The Elliott Wave principle Elliott Wave Theory Deflation and the Greater Depression.

By Delwyn Lounsbury - THE DEFLATION GURU

The Elliot Wave principle and Elliott Wave theory was first formulated by Ralph Nelson Elliott.  In the 1930's, Ralph Nelson Elliott found that the stock market prices moved in recognizable patterns. These patterns or waves had five variations and were repetitive in form, but not always in time or amplitude. He described how the Elliott Waves link together to form the same patterns as the next larger size (fractal), and so on and so on. This structured progression phenomenon is The Elliott Wave Principle. It can be used to predict both market direction and market timing according to its proponents.

An Elliott wave observes three rules (impulsive or main trend)
(1) Wave 2 always retraces less than 100% of wave 1.
(2) Wave 3 cannot be the shortest of the three impulse waves, namely waves 1, 3 and 5.
(3) Wave 4 does not overlap with the price territory of wave 1, except in the rare case of a diagonal triangle.
A common guideline in a five-wave pattern, waves 2 and 4 will often take alternate forms; a sharp move in wave 2, for example, will suggest a mild move in wave 4.

Corrective wave patterns unfold in forms known as zigzags, flats, or triangles evidenced by 3 waves A - B - C. 
The Greater Depression (The year 2000 dot com stock mania panic climax top to the 2016 -2018 market low with the Dow under 1,000) will be a big  A - B - C down with all main downward moves(impulsive since the main trend is down) showing us as 5 waves with corrections of 3's up.  Stock charts since 2000 are in 5's down!

In 1960, A. J. Frost became a partner of the late Hamilton Bolton, who introduced him to the Elliott Wave principle. After Bolton's death in 1967, Frost wrote two Elliott Wave Supplements. In 1977 he delivered a speech on Elliott and met Mr. Prechter.

Robert Prechter co-authored with A. J. Frost C.F.A., to write the book, ELLIOTT WAVE PRINCIPLE - KEY TO MARKET BEHAVIOR in 1978.

The Elliott Wave Principle and Elliot Wave theory can be a good forecasting tool as it is a detailed map of how markets behave from looking back and then extrapolating what direction they may go in the future at degrees of scale. Since the stock market in total is such a big compilation of human work, production and endeavor; it follows nicely along the wave principle patterns. Prechter has found that markets even in very short time periods can go through an Elliot Wave sequence.

Again, if the market is in a major long term trend, the Elliott Wave is a motive or impulse of five distinct price movements leading to a climax or blow off top or bottoming crash with periods of smaller three wave A-B-C retracing part of the 5 wave impulse up.  Robert Prechter says this is a Grand Supercyle top!

In bear markets the Elliott Wave is a corrective wave or Zigzag of three large A-B-C price movements down to a bottom or crash with five waves pointing down in down legs. This is what the wave structure is doing right now!  See Graph:  According to Robert Prechter, this proves we are in a secular long term bear market.

Amazingly, that is exactly what is going on right now.  The market is in retreat and the waves down have been in fives since the year 2000 top! It is undeniable evidence we are in a secular bear market. This bear market's large degree of scale is evidence we are in the Elliot Wave Principle as a Grand Super Cycle decline three times as large and long as the 1930's great depression. So, we are already ten years into the Greater Depression.  It is due to bottom out in 2016-2018. In fact, the stock indexes evidenced a 10 to 13 year head and shoulders topping formation (a technical indicator) with a bearish down trending neckline.  A neckline is the line drawn on the graph connecting bottoms of intermediate moves.

The Elliott Wave

A complete cycle is eight waves made up of two distinct phases.

1. The five-wave motive phase (also called a "five"), whose sub-waves are numbers.

2. The three-wave corrective phase (also called a "three"), whose sub-waves are denoted by letters. These waves can compound into patterns of one degree larger but the form is constant. Then the next eight-waves (5 impulsive and then 3 reactionary) compound into patterns one degree larger, and so on. Building a bigger and bigger (fractal). Regardless of degree, the form is constant.

R. N. Elliott had three consistent Elliot Wave Principle rules of the five-wave form.
1. Wave 2 never moves beyond the start of wave 1.
2. Wave 3 is never the shortest wave.
3. Wave 4 never enters the price territory of wave 1.

FRACTICALITY, FIVENESS AND FIBONACCI

Fibonacci (c. 1170-c. 1250) was an Italian mathematician who came up with the number sequence as the sum of the previous two numbers starting with 0 and 1.   0, 1, 1, 3, 5, 8, 13 and so on.  Higher up in this sequence he closer of two consecutive "Fibonacci numbers" divided by each other will approach the golden ratio of .618: (to) 1 -  Phi, also know as  THE GOLDEN SEXTANT or the GOLDEN NUMBER.  Very important! 
 
When analysts talk about the.618 retrace level they are referring to Elliott Wave and Fibonacci number fractal studies and points where markets often make a turn. Important Elliott Wave Fibonacci turning points are .382, .50, .618 (phi also known as the golden number, golden mean or golden sextant ruling all) - 1.382 - 1.50 - 1.682. Not enough attribution is given to these important numbers although awareness is growing in the investment and financial world. Especially, since this is where markets seem make a turn every time.

Robert Prechter has found many instances of Fibonacci and fractals along with the Elliot Wave Principle in nature and human relationships including:

1. Just about anything that data can be collected and shown in graphic form will show Elliott Waves.

2. Spirals in seeds, hurricanes, sheep horns, snail shells the mathematics is Fibonacci number related.

3. Branches in trees, arteries, animal brain and lung construction.
Phi allows more efficiency and robustness, according to Robert Prechter.

4 Stock, bond & commodity markets in short and long time frames.  Since man is a herd animal and the stock market is a compilation of the work and industry of a mankind in total, Elliott Wave Principles, fractals and Fibonacci in looking backward and predicting future retracing and support levels.

5. 5 pointed star or a spot on a line all math involved is Fibonacci.

6. Social man - self organizing progress ruled by Fibonacci mathematics because it allows the greatest efficiency and robustness. Precter has tracked use of words such as
deflation and found they fit the 5 wave impulse and 3 wave retracement Elliott parameters and tend to turn at Fibonacci points.

7. Arboration. Not just the branching angles larger to smaller as one travels out from the plants base, but how stems and leaves both rotate around the base of the stem or branch and spread to optimize the sunlight they receive.

8. Fractals - think broccoli - each small spear is a mirror image of the large bunch. Think tree -a branch is image of whole. Think coastline - edge of tide pool looks same as the whole coastline if looking down from airplane.  So, stock, bond and commodity charts show this same relationship in scale.

8. Evidence clear down to sub-atomic particle behavior.  Particles bouncing off walls of container look like coiled ferns, a look best defined by Fibonacci calculations.

9. The limbic system in the brain relates to emotional feelings and guides behavior required for self-preservation and the preservation of the species. If early man did not get along with the clan he was thrown out of the cave to freeze to death or was stoned to death. Likewise, if he did not conform with and follow his clan he was likely to get eaten by wild animals, get kicked out of the cave or get left behind to starve to death. So, mankind invests the same way. Buying more and more as prices rise (evidence is the recent real estate top) and conversely being afraid to buy at price low points.

Robert Prechter has also, more recently, found evidence in markets and in nature of Elliott Wave principle, Elliott Wave theory, Fibonacci and fractals all working together. His new study of Socionomics combines sociology with economics and Elliott Wave, Fibonacci and fractals all together. Socionomics says society's mood will swing form optimism (waxing) to pessimism (waning) and then back again. We are in the pessimism phase when World Wars happen!  Deflation and the Greater Depression Dead Ahead!  Cash is King in a deflation!  The Elliott wave principle proves it.  Learn more about the Ellitt wave principle by joining Club EWI for free at links on this site.  Then really learn about Elliott wave principle by subscribing to Robert Precher's monthly newsletter publication.

Copyright 2010 - by Delwyn Lounsbury - THE DEFLATION GURU
Reprint rights allowed with attribution back to:
http://www.deflationeconomy.com