to force the stock's price action into an Elliott count that may or may not exist
...
The Elliott philosophy broadly allows for individual attitudes and circumstances
to affect price patterns of any single issue and, to a lesser degree, a narrow group of stocks, simply
because what the Elliott Wave Principle reflects is only that part of each man's decision process which
is shared by the mass of investors
...
In other words, the form of the Wave Principle reflects the
progress not of each man or company but of mankind as a whole and his enterprise
...
Trends, fads, cultures, needs and desires ebb and flow with the human condition
...
Thus, each company, like each man, appears on the scene as part of the whole, plays its part,
and eventually returns to the dust from which it came
...
, but when that droplet is
part of a wave in the ocean, it becomes swept along with the force of the waves and the tides, despite
its individuality
...
It has been shown that on average, seventy-five percent of all stocks move up with the
market, and ninety percent of all stocks move down with the market, although price movements of
individual stocks are usually more erratic than those of the averages
...
Emerging growth stocks, however, tend
to create the clearest individual Elliott Wave patterns because of the strong investor emotion that
accompanies their progress
...
Decisive action is best taken only then, but it should be taken, regardless of the wave count
for the market as a whole
...

Despite the above detailed caveat, there are numerous examples of times when individual stocks
reflect the Wave Principle
...
The bull markets for U
...
Steel, Dow Chemical
and Medusa show five-wave advances from their major bear market lows
...
The charts of Kmart (formerly Kresge) and Houston Oil and
Minerals illustrate long term "growth" type advances that trace out Elliott patterns and break their long
term supporting channel lines only after completing satisfactory wave counts
...
One difference between the behavior of
commodities and stock market averages is that in commodities, primary bull and bear markets at times
overlap each other
...
Therefore, while
beautiful charts of Supercycle degree waves do exist for a number of commodities, it seems that the
peak observable degree in some cases is the Primary or Cycle degree
...

Also in contrast to the stock market, commodities most commonly develop extensions in fifth waves
within Primary or Cycle degree bull markets
...
Fifth wave advances in the stock market are
propelled by hope, while fifth wave advances in commodities are propelled by a comparatively
dramatic emotion, fear: fear of inflation, fear of drought, fear of war
...

Commodity bull market extensions, moreover, often appear following a triangle in the fourth wave
position
...
One example is shown in
the chart of silver in Figure 1-44
...

Unfortunately, semilogarithmic chart scale, which may have indicated applicability of Elliott trend
channels, was not available for this study
...

The pattern is unmistakably Elliott, even down to Minor wave degree
...
In these computations, the length of the rise to the peak of
wave (3) and to the peak of wave 3 each divide the bull market into the Golden Section at equivalent

99

distances
...
After the
peak of the fifth wave was reached, a devastating bear market struck apparently from out of the blue
...
The explosive rise in 1972-73
emerged from a long base, as did the explosion in coffee prices
...
618, gives almost exactly the
distance from the end of wave 3 to the peak of wave 5
...
Wave B of this correction is just shy of
...
A new bull market takes place in 1976-77, although of subnormal extent since
the peak of wave 5 falls just short of the expected minimum target of $10
...
In this case, the gain to
the peak of wave 3 ($3
...
618 gives $5
...
70 gives the $10
...
In each of these bull markets, the initial measuring unit is the same, the
length of the advance from its beginning to the peak of wave three
...
618 times
the length of wave 5, measured from the peak of wave 3, the low of wave 4, or in between
...


Figure 6-9
Figure 6-10 is a weekly high-low chart of Chicago wheat futures
...
45, prices trace out an Elliott A-B-C bear market with excellent internal interrelationships
...
The five touch points conform perfectly to the boundaries of the trendlines
...
618b; d =
...
618d)
...
In addition, the wave A decline is approximately 1
...


Figure 6-10
Thus, we can demonstrate that commodities have properties that reflect the universal order that Elliott
discovered
...
One commodity that is unalterably tied to the psyche of mass humanity is
gold
...
When the price of gold reverses to the upside
after a downtrend, it can often occur concurrently with a turn for the worse in stocks, and vice versa
...

In April of 1972, the long-standing "official" price of gold was increased from $35 an ounce to $38 an
ounce, and in February of 1973 was again increased to $42
...
This fixed "official" price established
by central banks for convertibility purposes and the rising trend in the unofficial price in the early
seventies led to what was called the "two-tier" system
...

