V.12:3 (106-111): SIDEBAR: THE ELLIOTT WAVE by Technical Analysis, Inc.

THE ELLIOTT WAVE by Technical Analysis, Inc.

The Elliott wave principle is a method for classifying and forecasting market movement. The basic tenet is that markets move in a five-wave pattern in the direction of the trend. Once the five waves have been completed, the market will move counter to the trend in a three-wave pattern. For example, in Figure 1 the trend is up and there are five waves labeled waves 1, 2, 3, 4 and 5. Waves 1, 3 and 5 are called impulse waves. Waves 2 and 4 are corrective waves, moving counter to the preceding waves. Once a five-wave movement is complete, the market will move in a countertrend fashion with a three-wave corrective movement labeled a, b and c.

Each wave, both impulse and corrective, is subdivided into waves of a smaller degree. In Figure 2, the same wave pattern as Figure 1 is presented with the waves subdivided. Notice that impulse waves 1, 3 and 5 are composed of waves of a five-wave form and waves 2 and 4 are of a three-wave nature. A complete cycle occurs once the five-wave moment followed by the three-wave corrective are complete. This cycle represents a subdivision of the wave of the next higher degree. Thus, waves can be subdivided into waves of a lower degree or expanded into waves of a higher degree.