Daily TrendWatch
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education.
February 3, 2012
Basics of Elliott Wave
A look at Elliott Wave Theory
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 and incorporates Fibonacci, 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.
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.
For those who utilize these techniques, they break down waves into degrees of the pattern, each with its own name. These degrees are not classified by their form; not by their size or duration. Therefore, waves of the same degree may have different sizes or durations. The waves are named:
Grand Supercycle (the longest)
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette (the shortest)
The Grand Supercycle can take years to complete while the subminuette can take mere minutes to run its course.
Bottom Line: Elliott Wave (and Wave Theory in general) can be fairly hard to quantify and utilize as a practical trading technique. Certainly there is a logical basis to the fact that "waves" occur both in nature and the stock market - and the psychological implications of various waves/trends from investor behavior are important, as well. Wave Theory technical analysis practitioners tend to be "true believers", but testing and measuring indicators for short-term active investing based on these theories/methods can be difficult.
Trade Well,
Price Headley
About Price Headley
Price Headley is the founder and chief analyst of BigTrends.com, which provides daily stock and options recommendations and education. Timer Digest recognized Price and BigTrends.com among the Top 10 stock market timers for 2000. Price has been widely quoted by Barron's, CNBC, The Wall Street Journal and USA Today. Price is also the author of the new book, Big Trends in Trading: Strategies to Master Major Market Moves.
If you want Price to answer any of your questions on future web site updates, send an email to askprice@bigtrends.com or call 1-800-BIGTRENDS (1-800-244-8736).
Disclaimer
THIS COLUMN IS AN INFORMATIONAL AND EDUCATIONAL SERVICE ONLY. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. The information provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy or completeness. BigTrends.com, Price Headley and Hard Right Edge shall not be liable for any damages or costs of any type arising out of or in any way connected with the services of the company.
