Where Did the Wave Theory Come From?

Ralph Nelson Elliott is the father of the Wave Theory, which is commonly called and more accurately described as the Elliott Wave Principle. Born on July 28, 1871 in Marysville, Kansas, Elliott reached his ultimate achievement late in life by a circuitous route.

After a long career in various accounting and business practices, R.N. Elliott was forced into an unwanted retirement at the age of 58 due to an illness contracted while living in Central America. Needing something to occupy his mind while recuperating, he turned his full attention to studying the behavior of the stock market.

Elliott examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. By November 1934, R.N. Elliott's confidence in his ideas of what is sometimes called the Wave Theory had developed to the point that he presented them to Charles J. Collins of Investment Counsel, Inc. in Detroit.

Collins had traditionally put off the numerous correspondents who offered him systems for beating the market. Not surprisingly, the vast majority of these systems proved to be dismal failures. Elliott's Wave Theory, however, was another story.

The Dow Jones averages had declined throughout early 1935, and advisors were turning negative with the memories of the 1929–32 crash fresh in their minds. On Wednesday, March 13, 1935, just after the close of trading — with the Dow Jones averages finishing near the lows for the day — Elliott, citing his Wave Theory analysis, sent a telegram to Collins and flatly stated:

“NOTWITHSTANDING BEARISH (DOW) IMPLICATIONS ALL AVERAGES ARE MAKING FINAL BOTTOM.”

The next day, Thursday, March 14, 1935, was the day of the closing low for the Dow Industrials that year. The 13-month “correction” was over, and the market immediately turned to the upside. Two months later, as the market continued its upward climb, Collins agreed to collaborate on a book on the Wave Theory. The Wave Principle was published on August 31, 1938.

During the early 1940s, the Wave Theory continued to develop. Elliott tied the patterns of collective human behavior to the Fibonacci, or “golden” ratio, a mathematical phenomenon known for millennia as one of nature's ubiquitous laws of form and progress.

Elliott then put together what he considered his definitive work, Nature's Law — The Secret of the Universe. This volume includes almost every thought he had concerning his Wave Theory.

As a result of Elliott’s pioneering research, today, thousands of institutional portfolio managers, traders and private investors use the Wave Theory in their investment decision-making.

This article on the history of the Wave Theory was excerpted from a detailed 64-page biography in R.N. Elliott’s Masterworks (New Classics Library, 1994). This book contains all of R.N. Elliott’s books and articles, plus highlights from his market letters on Wave Theory.

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