The beauty and significance of R. N. Elliott’s work is that he recognized
that markets are composed of groups of people that respond as crowd behavior
in the same way that other social groups respond to a cycle of
events. There is a process that evolves in almost every cycle of crowd
behavior that runs its course. This process results in a fairly predictable
pattern of behavior of cycles of optimism and pessimism. This process
and pattern of behavior is represented on price charts of financial markets,
as the price charts are simply reflections of the state of the psychology of
the group participating in the market.
Throughout the course of R. N. Elliott’s work developing his Wave
Principle, it is obvious he continually looked to refine and expand upon
the guidelines of his wave principle as applied to the markets. In Elliott’s
earlier work, there were no X waves, there were no “rules” and there was
no mention of Fibonacci numbers or ratios!
Elliott developed his theory over less than a ten year period from the
late 1920’s to the latter half of the 1930’s. It was in 1938 that Elliott’s
first monograph, The Wave Principle, was published by Charles Collins
and the following year that Elliott was commissioned to write a series of
articles on the principle for Financial World magazine.
It is these early works of Elliott that I find the most valuable. Here is
found the spirit of the fundamental truths of what Elliott discovered about
pattern and process in the cyclic development of the financial markets, unencumbered
with the need to explain every little twist and turn on the
financial charts. There were no X waves, no complex corrections, just
fives and threes. Occasionally, a fourth wave traded into the territory of
wave one. Occasionally, a third wave was the shortest impulse wave.
The form was more important than any rules. The process would not
be denied.
From 1938 - 1946 Elliott published his educational and forecast letters
(R. N. Elliott’s Market Letters, edited by Robert R. Prechter, Jr.). In these
letters it became evident that Elliott felt he must show his theory to be
right under all conditions, at all times. In these letters we find that he
made his theory fit whatever market activity unfolded. There are some
pretty wild counts in these letters. Here we are introduced to the dreaded
X wave (actually a # wave) which mysteriously shows up whenever a
market correction does not comply with a three (ABC) or five (ABCDE).
No correction will be denied its count!
It is also during this time that Elliott begins to expound on the
Fibonacci number series. Elliott’s knowledge of Fibonacci number and
ratio is elementary, at best. While he demonstrated some of the Fib counts
and ratios relating to some market activity of time and price, this aspect of
market activity was obviously not well thought out or researched by
Elliott. After what can only be considered a brief study of number, ratio
and geometry, Elliott was amazed and thrilled that he had discovered the
“secrets of the universe” and the great “laws of nature”, all conveniently
available on the shelves of his local bookstore, courtesy of Jay Hambridge,
Samuel Coleman, Manly P. Hall and others. (A little irreverence is due all
great men in order to maintain perspective and avoid idolatry.)
What is the point of this brief history of R. N. Elliott? The practical
application of Elliott’s Wave Principle to trading and investing decisions
has its strengths and weaknesses. Elliott did not describe a “law of the
markets” with inviolate rules. With a limited history of data and within a
fairly short period of time, Elliott recognized an important process that
developed in the cycles of market activity. He recognized that the form of
this process was fairly regular, which allowed for a certain degree of
predictability of future behavior. He recognized that markets have a fairly,
consistent symmetry of ratio based on the Golden Mean (1.618). He suspected
(rightfully so) that this was the same process and same proportions
that are evident in almost all natural growth processes outside crowd
behavior.
When Elliott died in 1948, the understanding and application of his
principle of form and ratio in the financial markets was really only in its
infancy. Since the time of his death, far more has been written about
Elliott and his Wave Principle than Elliott wrote himself. Market analysts
over the years have had the opportunity to study thousands of charts of
many more markets than did Elliott. The great value of his principle has
been demonstrated time and again, as well as the frequent weaknesses.
Knowledge is never static. There is never the final word on anything.
Today, we find that Einstein’s Theory of Relativity may not be the
inviolate law it has been accepted to be for most of the century. How can
we say that Elliott’s Wave Principle may also not be as complete and
inviolate as some would like us to think?
|
