Chapter: 13 Technical Analysis (Charting)

Section: 4 Elliot Wave Theory

The underlying forces behind the Elliott Wave Theory are of building up and tearing down. The basic concepts of the Elliott Wave Theory are listed below.

  1. Action is followed by reaction. 

  2. There are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move).

  3. A 5-3 move completes a cycle. This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.

  4. The underlying 5-3 pattern remains constant, though the time span of each may vary.

The basic pattern is made up of eight waves (five up and three down). Waves 1, 3, and 5 are called impulse waves. Waves 2 and 4 are called corrective waves. Waves a, b, and c correct the main trend made by waves 1 through 5. The main trend is established by waves 1 through 5 and can be either up or down. Waves a, b, and c always move in the opposite direction of waves 1 through 5. Elliott Wave Theory holds that each wave within a wave count contains a complete 5-3 wave count of a smaller cycle. The longest wave count is called the Grand Supercycle. Grand Supercycle waves are comprised of Supercycles, and Supercycles are comprised of Cycles. This process continues into Primary, Intermediate, Minute, Minuette, and Sub-minuette waves. An example is illustrated graphically as follows: