Financial Sense Home l Broadcast l WrapUp l Storm Watch l About Us l Contact Us
Profiting
From The Elliott Wave Principle
Using Nature's
Own Laws
by Robert B. Gordon,
Sc. D.
September 11, 2003
I know very few topics relating to investing that are as misunderstood as the laws of nature discovered seventy years ago by a genius named Ralph N. Elliott. Used for the right reasons, this principle can give an enormous benefit to a wide range of investors. Since Elliott’s great discovery, his brilliant pioneering work has been expanded to its present complete form by researchers after his death. An important research effort resulted in extending the Elliott Wave data back to the early American and then to the English stock market in the early 1700s.
If Elliott’s work in elucidating natures own laws had involved most any other field of endeavor than the stock market, it might have earned him a Nobel prize or its equivalent. Although he did publish his book the Elliot Wave Principles, it attracted only a small group of researchers to further extend his work.
Even the great work of Robert Prechter and his co-authors resulting in a series of ten or more books has not greatly increased the spread of knowledge about EW or its applications. In this essay I am going to try and do a difficult job, to use my own tedious learning path to shorten the learning period of my readers.
THINGS THAT MUST BE UNLEARNED
Virtually every investor goes into the stock market with one very wrong belief that is held by all but the small number of Elliott followers. Just about everyone grows up with the belief that the market is controlled by external events, both large and small, that are printed in the daily headlines: War and Peace, Major Accidents, the Economy etc. The truth Elliott discovered is that news events have only a temporary stock market effect. This huge error in thinking needs to be totally erased because Elliott’s pioneering work proved that the basis for the market waves is the collective action of investors moving in an unthinking herd action. So the stock waves come first and their effects in causing changes in society come as a result. Major Elliott waves are the cause of large economic changes like a booming economy or a depression. They also effect social changes like birthrates and the length of women’s hemline. It is very hard for many to make this huge change in attitude. It is hard to believe, but true, that the EW Principle has to date convinced just two of many thousands of University professors to write papers recommending it to investors. Elliott’s tremendous contribution is virtually unknown by all of Academia who should have been teaching it for many years. Our Ph.D. economists currently seem to lack any knowledge of the Depression that EW experts predict for the current bear market.
Although there are at least tens of thousands of investors around the globe using EW for stocks, commodities, options etc., the argument often heard against its use is that it is no use for timing. That objection is due to a major misunderstanding of what EW is and how it works. Elliott’s pioneering work discovered that stock market waves can only take a limited number of forms. Impulse waves both up and down require 5 waves and corrective waves require just 3. There are a finite number of shapes the waves may take. When five waves either up or down are complete, a change in market direction is signaled. The time for the change in direction is not signaled in advance, but is known only after its completion.
Impulse wave 3 is usually the longest of the five waves with waves 1 and 5 being about equal in length. But wave 5 can sometimes extend its length as occurred in SuperCycle wave 5 at the top of the late 1990s stock mania. The fact that the time to sell or buy is unknown for a while in some cases is one of the "beefs" from those who ignore the tremendous advantage of knowing when a huge bull market has finally ended. Or perhaps, it’s even more exciting to learn when the last wave down in a long bear market has ended
However, in answer to the EW critics, we must explain that many smaller degree waves are always involved in building each large scale wave. So an investor using the Wave Principle is continually watching the completion of small waves that are essential to creating the large waves.
ELLIOTT’S UNIVERSAL LAW
Ailing in health and working without today’s computer technology, Elliott’s mind was still able to discover the universality of his great wave principle. We now know that identical waves occur in all types of investments: stocks, bonds, options, commodities etc. The same waves are seen in every financial instrument in all parts of the world. Not only do the waves look alike, but they carry the same important message of the future direction of each market.
Elliott waves have the same appearance and structure when using any time scale from centuries to minutes. EW reports often contain daily and weekly price charts, but to show more detail, they may display charts with time intervals of 5 or 10 minutes. For every security there is always a just completed wave at some time scale.
