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ELLIOT WAVES FOR THE MASSES
by Robert B. Gordon, Sc. D.
December 5, 2002

Ralph N. Elliott was born in Kansas in 1871 and for most of his career was an accounting executive in several Central American countries. Later he returned to New York City and opened a financial consulting company. In 1929, a severe illness forced him to retire and he became interested in the stock market and especially in the various wave formations in stock charts that were repeated at different time intervals.

Reportedly sitting in a rocking chair on his porch, he discovered repeatable patterns in the various charts and wrote down a series of rules or principles describing their behavior. Using these rules he was successful in predicting an important bottom in one of the Dow indices. His work impressed Charles Collins, an investment counselor, and they jointly authored a book, titled The Wave Principle, and published in August 1938. Here is an impressive selection from the first chapter:

"No truth meets more general acceptance than that the universe is ruled by law. Without law, it is self evident there would be chaos, and where chaos is, nothing is ... Very extensive research in connection with ... human activities indicates that practically all developments which result from social-economic processes follows a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern ...The stock market illustrates the wave impulse common to socio-economic activity ... It has its law, just as is true of other things throughout the universe."

As I repeat those profound words written 64 years ago, I stand in awe of the brilliant intellect that was able to discover it from a tedious inspection of many, many stock charts. My exposure to the existence of the Wave principle came very late in my life. It occurred in 1995 at the age of 80 and completely changed my outlook on investing in the stock market. Since then I have read several books by experts following in Elliott's footsteps. It is of great interest that a mathematician, working in the new field of Fractal Geometry, has independently verified that the Elliott waves are in fact related to phenomena that are observed in nature. Another renowned mathematician, John Casti, has just published a trail-breaking paper that explains the relationship between the stock waves and other phenomena in our natural world.

An extremely interesting aspect of the Elliott Principle is that the waves very often exhibit numerical relationships that follow the Golden Number series: 1,1,2,3,5,8,13, etc. in which each number is the sum of the two previous numbers. This number series was known in ancient times and used in the construction of the Pyramids in Egypt and the Parthenon in ancient Athens. Knowledge of these Golden Numbers was lost and rediscovered in the 13th century by Leonardo Fibonacci. Examples of Fibonacci numbers or ratios of the numbers are found in nature in both plant and animal life.

Elliott's pioneering work proved that all stock waves whether measured in minutes, weeks or centuries are identical in form and follow the same rules. This is a structure known as a hierarchy in which all levels of organization are the same, e.g. the Catholic Church. Similar forms are also found in nature such as the broccoli plant in which each element from the main stalk to the tiniest floret are identical in structure.

THE IMPORTANCE OF ELLIOTT WAVES

Elliott's discovery of the repetitive nature of stock waves was based on charts over a limited period of a few decades. Since his death, other investigators have validated his findings over four centuries of stock market history. The larger base of data has required only a relatively few minor revisions to his original rules. Any objective observer of his accomplishments would surely describe them as brilliant. Using only his eyes and intellect, his discovery opened a new era in our understanding of the stock market and its relationship to the economy.

Elliott was the first person to relate stock cycles to the unthinking collective action of herds of investors. This revolutionary idea is still unaccepted today by virtually all of our academic, corporate and government leaders. Every day our print and TV media attribute changes in stock prices to a real or imagined external event in our society. These conclusions are wrong, completely wrong. Elliott and experts, who followed him, have proved conclusively that mass changes in social mood are the cause of stock market cycles. External news events, even very major ones, have only a temporary effect on the stock market, sometime lasting only a few hours or a day.

My present enthusiasm for Elliott Waves took quite a while to develop. I was quite skeptical at first, despite being very impressed by charts tracing Elliott Waves back to 1700 in the London market. However, the combination of my educational background and market experience convinced me to give it a try. I began to read a monthly Elliott Wave report and understand what this wonderful tool could be reasonably expected to do and what not to expect. Over the years, I have learned that Elliott Waves determine the Form of stock waves not their Timing. This is the big hurdle that has to be made before an investor can learn to appreciate their value. It is agonizing to see a major fifth wave extend for years at the top of a huge market mania. The Elliott Wave Principle cannot predict the TIME till the end of the wave. But, when the full wave structure has ended, one can then safely conclude that the next move will be a change in TREND.

From my Elliott Wave reports, I knew the date when the bear market started in each of the major indices. That turned me into a serious follower of Elliott market analysis. Patience is required while waiting for the completion of a wave formation but there is never any doubt about the direction of the next move, Having that information not only helps manage a portfolio but is very conducive to sleep at night.

One of the most fascinating tools available to Elliott Wave users is the modern computer graphics capability that can draw stock charts for any time interval for which the price data is available. For example a current issue of the Elliott Short Term Update showed recent identical wave action for a major stock index in charts drawn in intervals of 5 minutes, hours, days and weeks. This was the most powerful proof of the validity of Elliott's work I have ever seen. And recalling that Elliott had no computer to work with in the 1930 time period makes his discoveries an even more remarkable feat.

The Fibonacci number sequence, in the form of the numbers themselves or ratios of the numbers, plays a very important role in Elliott Wave Analysis. These numbers provide very useful information for analyzing wave formations as they are developing. They also permit calculation of prices for potential support and resistance levels. This subject is beyond the scope of this essay since it is best explained by charts not words.

TIMING HELP FROM TECHNICAL ANALYSIS

Investors do not have to rely solely on the Elliott Wave information. It can be helped by using available Technical Analysis tools for help in timing. In fact the thrice weekly short term reports I receive use both conventional and advanced methods to help in timing the end of major and minor wave formations. This added information is very important for all short-term market timers. All other investors can do quite well using the monthly reports.

It is important for readers to remember that Elliott Waves, alone or in combination with Technical Analysis, do not and cannot guarantee success. A successful investment program requires a wise choice of asset classes in which to invest and a careful selection of specific investment vehicles in balanced quantities for the market conditions anticipated. I have stressed these requirements in many essays and have given numerous examples for your consideration. Knowing when major market trend changes occur from Elliott Wave analysis provides an excellent time to rebalance a multi-asset portfolio.

VAST IGNORANCE OF ELLIOTT'S WORK

Anyone who has not read my recent article "Brilliant Minds" should do so to realize the tremendous state of ignorance existing throughout all segments of our society and the developed world. It is unlikely that this situation will improve in the near future, as it will first have to penetrate the present closed minds of our University Economics faculties.

I have seen no figures on how many investors are aware of the powers of the Elliott wave in this country and abroad. The fact that only two university professors, out of tens of thousands in the entire world, have written papers expounding Elliott's work gives some idea of the present lack of understanding.

It has been very distressing to me personally to see distinguished professors of economics displaying their ignorance on CNBC along with the bullish market analysts and mutual fund managers. It is surely going to take a very long time to rectify this tragic situation.

SEIZE THE OPPORTUNITY

Instead of looking at the gloom in academia, let's concentrate our attention on the opportunities for individual thinking investors. With tens of millions of investors and their advisors blindly looking for a market bottom, monthly reading of the Elliott Wave Forecast is an excellent way to keep on the right side of this vicious bear market. This service has correctly informed its readers of the end of Cycle Wave A, the first leg of the bear market and of the first major corrective wave, Cycle Wave B. We are now in the second major wave down, Cycle Wave C, with plenty of time and distance for further downside action.

There are several good Elliott Wave books to read, but they are no substitute for following the expert analysis of current market Elliott Wave action. Experienced investors should consider subscribing, as an educational endeavor, to the thrice-weekly issues of the Elliott Short Term Update. Based on my experience, following the short term Elliott wave analyses for a reasonable period will help serious investors understand and benefit from current timing information. It will help them make more confident investment decisions. In my opinion, there is no better tool for managing your assets in this difficult market.

SUMMING IT ALL UP

I confess that I chose the title "Elliott Waves for the Masses" with tongue in cheek to attract the maximum number of readers. With the great multitude of individual investors still holding on to their stocks and funds, three years into a major bear market, very few of them will ever adopt Elliott as an investing tool. Most of them may never enter the stock market again when they finally sell near the market bottom. That was certainly the experience after the 1929 Crash.

Having been a do-it-yourself investor for over 62 years, I'm used to being in a very small group of investors. Once you learn that the majority of investors will always be wrong much of the time, it feels good to have a lonely feeling. Once you make your own decisions, and realize there is no one else to blame, managing your assets well becomes a major goal in your life. Possessing and using the right tools to help you takes on more importance.

The Elliott Wave Principle is not only the fundamental rule for the stock market but is part of the laws that rule the natural world. Waves in the stock market are now known to have a major influence in many aspects of our society. When you become a disciple of Elliott, you become an insider in a very exclusive group who understand the mysteries of the stock market and the great effects its cycles have on the every day events in our society. You will be in a small elite group who will get the first warnings of any new mania in advance. I urge my readers to become Ellioticians.

For your information, my only relation to Elliott Wave International Inc. is that of a very happy long-term subscriber to their service. Every word in this essay, except the great Elliott quotation, is based on my personal study and experience. I trust that readers will seriously consider the suggestions made in this essay. I will try and respond to your questions.

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© 2002 Robert B. Gordon, Sc. D.
Bio and Editorial Archive

Robert B. Gordon, Sc. D.
Sun City West, Arizona
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