The free market price of gold rose from $35 per ounce in January 1970 and reached a closing
"London fix" price peak of $197 an ounce on December 30, 1974
...
50
...
S
...
R
...
S
...
M
...
auctions
...

Despite both the efforts of the U
...
Treasury to diminish gold's monetary role, the highly charged
emotional factors affecting gold as a store of value and a medium of exchange have produced an
inescapably clear Elliott pattern
...
50 an
ounce on April 3rd, 1974 is a completed five-wave sequence
...
The dynamic breakout from that base fits well the criterion for the clearest
Elliott count for a commodity, and clear it is
...
The Fibonacci target projection method typical of
commodities is fulfilled, in that the $90 rise to the peak of wave [3] provides the basis for measuring
the distance to the orthodox top
...
618 = $55
...
62
...
50, quite close indeed
...
50, the price of gold had multiplied by just over five (a Fibonacci number)
times its price at $35
...
This wave was wave [B] of an expanded flat correction, which crawled upward
along the lower channel line, as corrective wave advances often do
...
First, the news background, as everyone
knew, appeared to be bullish for gold, with American legalization of ownership due on January 1,
1975
...
Secondly, gold mining stocks, both North American and South African, were noticeably
under-performing on the advance, forewarning of trouble by refusing to confirm the assumed bullish
picture
...
In terms of the bullion price, the
authors computed in early 1976 by the usual relationship that the low should occur at about $98, since
the length of wave [A] at $51, times 1
...
The low for the correction was well within the zone of the previous
fourth wave of lesser degree and quite near the target, hitting a closing London price of $103
...
The [A]-[B]-[C] expanded flat correction implies great thrust in the next wave
into new high ground
...
It has nothing more to offer the world than discipline
...
Somehow, though,

102

governments always seem to manage to have a supply on hand "just in case
...
The disciplined life is the productive life, and that concept applies to all levels of endeavor, from
dirt farming to international finance
...

That paper is no substitute for gold as a store of value is probably another of nature's laws
...
Dow, the primary trend of the market is the broad, all-engulfing "tide," which is
interrupted by "waves," or secondary reactions and rallies
...
The latter are generally unimportant unless a line (defined as a sideways structure
lasting at least three weeks and contained within a price range of five percent) is formed
...
The leading exponents of Dow's theory, William Peter Hamilton, Robert Rhea, Richard
Russell and E
...

As Charles Dow once observed, stakes can be driven into the sands of the seashore as the waters
ebb and flow to mark the direction of the tide in much the same way as charts are used to show how
prices are moving
...
Thus, a movement to a new extreme in an established trend by one average
alone is a new high or new low which is said to lack "confirmation" by the other average
...
During advancing impulse waves,
the market should be a "healthy" one, with breadth and the other averages confirming the action
...

Dow's followers also recognized three psychological "phases" of a market advance
...


103

Figure 7-1
The Wave Principle validates much of Dow Theory, but of course Dow Theory does not validate the
Wave Principle since Elliott's concept of wave action has a mathematical base, needs only one market
average for interpretation, and unfolds according to a specific structure
...
Often, for
instance, the Elliott count can forewarn the Dow Theorist of an upcoming non-confirmation
...
In fact, this type of development has helped the authors more than once
...

On the other side of the coin, a Dow Theory non-confirmation can often alert the Elliott analyst to
examine his count to see whether or not a reversal should be the expected event
...
Since Dow Theory is the grandfather of the
Wave Principle, it deserves respect for its historical significance as well as its consistent record of
performance over the years
...
Such approaches have a great deal of validity, and
in the hands of an artful analyst can be an excellent approach to market analysis
...
In our opinion, the
analyst could go on indefinitely in his attempt to verify fixed cycle periodicities, with negligible results
...

News
While most financial news writers explain market action by current events, there is seldom any
worthwhile connection
...
In
Nature's Law, Elliott commented on the value of news as follows:
At best, news is the tardy recognition of forces that have already been at work for some time and is
startling only to those unaware of the trend
...
No single news item or series of developments can be regarded as the
underlying cause of any sustained trend
...
This statement can be verified by
casual study of the 45 year record of the Dow Jones Industrial Average
...
Yet all bull markets acted in the same way, and likewise all bear markets evinced
similar characteristics that controlled and measured the response of the market to any type of news as
well as the extent and proportions of the component segments of the trend as a whole
...

There are times when something totally unexpected happens, such as earthquakes
...
Those
who regard news as the cause of market trends would probably have better luck gambling at race
tracks than in relying on their ability to guess correctly the significance of outstanding news items
...

