Elliott Wave Theory

In a theory proposed by R. N. Elliott in 1938, the market moves in regular, repeated waves or cycles.

Five impulse waves + Three corrective wave.

Waves in the direction of the trend consist of five subwaves, and counter-waves consist of three subwaves.

The longest cycle can be broken down into subcycles. The major cycles are:

Grand supercycle     Minor

Supercycle           Minute

Cycle                Minuette

Primary             Subminuette

Intermediate

Elliott discovered that market waves follow patterns that are ratios of the numbers in the Fibonacci sequence.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34 …

1/2 = 0.50, 2/3 = 0.6667, 3/5 = 0.6, 5/8 = 0.625, 8/13 = 0.6154…

2/1 = 2, 3/2 = 1.5, 5/3 = 1.6667, 8/5 = 1.600, 13/8 = 1.6250…

These ratios converge around 1.618.

[Practice Problems] In 1938, R. N. Elliott proposed a theory that equity markets move:

A.       in stochastic waves.

B.        in cycles following Fibonacci ratios.

C.        in waves dependent on other securities.

[Solutions] B