〽️ Elliott Wave Principle and the Stock-Market Cycles

Elliott Wave Theory states that market prices move in predictable wave Patterns due to investors psychology.

ℹ️ About Ralph Nelson Elliott

An American accountant named Ralph Nelson Elliott studied stock market volatility during the 1930s and concluded that certain price movements (patterns) tend to repeat over different time frames. Before Elliott's work, investors largely viewed market fluctuations as random events. He proposed that the stock market moves in a recognizable structure, which became known as the "Elliott Wave Principle."

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🕸️ Introduction to Elliott Waves

The key step in applying the Elliott Wave Principle is to identify the pattern the market is currently following. Wave patterns have two phases: an impulsive phase and a corrective phase. The impulse phase consists of five sub-waves (labeled 1, 2, 3, 4, 5) that move in the direction of the main trend. The corrective phase consists of three sub-waves (labeled a, b, c) that move against the main trend. The diagram below shows the basic Elliott Wave Pattern.

• Wave count: 5️⃣ impulsive waves followed by 3️⃣ corrective waves

• Full cycle: 8 waves (5 + 3)

• Trend Direction: 🔼 Uptrend = 1–2–3–4–5, and then Downtrend 🔽 A–B–C 

Graph: Elliott Waves

 

📈 Impulsive Phase Analysis

■ Wave One: This wave starts a new uptrend. Before wave 1, the market is typically bearish, so wave 1 marks the shift toward a bullish trend. It usually appears when the market is still dominated by negative sentiment.

■ Wave Two: Wave 2 begins at the peak of Wave 1 and shows a pullback in the market. Investors expect wave 3 to follow, so they remain optimistic despite the temporary decline.

■ Wave Three: Wave 3 is the longest and strongest wave in the impulse phase. It signals strong bullish momentum, attracting more investors and pushing prices higher.

■ Wave Four: Wave 4 is a second pullback after wave 3. Most investors hold their positions during this phase, anticipating the final upward move of wave 5.

■ Wave Five: Wave 5 is typically very strong and often rivals wave 3. It marks the end of the uptrend and usually comes with a surge in trading volume. At the peak of wave 5, intraday price swings increase, and the market often closes at its daily low—a sign of the trend’s exhaustion.

📉 Corrective Phase Analysis

■ Wave A: Wave A starts the bearish correction. Prices often fall quickly, and market sentiment turns negative.

■ Wave B: Wave B is a short-lived upward correction. It does not rise above the peak of wave 5 and often gives false hope of a trend continuation.

■ Wave C: Wave C completes the correction with another move down. Once wave C ends, the market may start a new impulsive phase, beginning with wave 1 again.

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🔢 Elliott Waves and Degrees

Elliott identified nine degrees of waves, ranging from very small price movements to long-term market trends. The smallest degree appears as minor fluctuations on an hourly chart. Here are the nine wave degrees, listed from smallest to largest:

1. Subminuette

2. Minuette

3. Minute

4. Minor

5. Intermediate

6. Primary

7. Cycle

8. Supercycle

9. Grand Supercycle

Graph: Elliott Wave Degrees and their Symbols on Charts

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🌊 Short-Explanation of Elliott Wave Principle

 

The Elliott Wave Principle explains how groups of people behave in the stock market. It shows that market psychology shifts naturally between pessimism and optimism, forming specific, repeated patterns. In financial markets, these shifts in investor sentiment appear as price movements. The idea that markets move in recognizable patterns challenges the Efficient Market Hypothesis, which claims that future price movements are unpredictable.

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🌀 The Correlation of the Elliott Wave Principle with the Fibonacci Sequence of Numbers

 

A key part of applying the Elliott Wave Principle is understanding Fibonacci ratios. Corrective waves often retrace previous impulse waves of the same degree in Fibonacci proportions. Common retracement levels include 38%, 50%, and 62%. Numbers from the Fibonacci sequence frequently appear in Elliott wave structures—such as the impulsive phase (waves 1, 3, 5), a full cycle of 8 waves, and even extended patterns with 55 corrective and 89 motive waves. Elliott noted that he developed his Wave Principle before discovering its connection to the Fibonacci sequence. The Fibonacci sequence is also linked to the Golden Ratio (1.618), which is often used to identify support and resistance levels in wave analysis.

 

🔗 More: » More about the Fibonacci Sequence of Numbers | » Trading with Fibonacci Primes -The Platinum Sequence of Numbers

🔗 Book: » Buy the Fibonacci Tutorial for $3.99 at Amazon Books

 

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