1948. For some reason none of Elliott’s students had seen fit to carry on his work. Bolton had become intrigued with the possibilities of the Wave Principle when he first discovered the series of articles authored by Elliott in The Financial World, circa 1938. Following Elliott’s death in 1948, only one or two students were willing to discuss the Wave Principle in any way. In his work, “The Elliott Wave Principle – A Critical Appraisal” Bolton refers to Garfield Draw, a student of R. N. Elliott, and author of New Methods for Profit in the Stock Market. In this publication no mention is made of Elliott’s background by the notable Mr. Drew and a mere two pages of the 365-page volume are devoted to an explanation of the Wave Principle. It would appear that those who were unable to grasp the theories of Elliott merely dismissed them, while those who studied with him, kept his principles a well-guarded secret.
First contacts with Wall Street
In 1966 we have the sudden appearance in print of Charles J. Collins. Having learned of Collins’ previous association with R. N. Elliott, A. Hamilton Bond commissioned him to make a contribution to the 1966 annual supplement of the Bolton, Tremblay Bank Credit Analyst, such supplements being usually devoted to a dissertation on the current placement of the U.S. Stock Market within the Elliott Wave Cycle.
Collins tells of his first encounter with R. N. Elliott in late 1934. According to Collins, Elliott wrote to him from California in the autumn of 1934 claiming that a bull market in Wall Street had begun and the particular move was likely to carry the Dow-Jones Industrial Averages for a considerable distance. Elliott also proposed that Collins investigate his work on cycle theory upon which the forecast was based. Collins countered with the usual request, that Elliott go on record with his predictions for the period. Collins then let the matter rest.
At that time Charles J. Collins was the editor of a weekly investment bulletin in America distributed on a national basis. As is common to most publishers of investment advice Collins was subject to frequent letters and a stream of visitors all claiming to have developed “infallible” methods or systems for forecasting the stock market. I have had them in my offices over the past few years and have adopted an approach similar to that of Collins. In an effort to discourage repeated requests for assessment of these “beat the market” methods I usually suggest that the author of the system go on record with me over a complete up-and-down market cycle. If the record proved the method had some merit I would then determine whether or not to investigate the matter in further detail, possibly submitting the method to the London School of Economics who provide testing facilities. In practically all instances, at some point in the stock market cycle the system goes haywire and nothing further is heard from the author of the system. Collins makes it quite clear that Elliott and his work were one of three notable exceptions in his lifetime.
In March 1935 the Dow-Jones Rail Averages collapsed under the 1934 low while the Dow-Jones Industrial Averages shed over 11 per cent in tandem. According to classic Dow theory, a shuddering “sell signal” was produced and in Collins’ mind it looked as if another so-called “infallible” stock market system was ready for annihilation. Obviously, with the disaster of 1929 still fresh in the minds of the U.S. investing public, the development scared the daylights out of most people. Completely unperturbed by the decline, Elliott cabled Collins on the very day the Dow-Jones Industrial Averages plumbed what subsequently proved to be an important low. As was always his way, Elliott dogmatically affirmed that the break in the market was over and that another leg of the bull market was just beginning.
As Collins was reading the telegram the Dow-Jones Industrial Averages were racing upward. However, the time stamp on the telegram clearly showed that Elliott had issued the wire two hours before the Dow-Jones Industrial Average had hit bottom. For the two months that followed, the U.S. market continued to forge ahead. So impressed was Collins with the accuracy of the Elliott forecast, not to mention his dogmatism, that Elliott was invited as the house guest of Mr. Collins at his splendid estate in New England.
Elliott accepted the invitation and the two men spent several weeks together thoroughly investigating Elliott’s Wave Principle. As intriguing as the principle was the modest background from which it emanated. Elliott was an American citizen, but said he had been a wireless operator in Mexico before he was stricken with illness. Upon the instructions of his medical adviser Elliott was forced to move back to his original home in California, where, for almost three years, all he could do was sit on the front porch. For want of any other intellectual stimulation and in order to keep his mind occupied, Elliott began to study the stock market. He was a complete novice at the time. It was probably this factor more than any other which allowed him to pursue the subject with the necessary openness of mind. During his studies he covered the classical work produced by Dow, Schabacher and other analysts of the era. However, he discovered a pattern of previous share behaviour that went beyond the accepted methods of most analysts. Underlying the repetition of configurations which formed the cornerstone of most technically oriented methods at that time, Elliott discovered a form which seemed to account for the many times that the accepted patterns failed. In due course the wave theory thus evolved.
When Elliott approached Collins he was a fledgling in the securities industry, just trying his wings. He wanted to join Collins’ organisation. However, it was the firm’s policy never to base any decision-making on one single tool or on any single approach, while Elliott refused to allow any extraneous factors to deflect him from his Wave Principle. Collins offered to help Elliott set up on his own and was instrumental in obtaining some risk capital which Elliott was to supervise. Collins was then to edit Elliott’s first monograph, “The Wave Principle” which was later supplemented by “Nature’s Law”, a more comprehensive document prepared by Elliott in which he added many philosophical points, including reference to Fibonacci Summation Series, all of which formed the basic rationale for the Wave Principle.
In these two monographs, Elliott postulates that all fluctuations in the stock market are fragments of a great rhythmic system of waves and cycles in ascending and descending orders of magnitude. This great rhythm is supposedly repeated in various forms of nature throughout the universe. Elliott himself was an agnostic, leaning towards mysticism, somewhat along the lines of thought established by the great W. D. Gann. It was Gann’s contention that the stock market continually traced a pattern of perfect mathematical balance and that share price behaviour could be seen as being mathematically symmetrical when one finally established the starting point of the various forms of cyclical activity. Elliott also believed in this view and felt that the Fibonacci Summation Series formed the basis of all points of cyclical departure. I will describe exactly how the Fibonacci Series fitted into Elliott’s scheme. It is remarkable how Josef Schillinger operating in a totally different area arrived at the same conclusion in his superb volume, The Mathematical Basis of the Arts. As we continue, the reader will no doubt be astonished at the manner in which this concept of mathematical symmetry weaves in and out of the various aspects of human behaviour.
Elliott and the Economists
Elliott explained the historic movement of share prices on the basis of irresistible cyclical forces acting over long periods of time. Obviously, he was not alone in his direction of thought, although he was the only man ever to apply these long-term cyclical influences to the stock market. N. D. Kondratieff, in his essay “Die langen Wellen der Konjunktur” discovered the 54-year cycle of economic life which confirmed the findings of the Dutchman J. van Gelderen, who in his book Springvloed; Beschouwing Over Industriele Ontwikkeling en Prijsbeweging, observed that in addition to the 10-year cycle discovered by W. Stanley Jevans in 1878, a much longer cycle of economic activity existed. Joseph Schumpeter later formalised the work of the main cyclical theorists: Kondratieff (54-year cycle), Juglar (18-year cycle), and Kitchin (4-year cycle). It was Schumpeter’s concept in his Theory of Economic Development that each Kondratieff Cycle contained 3 complete Juglar cycles and 14 Kitchin cycles.
Professor Schumpeter wrote of his model:
“No claims are made for our three-cycle scheme except that it is a useful descriptive or illustrative device. Using it, however, in that capacity, we in fact got ‘ex visu’ of 1929, a ‘forecast’ of a serious depression embodied in the formula: