Posts Tagged ‘elliott wave analysis’
How Do You Get from Dow Theory to Elliott Wave Analysis?
Happy 160th Birthday, Charles Dow
By Elliott Wave International
If you are interested in Elliott wave analysis, odds are that you have also heard of Dow Theory, whose best and longest-lived proponent is Richard Russell. (Best wishes to Richard as he recovers his health.) This excerpt from Prechter’s Perspective explains how Elliott wave analysis and Dow Theory are connected. We wanted to run it now in honor of the 160th anniversary of the birth of Charles Dow, which the Market Technicians Association celebrates on Wall Street on Thursday, November 3, 2011.
* * * * *
Excerpted from Prechter’s Perspective, 2004
Q: What was R. N. Elliott looking for in the stock market data in the late 1930s? Did he have a model or theory about price behavior?
Bob Prechter: Elliott had no basic premises, just a mind that was open to the idea that the market might be patterned, which he may have adopted from the then relatively new Dow Theory, which was a set of very few and far more general observations about market behavior. Though the Dow Theorists formed only very rough concepts, they broke ground, tremendous ground, in merely coming up with their observations that market behavior was non-random and tied to investor psychology. That was probably the germ of the idea that kicked off Elliott’s research.
Q: What was his procedure?
Bob Prechter: He did what every good researcher must do. First, he recorded the data that reality provided. He looked at the movements on chart paper and wondered, “Can I find forms that occur over and over again?” His answer was, “Yes.” He found that they occurred on hourly moves, daily moves, weekly, yearly. He even plotted moves that were decades long and noticed that they were following the same form. Likewise, the specific market did not matter. It could be the stock market, the gold price, interest rates or any other market. Then he organized the data, which was his talent. He began recognizing recurrences in the data, so it became clear that there were indeed repetitive patterns, which he ultimately organized into concepts.
Q: What exactly is Dow Theory and how does it relate to the Wave Principle?
Bob Prechter: The Dow Theory was developed by Charles Dow in the late 1800s. One of the tenets of Dow Theory is that, in general, a primary bull market runs in three upward phrases. In the initial phase, there is a lot of disbelief, and the markets are at very depressed levels. The middle phase is a kind of recognition phase when people begin to realize that the fundamentals are improving, and the markets are rising in harmony with them. The final stage is when the euphoria and the gambling come in. Elliott discovered that this basic formula of three steps up, separated by two intervening corrections, making five waves, was applicable not just to a primary bull market but to any degree of advance. He then observed that corrections take a different path: a three-wave shape or variation thereof. Then he observed that these cycles were not independent of each other but part of the market’s larger structure, which in turn developed according to these principles.
Q: It is through Charles Collins that we know about the genesis of the theory. He more or less sponsored Elliott’s introduction to Wall Street and helped him think through various aspects of becoming professional. In fact, he was the ghostwriter of a good deal of Elliott’s first important book, The Wave Principle, which came out in 1938. Did Collins make any contribution to the theory itself?
Bob Prechter: Yes. The catalyst for tying the Wave Principle to grander natural forces was Collins’s discovery that the number of waves in Elliott’s idealized pattern reflected the Fibonacci sequence. Collins wrote Elliott during the development of the theory and said in essence, “You ought to read this book by Jay Hambidge on Fibonacci ratios and spirals, because I noticed that when you count the waves through lower and lower degrees of trend, you find the Fibonacci sequence.” That sent Elliott off on the track to his grand conclusion. It is comforting to know that he did not start with the Fibonacci sequence or a theory based on it and then force nature to it. Nature showed its law, and these two men observed it.
Q: Is Fibonacci really that crucial to the theory?
Bob Prechter: It is not crucial to the what, but it is crucial to the why. First, Elliott observed the Wave Principle operate. Then he took the next step and asked, “Why does it exist?” He concluded that there must be some progression that human beings go through as they move overall from a state of deep pessimism to extreme optimism and back again, because they continue to trace out these patterns. His eventual conclusion was that it was a natural law of human behavior, that human beings were part of the natural world, and just like trees and wolves and lemmings and anything else you can name, they have certain ways of acting. It shows up in the charts vividly, making it clear that mass psychology is structured. The unifying conclusion, that mankind’s progress follows a law of nature exhibited by countless forms of life, is a profound and reasonable explanation that fits the facts.