Elliott recognized that not news, but something else forms the patterns evident in the market
...
In periods of increasing optimism, the market's
apparent reaction to an item of news is often different from what it would have been if the market were
in a downtrend
...
The psychology of the market in relation to the news, then, is
sometimes useful, especially when the market acts contrary to what one would "normally" expect
...

During waves 1 and 2 of a bull market, the front page of the newspaper reports news that engenders
fear and gloom
...
Favorable fundamentals return in wave 3 and peak temporarily in the early part
of wave 4
...
At the market's
peak, the fundamental background remains rosy, or even improves, yet the market turns down,
despite it
...
The
news, or "fundamentals," then, are offset from the market temporally by a wave or two
...

Technicians argue, in an understandable attempt to account for the time lag, that the market
"discounts the future," i
...
, actually guesses correctly in advance changes in the social condition
...
However, the idea that investors are clairvoyant is somewhat
fanciful
...
e
...
" To sum up our view, then, the market, for our purposes, is the news
...
The theory holds that
stock prices move at random and not in accord with predictable patterns of behavior
...

Amateurs, no matter how successful they are in other fields, usually find it difficult to understand the
strange, "unreasonable," sometimes drastic, seemingly random ways of the market
...
Many facts contradict this conclusion, and not all of them are at
the abstract level
...
Statistically speaking, these performances prove that the forces animating the
market's progression are not random or due solely to chance
...
A very short term speculator who makes
tens of decisions a week and makes money each week has accomplished something akin to tossing a
coin fifty times in a row with the coin falling "heads" each time
...
Calling either heads or
tails is a fair bet because the chance of either result is one half
...
For a coin to
fall heads fifty consecutive times would take a million men tossing coins ten times a minute for forty
hours a week, and then it would only happen once every nine centuries
...
Action on the NYSE does not create a formless
jumble wandering without rhyme or reason
...
Thus, as the reader of this book
may witness, the Elliott Wave Principle challenges the Random Walk theory at every turn
...
As in the Wave Principle, technical
analysis (as described by Robert D
...
The
concept of a "wedge" is the same as that for Elliott's diagonal triangle and has the same implications
...
"Rectangles" are usually double or triple threes
...

The famous "head and shoulders" pattern can be discerned in a normal Elliott top (see Figure 7-3),
while a head and shoulders pattern that "doesn't work out" might involve an expanded flat correction
under Elliott (see Figure 7-4)
...
In Figure 7-3, wave 3 will have the heaviest volume, wave 5 somewhat lighter, and wave b
usually lighter still when the wave is of Intermediate degree or lower
...


107

Figure 7-3

Figure 7-4
Trendlines and trend channels are used similarly in both approaches
...
High volume and volatility (gaps) are recognized
characteristics of "breakouts," which generally accompany third waves, whose personality, as
discussed in Lesson 14, fills the bill
...

The technical analytic tools known as "indicators" are often extremely useful in judging and confirming
the momentum status of the market or the psychological background that usually accompanies waves
of each type
...
Momentum indicators reveal an ebbing of the market's power (i
...
, speed of
price change, breadth and in lower degrees, volume) in fifth waves and in "B" waves in expanded flats,
creating "momentum divergences
...
Indeed, the associated guidelines within the Wave Principle at times have suggested
a market environment that made the temporary alteration or impotence of some market indicators

108

predictable
...
In our opinion, attempts to forecast the
market without listening to the market itself are doomed to fail
...
Moreover, taking a long term
historical perspective, we feel strongly that while various economic conditions may be related to the
stock market in certain ways during one period of time, those relationships are subject to change
seemingly without notice
...
Another changing relationship is the occurrence of
inflation or deflation, each of which has appeared bullish for the stock market in some cases and
bearish for the stock market in others
...
Falling interest rates often accompany bull markets but also accompany the very worst
market declines, such as that of 1929-1932
...
Walter E
...
If
percentage changes (from one year earlier) in the consumer price index are plotted, the rate of
inflation from 1965 to late 1974 appears as an Elliott 1-2-3-4-5 wave
...
The waves are useful, however, in suggesting turning points, as in late 1974
...
For instance, net free banking reserves, which White said "tend to precede turning
points in the stock market," were essentially negative for about eight years from 1966 to 1974
...

