the FT30 down to 503.1. Wave 3 began on 27 March, running for 30 days, taking the FT30 up to 540.3. Minuette Wave 4 then acted in a corrective fashion for nine days, taking the FT30 back down to 419.6. The final Minuette Wave 5 lasted 12 days until the top at 545.6 was reached on 22 May 1972.
Sub-minuette. The sub-minuette waves comprising the last 12 trading sessions in the final stages of the bull move of May 1972 reveal a Sub-Minuette Wave 1 lasting 12 hours, Sub-Minuette Wave II lasting five hours, Sub-Minuette Wave III eight hours, Sub-Minuette Wave IV six hours; the final burst of the Sub-Minuette Wave V was 19 hours long.
One can readily begin to see how Elliott’s method completely supersedes most other forms of pattern categorisation of share price movements and, to say the least, clearly demonstrates the obsolescence of the over-simplified bull market-bear market fixation, which tries to establish a constantly recurring periodicity of bull and bear market cycles into two and three-year repetitions. The randomness of the time relationship in classification amply demonstrates this point. For all practical purposes, we have in the Wave Principle the ultimate work-a-day series of stock market sequences.”
Three: Elliott… Pure and Simple
“The market was its law. Were there no law, there could be no center about which prices could revolve, and therefore, no market.”
The Wave Principle (1938), Ralph Nelson Elliott
FROM ELLIOTT’S WRITINGS it would appear that he was well versed in the work that Charles Dow had developed while editor of the Wall Street Journal. By the time Elliott had formulated his work, the Dow Theory was some 50 years old and fairly well established in many quarters as having special forecasting significance. Elliott, no doubt, spotted the short-comings of Dow Theory, its imprecision and somewhat laggard characteristics. One of the primary problems of Dow Theory is that a trend is usually well established before one is advised to take action in accordance with the classic Dow Theory “Bull Signals”.
It was Elliott’s contention that since the store of information regarding stock market transactions has been greatly multiplied since Dow’s original work, important and valuable new forecasting inferences could be drawn from certain behavioural characteristics of price movements.
A Rhythmic Pattern of Waves
During years of compilation of statistics relating to share price behaviour, Elliott noted that the “wild, senseless and apparently uncontrollable changes in share prices from year to year, month to month, day to day, and even hour to hour, linked themselves into a law-abiding rhythmic pattern of waves”. He claimed this pattern continually repeated itself over and over in sequence, ranging from the most minute hour to hour movements to massive market movements spanning many decades, as seen in the wave classification summary produced in the last chapter. By establishing the exact position of the current market’s movement within the major cyclical force one could therefore determine whether the general trend of the market was in the incipient, mature, or mid-way development stage of any particular trend, planning one’s investments accordingly. When discussing the Elliott Wave U.K. categorisation of the January 1975-March 1976 move, investors would have remained confident during the June-August decline of 1975 and the February-March decline of 1976, for only 3 impulse waves of that particular bull cycle had been completed. The mature stages of that particular movement would not occur until the fifth and final wave was reaching a terminal state. Thus investors could make their purchases with confidence during the aforementioned downswings which interrupted the cycle, and offered opportunities for the bargain hunters.
In many respects Elliott’s principles are totally compatible with the workings of Dow Theory. Both men recognised that long and short term swings are part of the same movement. That is, Elliott noted, the small swings are an integral part of a swing of the next higher degree which in turn forms a part of a swing of the next higher degree still, etc. We thus start with hourly movements and build-up to the Grand Super Cycle. We can also start regressively, with the Grand Super Cycle working downward to the hourly movements.
It was Dow who established the analogy of the ocean tide, the waves forming a subordinate part of the tide, and the ripples in the water subordinate to the waves, each rising and falling with rhythmic regularity (a) from their own direct cause and forming cross-currents, and (b) being ultimately governed by the overwhelming tidal force. Perhaps one can more readily understand the several different trends of share prices which act concurrently with each other, sometimes counter to one another, by considering this analogy. In essence, the shorter term price movements which we have referred to as “random noise”, basically caused by spontaneous occurrences, are the flotsam on the surface of the stock market ocean. Movements of this type, in two or three or more directions at once, and often opposing, are difficult to assimilate for many investors; but if we bear in mind the basic sub-division of three kinds of cycles, for the sake of simplicity – short, medium and long – and use the long to give us perspective from which to judge the short swings, and use the shorter swings to give us perspective from which to judge the longer swings, one can gain a greater proficiency in understanding stock market movements. Needless to say, comprehension or this simple phenomenon is mandatory if one is to understand the basis of the Wave Principle.
Elliott’s work supersedes the work of Dow in the precise classification of the various movements in a completed cycle. One of the most fascinating aspects of the Wave Principle was Elliott’s separation of larger corrective movements into the minor, minute, minuette and sub-minuette categories, all of which comprise a grand symmetry of share price movements which have been noted to be in effect since the 19th century in the U.S. and which can be observed dating back to the 17th century in the U.K. In these movements Elliott’s basic pattern repeats itself over and over again, beginning with the sub-minuette cycles, upward to the minuette cycles, then upward to the minute cycles, upward still to the minor and then intermediate, and so on until we reach the Grand Super Cycle spanning more than 70-100 years.
Elliott’s Five Basic Tenets
The basic pattern which is the subject of this cumulative upward progression is quite simple to comprehend. Elliott’s work can be summarised in five basic tenets:
1 For every action there is a reaction. Stock market movements in the direction of the main trend have been defined as “impulse moves”. Stock market movements counter to the main trend have been defined as “corrective moves”. An “impulse move” is always followed by a “corrective move”.
2 Generally, all “impulse moves” have five subordinate wave components while all “corrective moves” have three subordinate wave components.
3 When the main trend is upward, waves 1, 3 and 5 are deemed “impulse moves” and waves 2 and 4 are “corrective moves”. When the main trend is downward, the first and third waves become “impulse moves” while the second wave becomes a “corrective move”.
4 The action of the main trend can be taking place over a time frame of anything from a few hours to many years. When the main trend has completed a series of five waves the trend is reversed and a “counter move” consisting of three waves is expected.
5 Upon the termination of a move comprising five waves followed by a “counter move” consisting of three waves, we thus have the first complete cycle movement. This complete cycle movement will represent the first and second waves of a cycle in the time frame of the next higher degree.
Bull Market – Bear Market
Well, that’s Elliott’s “pure”… now let’s see if I can simplify it a bit. Elliott’s basic configuration was the five-three pattern consisting of five waves in an overall upward direction and three waves encompassing a downward move. At this stage, for the sake of simplicity, we will act on the assumption that the five wave pattern is applicable to bull markets, bear markets having three waves. (No point in dealing with the variations and exceptions to the rule until we master the basic rule.) As I have demonstrated to members of my classes who have studied the Elliott Wave