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Technical Analysis: Elliott Wave Theory Basics

R. N. Elliott developed his wave theory in 1934. It is a method for explaining stock market movements.

Elliott Wave Technical Analysis rules and guidelines applied to the charts, and will help you trade and invest successfully through a better understanding of the market to maximize opportunity and minimize risk.

Under the Elliott Wave Principle, every market decision is both produced by meaningful information and produces meaningful information. Each transaction, at once affects to the market and, by communicating transactional data to investors, causes other's behavior.

According to the Elliott Wave Theory, stock prices tend to move in a predetermined number of waves. Elliott believed the market moved in five distinct waves on the upside (Motive or Impulse Wave) and three distinct on the downside (Corrective Wave).

Motive wave structure is denoted by numbers (1-2-3-4-5) and, corrective wave structure is denoted by letters (a-b-c).

Market cycles are composed of Motive Wave and Corrective Wave, So one complete cycle consists of eight waves.

Elliott Wave degrees

An important feature of Elliott Wave Theory is that they are fractal in nature. 'Fractal' means market structure is built from similar patterns on larger or smaller scales. Therefore, we can count the wave on a long-term yearly market chart as well as short-term hourly market chart

Elliott Wave theory categorizes waves by relative size, or degree. Elliott discerned nine degrees of waves, and chose the names listed below to label these degrees, from largest to smallest:

1.Grand Supercycle

2.Supercycle

3.Cycle

4.Primary

5.Intermediate

6.Minor

7.Minute

8.Minuette

9.Sub-Minuette

The major waves determine the major trend of the market, and minor waves determine minor trends.

For complete article with images refer to: Technical Analysis: Elliott Wave Theory Basics

By Mostafa Soleimanzadeh. Learn to Make Money in Stocks by reading Free Stock Market Investing Tips.

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A look at Elliott Wave Theory

Elliott Wave

The Elliott Wave Principle focuses on the behavior of humans and how that behavior impacts the stock market. Rather than acting in an unpredictable manner, Ralph Nelson Elliott (in the late 1920s) noticed that the market actually ran in repetitive cycles - which were a result of investors' reactionary behavior to outside influences. The principle was published in Elliott's books The Wave Principle and Nature's Laws - The Secret of the Universe. Elliott believed that humans are rhythmical beings, so all human decisions and actions could be predicted in rhythms. So basically, we have a stock principle based on human behavior.

While Elliott's Wave Principle is based partially on the Dow Theory, it expands on the belief thanks to individual wave aspects that Elliott uncovered. According to Elliott, an impulsive wave follows the main trend - and it is comprised of five other waves, a pattern that runs infinitely (these are wave degrees). Each impulse wave is followed by a corrective wave, which occurs in threes - creating a five/three pattern.

Basics Of Elliott Wave Chart

Robert Prechter et al are among the biggest proponents of Elliott Wave theory. The long-term record of such analysis is a bit spotty though -- they have called some big market moves very well, yet also been on the wrong side of some gigantic long-term moves.

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Elliot Wave Theory - Pedicting Market Direction for Profit

Elliot wave theory has a huge and devoted following and is being described as advanced technical analysis and the key to un locking market behavior and predicting the future.

Let’s look at it in more detail and why Elliot Himself could not make money from the theory.

The theory was named after Elliott himself, who concluded in his book “nature’s law” something all traders would love to know.

He concluded that:

The movement of financial markets could be predicted by observing, and identifying a repetitive pattern of waves.

Of course there are repetitive patterns in nature and we all know that, but how do we use them to trade?

We know that at some time in the future, we will see a sunny day when we go outside, the REAL question is when exactly?

So, markets are cyclical, but that doesn’t mean you can predict them in advance and that means in specific time frames.

What we want from an investment theory, is the EXACT timing of a specific event.

Elliott wave theory is put forward as objective investment theory but this is a contradiction in terms as there is nothing objective about it.

The whole theory relies on the subjectivity of the person using it!

You need to look at peaks and troughs, (various time frames) and then make a subjective judgment on where prices are going to go next.

That’s up to you.

Elliot Wave Theory

Is according to Elliot based on rhythms found throughout nature and these of course apply to financial markets to.

He then makes the observation that:

The financial market moves up in a series of five waves and down in a series of three waves.

Elliott wave principle however neglects the most important part we all want to know:

The time requirements for a cycle to complete.

In Elliot wave theory there is no time requirement.

The subjectivity is so great in Elliott wave that a thousand different people will all come to different conclusions, so this can hardly be called an objective theory as it’s all subjective.

