It could be stated that the Elliott Wave Principle is not a truly cyclical theory, since true cycles are observed repetitions of events at stated intervals. As with the theories of Charles Dow, the cyclical notions within Elliott’s concepts had to allow for psychological deviations. Thus action and reaction are given priiority over cause and effect. Whatever the cause of a change in expectation of share prices, it is the consequence of change – allowing for the element of uncertainty – that the psychological theorist believes will trigger the next phase of the cycle.
Both Dow and Elliott recognised that seeking periodic repetition in share price movement, primarily stimulated by emotion, would be irrelevant. Elliott believed that the waves would occur regardless of the time element, with each subsequent wave reflecting investor’s response to the extent and duration of its predecessor.
As the Elliott Wave cycle unfolds, there develops a series of impulse moves, which eventually rise excessively, due to speculation. Corrective moves then occur, eliminating or smoothing out the excesses. The time relationship is that a corrective move is proportionate to the impulse move it is countering. So if the impulse move has a duration of, say, a fortnight, then the corrective move will typically last seven or eight days. On a larger scale: with an impulse move of two or three years (such as found in many bull market rallies), the corrective move would take 18 months or so.
Elliott’s actual classification of the several wave formations by degree in order of decreasing magnitude, designed to cover all wave formations from the smallest, involving hourly or shorter moves of the stock index, to a formation enduring two hundred years or longer, are as follows (giving actual historic stock market examples):
Grand Super Cycle – This covers the longest measurable time period. Due to the limitations of current historic records, there is no concrete evidence of the completion of a Grand Super Cycle – Elliott’s records date back only to the mid-1800s. According to Elliott, Wave I of such a cycle began in 1800 and ran to 1850; Wave II from 1850-1857; Wave III from 1857-1928; Wave IV from 1929-1949; and, according to the Principle, we are currently at the end of Wave V. Here the risks for investors are far greater than at the early stages of a Grand Super Cycle, such as the beginning of Wave III, or even the beginning of Wave V.
Super Cycle – Elliott claims that a Super Cycle of five waves began in 1857 (during Wave III of a Grand Super Cycle), following the depression of the 1850s. The five waves ended in 1929. There then followed a corrective Super Cycle, running from 1929 to 1949. A new Super Cycle began in 1949.
Cycle – A breakdown of the 1857-1929 Super Cycle to yield the internal Cycles, yields an upmove between 1857-1864, the downmove of 1864-1877, the next upmove between 1877-1881, the pursuant downmove between 1881-1896, and the ultimate upmove between 1896-1919.
Primary – The period 1896-1929 represents Cycle Wave 5 of the Super Cycle. Breaking this down into its Primary Wave components yields an upmove 1896-1899, a downmove 1899-1907, an upmove 1907-1909, a downmove 1909-1921, and a major upmove during 1921-1929.
Intermediate – The Intermediate Waves of the long bull market stretching the eight years of 1921-1929 can be subdivided as follows: first upmove 1921-1923; first downmove 1923-1924; second upmove 1924-1925; second downmove 1925-1926; then the ultimate massive three-year upmove which sent share prices soaring during 1926-1929.
Minor – From more recent market history, examining the upwave in the UK FT30 which began in Feb 1971 and ended in May 1971, the same 5-wave pattern can oce again be identified: Minor Wave 1, Feb ‘71- May ’71; Minor Wave 2 (downwave), May ’71-June ’71: Minor Wave 3 (upwave), June ’71-Sep ’71; Minor Wave 4 (downwave), Sep ’71-Nov ’71; and the longest wave, which is almost always upwave Wave 5, Nov ’71-May ’72.
Minute – As evidenced, the Minor Waves usually encompass monthly price movements. The Minute Waves similarly tend to relate to weekly movements. Thus, examining Minor Wave 5 of the move Nov ’71-May ’72, a Minute Wave 1 is found, commencing mid-November and terminating mid-January, lasting a total of seven weeks. This is followed by a Minute Downwave 2 commencing mid-January and ending mid-February, lasting four weeks. Minute Wave 3 begins mid-February and ends late February, lasting two weeks. Minute Wave 4 encompasses the period late February to early March, lasting three weeks; whilst Minute Wave 5 encompasses the longer period early March to mid-May – a total of eight weeks.
Minuette – Looking at the period representing the last eight weeks of the Feb ’71 to May ’72 bull move – representing Minute Wave 5 of Minor Wave 5 of Intermediate Wave V, of Primary Wave V, of Cycle Wave III, etc – the pattern can be broken down further into its Minuette Wave components, representing daily movements. Minuette Wave 1 began on 10 March at FT30 495.1 and ran for twelve days, reaching FT30 520.0 on 22 March. Minuette Wave 2 began on 22 March and, running for two days, brought the FT30 down to 503.1. Minuette Wave 3 began on 27 March and, running for thirty days, took the FT30 up to 540.3. Minuette Wave 4, acting correctively for nine days, took the FT30 back down to 419.6. The final Minuette Wave 5, lasting twelve days, took the FT30 up to a peak of 545.6 on 22 May.
Sub-Minuette – The Sub-Minuette Waves comprising the last twelve trading sessions in the final stages of the bull move of May 1972 (Minuette Wave 5), reveal a Sub-Minuette Wave I lasting twelve hours, Sub-Minuette Wave II of five hours, Sub-Minuette Wave III of eight hours, Sub-Minuette Wave IV of six hours, and the final Sub-Minuette Wave V surge lasting nineteen hours.
[The foregoing analysis is derived from an article first published in
the British Accountancy Magazine of April 1974]
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