As we will show in subsequent lessons, the
spiral-like form of market action is repeatedly shown to be governed
by the Golden Ratio, and even Fibonacci numbers appear in market
statistics more often than mere chance would allow. 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. Although it is rarely pointed out in the
literature, the Fibonacci ratio results from this type of additive
sequence no matter what two numbers start the sequence. 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. However, we may also take any two randomly
selected numbers, such as 17 and 352, and add them to produce a
third, continuing in that manner to produce additional numbers. As
this sequence progresses, the ratio between adjacent terms in the
sequence always approaches the limit phi very quickly. This
relationship becomes obvious by the time the eighth term is produced
(see Figure 3-18). 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. That is why this ratio governs so many relationships in data
series relating to natural phenomena of growth and decay, expansion
and contraction, and advancement and retreat.
Figure 3-17
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.
The Elliott Wave Principle shows up clearly in the market because the
stock market is the finest reflector of mass psychology in the world.
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. What the Wave Principle says 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. Rather, progress takes shape in a
"three steps forward, two steps back" fashion, a form that
nature prefers. In our opinion, the parallels between and Wave
Principle and other natural phenomena are too great to be dismissed as
just so much nonsense. 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 stock market is no exception, as mass behavior is
undeniably linked to a law that can be studied and defined. The
briefest way to express this principle is a simple mathematical
statement: the 1.618 ratio.
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. And whether or
not it is clear to you, no doubt the Universe is unfolding as it
should." Order in life? Yes. Order in the stock market?
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