As testimony to the utility of wave analysis in the money markets, we present in Figure 7-5 a wave
count of the price of a long term U
...
Treasury bond, the 8 and 3/8 of the year 2000
...
On this chart we have three
examples of alternation, as each second wave alternates with each fourth, one being a zigzag, the
other a flat
...
The fifth wave constitutes an extension, which
itself is contained within a trend channel
...
(Further evidence of the applicability of the Wave Principle to
forecasting interest rates was presented in Lesson 24
...
Apparently,
what influences investors in managing their portfolios is likely influencing bankers, businessmen and
politicians as well
...
Elliott waves, as a reflection of the mass psyche,
extend their influence over all categories of human behavior
...
For instance, for years analysts have suspected a connection between sunspot
frequency and stock market prices on the basis that changes in magnetic radiation have an effect on
the mass psychology of people, including investors
...
Collins published a paper
entitled "An Inquiry into the Effect of Sunspot Activity on the Stock Market
...
More recently, Dr
...
Burr, in Blueprint for Survival, reported that he had discovered a striking
correlation between geophysical cycles and the varying level of electrical potential in plants
...
Indeed, some
analysts successfully use planetary alignments, which apparently affect sunspot activity, to predict the
stock market
...
A
...
S
...
The article is entitled "Fibonacci Series in the Solar System" and
establishes that planetary distances and periods conform to Fibonacci relationships
...
Nevertheless, we are content for
the time being to assume that Elliott Wave patterns of social behavior result from the mental and
emotional makeup of men and their resulting behavioral tendencies in social situations
...

Next Lesson: A Forecast From 1982

Lesson 32: A FORECAST FROM 1982, PART I

110

Elliott Wave Principle concluded that the wave IV bear market in the Dow Jones Industrial Average
ended in December 1974 at 572
...
Neither level was ever broken on a daily or hourly closing basis
...

excerpt from
The Elliott Wave Theorist
September 13, 1982
THE LONG TERM WAVE PATTERN —
NEARING A RESOLUTION
This is a thrilling juncture for a wave analyst
...
The next fifteen weeks should clear up all the long term questions that have persisted
since the market turned sloppy in 1977
...
But the task of wave analysis often requires stepping back and taking a
look at the big picture and using the evidence of the historical patterns to judge the onset of a major
change in trend
...
Those content to focus on 100-point swings will do extremely
well as
long as the Cycle trend of the market is neutral, but if a truly persistent trend gets under way, they'll be
left behind at some point while those in touch with the big picture stay with it
...
J
...
That target is still just as valid, but since the Dow is still where it was four years
ago, the time target is obviously further in the future than we originally thought
...
Most of these have proposed
failed fifth waves, truncated third waves, substandard diagonal triangles, and scenarios for immediate
explosion (usually submitted near market peaks) or immediate collapse (usually submitted near
market troughs)
...
But the real answer remained a mystery
...
At this point, the two
alternates I have been working with are still valid, but I have been uncomfortable with each one for
reasons that have been explained
...

Series of 1s and 2s in Progress
This count [see Figure A-2] has been my ongoing hypothesis for most of the time since 1974, although
the uncertainty in the 1974-1976 wave count and the severity of the second wave corrections have
caused me a good deal of grief in dealing with the market under this interpretation
...
The technical name for wave IV is an expanding
triangle
...

Wave V will contain a clearly defined extension within wave [3], subdividing (1)-(2)-(3)-(4)-(5), of which
waves
(1) and (2) have been completed
...
[The main] disadvantage of this count is that it suggests too long a period for the entire wave
V, as per the guideline of equality
...

2) Allows to stand A
...
Frost's 1970 forecast for an ultimate low for wave IV at 572
...

4) Accounts for the breadth surge in August 1982
...

6) Fits the idea of a four year cycle bottom
...

8) Fits the idea that the Kondratieff Wave plateau is partly over
...

Disadvantages
1) 1974-1976 is probably best counted as a "three," not a "five
...

3) The breadth of the 1980 rally was substandard for the first wave in what should be a powerful
Intermediate third
...

Next Lesson: A Forecast From 1982, Part II
Lesson 33: A FORECAST FROM 1982, PART II
excerpt from
The Elliott Wave Theorist
September 13, 1982

112

THE LONG TERM WAVE PATTERN —
NEARING A RESOLUTION
Continued from Lesson 32
Double Three Correction Ending in August 1982
The technical name for wave IV by this count is a "double three," with the second "three" an ascending
triangle
...
] This wave count
argues that the Cycle wave correction from 1966 ended last month (August 1982)
...
A brief break of the long term trendline, I should note, was recognized as an occasional trait of
fourth waves, as shown in [R
...
Elliott's Masterworks]
...


