12,000 Years of Elliott Waves

Appendix A: Introduction to Elliott Wave Theory.

R. N. Elliott was a businessman during the early part of the Twentieth Century. He traveled widely throughout the Americas and during these travels he developed a serious illness that caused him to interrupt his work and travels. During his convalescence, he turned his attention to the stock market. In his study of the stock market, he discovered a sequence of waves, which reoccurred in stock market trading over time.

Elliott refined his studies and published the results first in a monograph titled The Wave Principle in 1938. He published more on his Principle in a series of articles in the Financial World during 1939. He added to the body of literature on his Principle by publishing another monograph in 1946 titled Nature's Law, plus various Interpretive Letters between 1938 and 1947. He died in 1948.

By the time Elliott wrote Nature's Law, he had reached a point where he was convinced the waves and Principle he had discovered was not only present in organized financial markets, but also in all human endeavors and development. He wrote the following: "Nature's Law has always functioned in every human activity. Waves of different degrees occur whether or not recording machinery is present. When the machinery described below is present, the patterns of waves are perfected and become visible to the experienced eye."

The machinery he described was a viable stock market average. Such averages have only been available for about 150 years. It is the authors' faith in this belief that has been the motivating force in expanding the years covered in this Elliott Wave analysis of history, from a few hundred to 12000 years. This fact is vital if the reader is to understand the purpose and the importance of the conclusions drawn from this work.

Elliott empirically derived the Elliott Wave Principle. It came into being after long study of stock market movements. He discovered form and structure in stock price movements, which no one before him had observed. The form and structure he uncovered is both simple and elegant in its basic manifestation. He discovered that all stock market movements take place in eight waves or sequences. Each wave in this sequence is a move by the index that occupies a predetermined position in terms of direction and duration in relation to the other 7 waves of the sequence.

The eight waves consist of five waves that typically form a bull market, which is then followed by a corrective phase (or bear market) that consists of three waves. The form and structure of this discovery is displayed in the chart below (Figure A1).

Figure A1

You can see that the bull market phase of five waves consists of three waves up (Waves 1,3, and 5), with two corrective waves down (waves 2 and 4). This is followed by three waves down in the bear phase of the cycle, completing the eight-wave sequence. He further discovered that these eight wave sequences appeared one after another and became part of a larger wave sequence. Elliott after making this discovery decided he needed to find a name for these waves of differing degree. He started by naming the smallest wave he observed a subminuette wave, and continued naming these waves in order of rising magnitude as follows:

subminuette
minuette
minute
minor
intermediate
primary
cycle
super cycle
grand super cycle

He felt this range of wave sizes would cover all possible observations from the smallest to a wave lasting several hundreds of years. Our focus will dwell on the larger waves and mostly ignore the smaller magnitude waves.

At this juncture it is appropriate for us to introduce the idea that there are waves of longer duration which are important, which Elliott did not discuss. The reason for this omission on his part was simply due to the fact there was no need for him to address longer periods of time. If he had not been in poor health and lived longer, it is most likely that he would have addressed waves of larger and longer duration than his Grand Super Cycle Wave which lasts several hundred years. The purpose of this current work is simply to continue where Elliott stopped.

One point that needs to be made because it is relevant to the main discussion is that occasionally a 5-wave bull sequence ends with an irregular top. When this happens, the A-wave correction is as usual, but the upward B-wave extends well beyond the top of the previous fifth wave in a final display of "irrational exuberance". As a consequence of this blow-off end to the bull market, the subsequent C-wave correction is steeper, more severe and longer lasting than what is normally the case with an ABC correction.

The diagram below illustrates this kind of event.

FIGURE A2

We can conclude at this juncture of our work that Elliott's Principle suggests the stock market expands and contracts in line with a set structure (form). Bull (upward) waves start at the end of a three-wave correction and progress upward in a five-wave structure. This is followed by a three-wave bear (downward) corrective structure. The empirical evidence on which the Elliott Principle is based indicates that prices do not return to the low point of the previous 8 wave sequence, prices only approach the previous low. This phenomenon indicates the pathway of humankind is ever upward. A happy thought.

These eight wave sequences build up into eight wave patterns of larger degree which can ultimately expand to include scores of years, hundreds of years, and even thousands of years. It is the goal of this article to show how these waves fit together in a logical structure, which has relevance to historical facts. We will endeavor to determine where we have been and where we are now in this sequence of large waves, and then draw some conclusions about what this may portend for future human history and stock market movements.

More detailed information can be obtained on the Elliott Wave Principle in the following sources:

Books
Prechter, Robert R. Jr. The Major Works of R.N. Elliott. New Classics Library
Frost and Prechter. Elliott Wave Principle. New Classics Library
Other books can be found by searching at amazon.com or other bookstore websites.

Internet Resources

http://home.netvigator.com/~pcwonghk/ew
http://www.ozsurf.net.au/elliott/correc
http://www.gamesdomain.com/directd/pc/windows/edutainment/ewt2_2.html
http://www.elliottwave.com/basics1.htm

Other web resources can be obtained by searching on the web.