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A method developed by Ralph Nelson Elliott and based on Fibonacci numbers, Elliott Wave Theory claims that the stock market (and most everything else, too) moves in a series of repetitive waves. There are five waves in the direction of the trend and then three 'corrective waves' (a '5-3' move) in a complete cycle, which then becomes 2 subdivisions of the next higher 5-3 cycle. What this means is that although timespans may vary, the basic pattern is always composed of eight waves (five up and three down). In any sequence of 8, waves 1, 3, and 5 are the so-called 'impulse' waves. Waves 2 and 4 are corrective waves (i.e. in the other direction). Waves 6, 7, and 8 correct the main trend made by waves 1, 2, 3, 4 and 5. Waves 1 through 5 establish the main trend (either bullish or bearish). Elliott Wave Theory is fractal, in that each wave within a wave count contains a complete 5-3 wave count of a smaller cycle, which should mean that it has application in day trading techniques, but unfortunately, the subjectivity of the theory (as expanded on below) makes it difficult to use well in this timeframe. Elliot called the longest wave count the 'Grand Supercycle', which is composed of 8 'Supercycles', themselves composed of smaller 'Cycles', and so on right down to 'Primary', 'Intermediate', 'Minute', 'Minuette' and 'Sub-minuette' waves. Elliott Wave experts generally agree that the most recent 'Grand Supercycle' started in 1932 and that the final fifth wave of this cycle began as the market touched bottom in 1982. Unfortunately, there has been much less agreement since 1982, with some commentators declaring that the October 1987 crash was the end of the cycle while others point out that a strong recovery since invalidates this claim, and this is the weakness of the theory - when to start the count and what actually 'is' a wave is highly subjective. |
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