Figure A-3
A surprising element of time symmetry is also present
...
The 3½ year bull market from 1942 to 1946
was corrected by a 3½ year bear market from 1946 to 1949
...
The count is a downward sloping [A]-[B]-[C], with wave [C] a diagonal
triangle [see Figure A-3]
...

I've added the expanding boundary lines to the upper portion of the chart just to illustrate the
symmetrical diamond-shaped pattern constructed by the market
...
The center of the pattern (June-July 1973) cuts the
price element in half at 190 and the time element into two halves of 8+ years each
...
[For the full story on The Elliott Wave Theorist's long term assessment of this
index, see Chapter 3 of At the Crest of the Tidal Wave
...

2) Keeps nearly intact the long term trendline from 1942
...

4) Allows for a simple bull market structure as originally expected
...

6) Takes into account the sudden and dramatic rally beginning in August 1982, since triangles
produce "thrust" [Lesson 1]
...

8) Fits the idea of a four year cycle bottom
...
Parallel with late 1921
...
"
Disadvantages
1) A double three with this construction, while perfectly acceptable, is so rare that no example in any
degree exists in recent history
...

Outlook
Triangles portend "thrust," or swift moves in the opposite direction traveling approximately the distance
of the widest part of the triangle
...
Since the triangle boundary extended below January 1973 would add
about 70 more points to the "width of the triangle," a thrust could carry as far as 1350
...
Therefore, one must
conclude that a bull market beginning in August 1982 would ultimately carry out its full potential of five
times its starting point, making it the percentage equivalent of the 1932-1937 market, thus targeting
3873-3885
...
An interesting observation regarding this target is that it parallels the 1920s, when
after 17 years of sideways action under the 100 level (similar to the recent experience under the 1000
level), the market soared almost nonstop to an intraday peak at 383
...
As with this fifth wave, such a
move would finish off not only a Cycle, but a Supercycle advance
...
The experience of the last
16 years has turned us all into [short-term market timers], and it's a habit that will have to be
abandoned
...

November 29, 1982
A PICTURE IS WORTH A THOUSAND WORDS
The arrow on the following chart [see Figure A-7] illustrates my interpretation of the position of the
Dow within the current bull market
...
Whether he's right, of course, only time will tell
...
Mid-pattern decision making is particularly
difficult
...
At such times, one's level of
conviction rises to over 90%
...
Here in March 1997, the evidence is compelling
that the Dow Jones Industrial Average and the broad market indices are registering the end of their
rise
...

Elliott Wave Principle, written in 1978, argued that Cycle wave IV had finished its pattern at the price
low in December 1974
...


Figure D-1
Figure D-2 shows the same labeling updated
...
As shown in Lesson 33, the
count detailed on the inset called the 1982 lift-off, the peak of wave [1], the low of wave [2], the peak of
wave [3], and by Frost's reckoning, the low of wave [4]
...
In doing so, it has finally met and surpassed in a throw-over its
long term trendlines
...
Those familiar with the Wave Principle will see a
completed textbook formation that follows all the rules and guidelines from beginning to end
...
With the
last two decades' performance behind us, we
can record some additional facts
...
Most important, wave V has finally
reached the upper line of the parallel trend channel drawn in Elliott Wave Principle eighteen years
ago
...

This is a stunning snapshot of a market at its pinnacle
...
S
...


117

Figure D-3
Epilogue
Until a few years ago, the idea that market movements are patterned was highly controversial, but
recent scientific discoveries have established that pattern formation is a fundamental characteristic of
complex systems, which include financial markets
...
This is precisely the type of pattern identified in market movements by R
...

Elliott some sixty years ago
...
It is a vantage point that affords remarkable
clarity of vision, not only concerning history, but the future as well
...
It presents a highly detailed elaboration of the
second half of the authors' forecast, i
...
, that a record-setting bear market is now due
...
That first leg, upward, was both personally and financially rewarding in
fulfilling the authors' sober expectations, which were simul- taneously beyond most market observers'
wildest dreams of riches
...
Being prepared the first time meant
fortune and perhaps a bit of fame for its forecasters
...
Although it is generally believed (and tirelessly reiterated) that "the
market can do anything," our money is once again on the Wave Principle
...
N
...
We invite you to stay with us for the next leg of our great
journey through the patterns of life and time

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