The Most Efficient Path of the Stock Market Unfolds at Large Degree
Investors face a historical juncture in the price pattern.

By Bob Stokes
Wed, 08 May 2013 12:45:00 ET

In the 1920s, R.N. Elliott was a successful author, consultant and accountant. But late in that decade he contracted a debilitating and near-fatal illness that left him bedridden. He chose to pass the time by studying the stock market's price patterns.

His career had required meticulous attention to detail, and in turn he applied that rigor to his study of the market.

Elliott observed that markets unfold in five wave moves (the "motive phase"), followed by three-wave moves (the "corrective phase").

Take a look at the graph from Frost and Prechter's Elliott Wave Principle: Key to Market Behavior.

As you can see, this idealized bullish market pattern unfolds in five waves of progress separated by three waves of regress.

Why 5-3?

Elliott himself never speculated on why the market's essential form is five waves of progress and three waves of regress. He simply observed the Fibonacci-driven pattern.

"The Fibonacci Summation Series is the basis of The Wave Principle. The numbers thereof are as follows: 1, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. The sum of any two adjoining numbers equals the next higher number. For example: 3+5=8. The waves of every movement coincide with these numbers," wrote Elliott in one of his market letters.

Does the essential form have to be five waves and three waves? Think about it, and you'll realize that this is the minimum requirement to efficiently achieve both fluctuation and progress.

One historical phase of progress started 30 years ago.

Back in 1982 and 1983 ... the Elliott wave position of the market gave us a unique and valuable perspective. The Elliott Wave Theorist recognized that a bull market akin to that of the Roaring ’Twenties had started and that it would become a bull market of “manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.”

The Elliott Wave Theorist, April 2013

That is exactly what unfolded.

The stock market's price pattern now stands at another historical juncture.

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