Like most of the far out investment theories, everything is explainable in hindsight, however we don’t trade in hindsight - we have to predict what will happen next in real time.

In conclusion:
Elliott says that you are able to predict the market with his theory- but then gives you no objective way of doing it.

Who uses Elliott Wave?

1. Investors who want an easy way to make money, and are taken in by great advertising copy – well it is a good story!

2. The far out investment crowd attracted to the mysticism of objective laws in nature and the markets.

Predictive and subjectivity are contradictory!

The Elliott wave theory is a predictive theory which predicts nothing at all and leaves everything to subjective analysis.

If Elliott had worked out a predictive theory then he could have be kind enough to give us an objective way to make money.

If all investors could predict the market in advance, we would all know what was going to happen - and there would actually be no market at all, as we have said previously.

Did Elliot leave a track record of stunning gains?

Of course he didn’t - in fact he died a pauper, so he obviously couldn’t use his own theory like the rest of the people who try it

You can predict one certainty with Elliot Wave

The only thing you can predict with certainty with Elliot wave theory, is that you will get wiped out in the markets.

Predictive theories are hard when you actually have to decide market direction with no objective help!

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Bearish Candlestick Patterns Warn of a Killer Third Wave Down Approaching

On June 15, 2009, the Dow Industrials marked an "outside-down" day which bearishly engulfed the "real bodies" of the nine preceding days' price action. I had never before seen a pattern such as this. We took it to be a bearish warning of particular significance. Since that time, through today, prices have developed two descending "one-two, down-up" patterns, the latter of which is still not complete, and would not be complete unless prices fall below 8259.60, which was the low on June 25. When and if prices fall below that low, then we can be reasonably sure that prices will have embarked on a "third wave down," which should mark the end of the bull rally that began on March 10 - and, therefore, that prices will be on their way to much lower levels.

Quite apart from the June 15 "outside-down day," today's price bar in the Dow Industrials shows us a bearish "Dark Cloud Cover" pattern, which is shown as a "Bearish Engulfing" pattern in the S&P 500 and also in the NASDAQ Composite.

Typically, a bull rally in an underlying bear market (which is the situation today) does not come to an end unless and until there is an aura of optimism and even euphoria which is reminiscent of that which obtained at or near the prior price peaks - in this case, early in year 2000 and again in September and October 2007. We do not see any such degree of optimism now, which leads us to believe that the Great March Rally of 2009 is probably not yet over, and that we could yet see Dow prices in the 10000 range.

Nevertheless, we have no choice but to go with the evidence that we see, not the evidence that we think we should see or that we would like to see. A highly-skilled practitioner of Elliott Wave aalysis wrote - decades ago - that "the hardest thing is to believe what you see."

In this particular case, much as we would like to see evidence of a final rally price high which is attended by a high degree of optimism, it may in fact "be different this time."

The key will be the low of June 25. If that low should be exceeded on the downside, especially on a Closing basis, then the chances would be at least fair that a third wave of a third wave is in progress, the Rally would be history, and we could look to much lower prices ahead.

William Kurtz June 30, 2009

The author is a retired corporate CEO and attorney, and a long-time investor. He has passed the NASD Series 65 Investment Adviser exam. He publishes his Investment Newsletter and Action Suggestions three times per week at the CandleWave website, http://www.candlewave.com/ The Action Suggestions provide specific Safety Stops on major Indexes; a review of the major Indexes; an individual review of each of the Gold, Silver, and Crude Oil markets; an individual review of each of the Dow 30 stocks and of selected non-Dow stocks; a review of five popular Forex pairs; and his Daily Commodities Report. The Daily Commodities Report is also available as a free-standing service at http://www.commoditiesjunction.com/ The Operating Manual for his copyrighted “Candelaabra” technical analysis trading system for all financial markets is also available through its own website at http://www.candelaabra.com / E-mail contact via info@candlewave.com/ “Candelaabra” rides atop Genesis Financial Technologies’ “Trade Navigator” © platform. “Trade Navigator” with the “Candelaabra” overlay, and data feed, are available directly from Genesis by arrangement with CandleWave, LLC in a joint 30-day trial of both Trade Navigator and Candelaabra.

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Elliott Wave Theory offer international financial insights, patterns and signals, Market analysis is carried out using charts and computer technology to predict short term time forecasts.  Some websites provide free updates and presenting countsat regular updated time horizons. DOW theory requires that one indicators must be confirmed by another in order to know the trend. No confirmation means a divergence and signals change may happen.