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Who
is R.N. Elliott?
He is
the father of
The Wave Principle,
and whom our company
is named for.
His groundbreaking
studies of the
behavior of the
stock market helped
him develop a
set of principles
that applied to
all degrees of
wave movement
in the stock price
averages. Today,
thousands of institutional
portfolio managers,
traders and private
investors use
The Wave Principle
in their investment
decision making.
What
is the Wave Principle?
In the
1930's, Ralph
Nelson Elliott
discovered that
stock market prices
trend and reverse
in recognizable
patterns. The
patterns he discerned
are repetitive
in form, but not
necessarily in
time or amplitude.
Elliott isolated
thirteen such
patterns, or "waves,"
that recur in
market price data.
He named, defined
and illustrated
the patterns.
He then described
how they link
together to form
larger versions
of themselves,
how they in turn
link to form the
same patterns
at the next larger
size, and so on,
producing a structured
progression. He
called this phenomenon
The Wave Principle.
Although it is
the best forecasting
tool in existence,
the Wave Principle
is not primarily
a forecasting
tool; it is a
detailed description
of how markets
behave.
What
is Elliott wave
analysis?
The Wall
Street Journal
stated it best
in a March 1987
news article,
"The idea
behind the Elliott
Principle is that
stock prices are
a barometer of
the national mood
and that mood
moves in predictable
waves between
optimism and pessimism."
So, Elliott wave
analysis is used
to analyze these
predictable patterns
in order to have
a better idea
of where the markets
are likely to
go next.
How
does Fundamental
analysis of the
markets factor
in to what you
do?
It doesn't.
In fact, we think
fundamental approaches
such as using
what's happening
in the news to
justify what's
going on in the
markets on a particular
day have zero
value. News actually
lags the market.
The patterns of
social psychology
that occur naturally
are the fundamentals
of the market.
They are what
cause what most
people think are
the fundamentals.
Why
has the Wave Principle
been referred
to as the "purest
form of technical
analysis"?
For a hundred
years, investors
have noticed that
events external
to the market
often seem to
have no effect
on the market’s
progress. With
the knowledge
that the market
continuously unfolds
in waves that
are related to
each other through
form and ratio,
we can see why
there is little
connection. The
market has a life
of its own. It
is mass psychology
that is registering.
Changes in feelings
show up directly
as price changes
in the barometer
known as the DJIA.
The Wave Principle
is a catalog of
the ways that
the crowd goes
from the extreme
point of pessimism
at the bottom
to the extreme
point of optimism
at the top. It
is a description
of the steps human
beings go through
when they are
part of the investment
crowd, to change
their psychological
orientation from
bullish to bearish.
That description
fits the movement
of any market,
as long as human
beings are involved,
rather than Martians,
who may have a
differently operating
unconscious mind.
Since people don’t
change much, the
path they follow
in moving from
extreme pessimism
to extreme optimism
and back again
tends to be the
same over and
over and over,
regardless of
news and extraneous
events.
What
is the basic path?
Very
simply, Elliott
recognized that
movement in the
direction of the
one larger trend
subdivides into
five waves. Movement
against the trend
subdivides into
a three-wave pattern
or some variation
involving several
three-wave patterns.
In rising markets,
true bull markets,
the subdivisions
occur in five
waves up, an up-down-up-down-up
sequence. Bear
markets tend to
occur in three
wave sequences,
down-up-down.
Each one of those
movements has
a shape and a
personality. As
long as you can
recognize the
shapes that are
occurring, you
have a handle
on what might
happen next.
But
the five-wave
form does occur
on the downside.
Yes, but only
as a component
of a larger three-wave
pattern. The essence
of the Wave Principle
is that the moves
in the direction
of the one larger
trend are five-wave
structures, while
moves against
the one larger
trend are three-wave
structures. From
that, you can
tell what the
underlying trend
is and invest
accordingly.
Is
Elliott’s
a mechanical system?
Not really. What
we’re dealing
with here is the
behavior of people.
If the tools you
work with measure
something other
than the behavior
of people, you’ll
be removed from
the reality of
what’s going
on. One of the
biggest failures,
in terms of approaching
the stock market,
is to assume that
the market is
mechanical in
the sense that
outside action
causes market
reaction, such
as the idea that
the market “responds”
to Fed policy
or the trade balance
or political decisions.
Others have tried
to reduce it to
a sum of periodic
sine waves, but
always find that
it cannot be done,
because the market
is not a time-repetitive
machine in its
essence.
From the standpoint
of theory, market
behavior is tied
to a mathematical
law, but it is
just not the same
type of law found
in the physical
sciences. From
the standpoint
of practical application,
the Wave Principle
is tracking a
living system,
which is allowed
variation in its
forms, in fact,
infinite variation,
but limited by
an essential form.
Whereas a rigid
system with numbers,
strict mechanical
numbers, never
works.
Doesn’t
infinite variation
imply that anything
goes?
Not at all. Trees
vary infinitely,
but they all look
like trees, don’t
they? And you
can tell them
apart from clouds,
which also vary
infinitely, and
buildings as well.
In fact, despite
infinite variability,
they are amazingly
similar. The same
is true of market
patterns.
What
are the Wave Principle’s
key strengths?
Frost liked to
say, “Its
most striking
characteristics
are its generality
and its accuracy.”
Its generality
gives market perspective
most of the time,
and its accuracy
in pointing out
changes in direction
is almost unbelievable
at times.
Why
does the Wave
Principle work
so well?
Because it is
100% technical.
No armchair theorizing
from economics
and politics is
required.
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