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Elliot Wave Theory

     There are many methods of interpreting and purportedly predicting future market moves. If you've been in the markets for very long you've certainly heard of the granddaddy of them all and that's the Elliot Wave Theory. Named for its developer R. N. Elliot who lived in the first half of the 20th century. Elliot stated in his own book Natures Law - The Secret of the Universe: "…Practically all developments which result from (human) socio-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials [sic] of waves or impulses of definite number and pattern..." Elliot believed that stock market movements unfold in a series of rhythmic patterns, which are based on a natural progression of shifts in mass investor psychology.

    Elliot believed there were various types of wave patterns and labeled them. The two types of waves were 1) impulse waves that move in the direction of the main trend of the market and consisted of 5 smaller waves; and 2) corrective waves that move counter to the market's trend, and consisted of 3 smaller wave formations. By counting and labeling the wave patterns, Elliot Wave followers should in theory be able to determine the direction and scope of future market trends. Wave counts can be deeply nested one within another. Elliot Wave pundits can sometimes count the waves differently and sometimes end up with different forecasts despite using the same basic theory. You have to give credit to some followers in that they fairly accurately predicted the Dow being at 10,000 almost 10 years prior to it occurring, and their prediction was made at a time when the Dow was only at 1,000. Elliot Wave novices have an almost endless collection of books to wade through to try to sharpen their skills.

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