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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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