 | Learn about R.N. Elliott’s Wave Analysis with The Basic Tutorial — Free from Elliott Wave InternationalNow you know how R.N. Elliott did his research. Next, learn how to analyze price charts using his form of analysis. The Elliott Wave Basic Tutorial is a 10-lesson comprehensive course with the same content you’d receive in a formal training class — but you can learn at your own pace and review the material as many times as you like! Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever >> |
This article was syndicated by Elliott Wave International and was originally published under the headline How Do You Get from Dow Theory to Elliott Wave Analysis?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Slicing the Neckline: A Classic Technical Pattern Agrees with the Elliott Wave Count
By Elliott Wave International
In the August issue of his Elliott Wave Theorist, market forecaster Robert Prechter alerted readers that the U.S. stock market was slicing the neckline of a classic head-and-shoulders pattern in technical analysis, and that this may send the market into critical condition.
Prechter said that when the Elliott wave count and a head-and-shoulders pattern are saying the same thing about the stock market, it’s best to pay attention.
Here’s how the August issue of the Elliott Wave Financial Forecast, the sister publication to Prechter’s Theorist, described the head and shoulders pattern unfolding in the stock market:
“The weekly Dow chart [below] shows the development of an intermediate-term, head-and-shoulders pattern from the January high at 10,729.90 to the present. The January high marks the left shoulder, the April 26 high at 11,258 is the head, and the right shoulder is now ending. The April [Theorist] discussed the pertinent characteristics that Edwards and Magee used to define this technical pattern … all apply to the current formation. Observe how weekly stock trading volume has contracted during the development of the right shoulder, a necessary trait of this pattern. The downward-sloping neckline — exactly as on the big ten year pattern — displays market weakness, which is consistent with our interpretation of the wave structure.”
This chart shows the head-and-shoulders pattern.
Here’s what Robert Prechter himself said in a recent Elliott Wave Theorist:
“Generally, when the neckline slopes downward, the right shoulder does not rise to the level of the left shoulder …”
Please look at the chart again — then re-read Prechter’s quote.
This article was syndicated by Elliott Wave International and was originally published under the headline Slicing the Neckline: When the Market May Go into “Critical Condition”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Prechter Describes The “Stunning Long-Term Elliott Wave Picture”
By Robert Folsom, Elliott Wave International
Please join me to consider a time in the stock market that lasted just under three years: 32 months, to be precise.
During this period a series of powerful rallies stand out clearly on a price chart. The shortest of these rallies was four weeks, the longest more than five months.
I can even list seven of these rally episodes, with the number of calendar days and percentage gains.
1. 152 days +52%
2. 28 days +11%
3. 77 days +19%
4. 69 days +27%
5. 31 days +30%
6. 35 days +39%
7. 28 days +27%
Get Robert Prechter’s Latest Analysis — Click Here to Download His 10-Page Market Letter FREE
For a limited-time, you can download Robert Prechter’s April 2010 Elliott Wave Theorist, the first in a two-part series entitled “Deadly Bearish Big Picture,” for FREE! Click here to learn more and download your free Theorist.
This information obviously seems to paint a bullish picture: The stock market was in double-digit rally mode during 43% of the total calendar days in question.
But in fact, those rallies were the days when the bear was catching his breath. The market was the Dow Jones Industrials; the overall period was from November 1929 to July 1932. It devastated investors. The Dow lost 80% of its value. Yes, that includes the rallies listed above.
I said that these rallies stand out on a price chart, and indeed they do — it’s just that the declines stand out even more. There’s virtually no “sideways” action. Prices moved rapidly in one direction or the other.
You can see the chart for yourself in the first issue (April issue, page 4) of the two-part series Bob Prechter has published in The Elliott Wave Theorist. Part One was in April, “A Deadly Bearish Big Picture.” The final sentence of that issue said Part Two “will update the stunning long-term Elliott wave picture.”
Bob just published Part Two. It completes the “Big Picture” he has now delivered to subscribers.
The past doesn’t “define” the present or the future, but it sure does provide context. No analyst alive today understands this better than Bob Prechter.
Believe me when I say that the charts and analysis in this two-issue series are unique. The word “stunning” only begins to describe what you’ll read.
Get Robert Prechter’s Latest Analysis — Click Here to Download His 10-Page Market Letter FREE
For a limited-time, you can download Robert Prechter’s April 2010 Elliott Wave Theorist, the first in a two-part series entitled “Deadly Bearish Big Picture,” for FREE! Click here to learn more and download your free Theorist.
This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