Too complex to cover here is the fact that all Elliott waves follow the Golden Number series -1,1,2,3,5,8,13,21 etc., known to the ancients and used to construct the pyramids and the Parthenon. Rediscovered by Antonio Fibonacci in the12th century, they are now known to be closely involved in both the time and price relationships in stock charts. Price rallies have a strong tendency to stop at certain percentages of the prior decline. Similarly, market tops and bottoms sometimes tend to occur at Fibonacci intervals. This is not an accident since these Golden Numbers are also found in nature in things like shell spirals or snowflakes. You do not have to read this fascinating story about Mother Nature to benefit from Elliott’s great discovery, but it helps to realize that stock charts do reveal a very basic truth.
MY EXPERIENCE WITH ELLIOTT’S GREAT WORK
In 1995, at age 80, I opened the pages of Robert Prechter’s monumental book At the Crest of the Tidal Wave. It was the most fortunate book purchase in my life as an investor. At that time I was totally unfamiliar with the Wave Principle, but had studied the history of the worlds greatest manias. So when almost immediately in the first few pages, I saw an EW chart that traced the great bull market of the 1990s back to London’s South Sea Bubble in 1721, I was very impressed. When I had read all 400 pages and Prechter’s prediction of a market crash and ensuing depression greater than in 1929, I began to think about the future in a very new light. I believe it will have the same effect on a great many of my readers.
I decided at the outset not to be an EW expert and do my own chart analysis, but use the periodic EW reports to guide my investing. I started with the monthly EW report and later added the thrice weekly and monthly Theorist report to get Robert Prechter’s current personal views. I am using this information for trading long and short over the major bull and bear cycles and consider the EW reports as essential reading. I look forward eagerly to the arrival of each report.
I now know from my fairly extensive reading that EW analyses are sometimes very clear, but other times they reveal two or even three possible paths for the near future. Such an uncertainty eventually clears up in a few days because in the end every finished wave pattern must conform to only a limited number of permissible shapes.
A YOUNG READER’S EW EXPERIENCE
While writing this essay, I received a two page letter enclosing 7 EW charts on gold and gold stock indices. The paragraph below covers his investing education and experience with preparing his own EW charts. It would seem that this young man has already made more progress at his age than I did by age 80. I sent his full mailing to the webmaster at www.financialsense.com where it has already been published. I thank him for his contribution and wish him well.
September
8, 2003
As a 26 year old investor I became interested in the financial markets
at a young age. I read my first book The Wealthy Barber" at age 17,
since that time I have dedicated my life to the financial markets and
real estate, reading dozens of books and now focusing mostly on
technical analysis and more specifically Elliott wave theory. I read the
classic book Technical Analysis of Stock Trends by Magee and Edwards at
21 and stumbled across Elliott wave theory a few years later. After
reading Prechter and Frost’s Elliott Wave Principal, it really changed
the way I viewed the financial markets. I have since read most of
Prechter's books and I do subscribe to his and his associate’s
newsletters. I believe without a shadow of a doubt that Elliott wave
theory is the best form of Technical Analysis. There is no other form of
T.A. that allows the investor to make very precise calls that are very
stunning based on the movements of Elliott waves. I have personally
found the same Elliott patterns in stocks and commodities of all types
and sector classes from tech stocks to the price of cocoa, bank stocks
to gold. I fully believe R. N Elliott’s theory that the emotions of
humans (greed and fear) are extrapolated onto the price charts of
financial assets in waves. The more emotional the market, the clearer
the wave pattern (DJIA, gold stocks, tech stocks, gold, silver). This
very brief introduction is the basis of my essay. [See
"The 5th Wave Advance in Gold"]
EARLIER ESSAYS ON ELLIOTT WAVES
I have written a number of essays about various aspects of the Elliott Wave Theory. Several are in the FSO archive and others are in freebuck.com archive as will be noted below. However, the very best essay ever written should be the first read in my opinion. It is, to my knowledge, the only paper written by a college economics professor. The title is "Forecasting Crashes and Recessions" and was written by Hernán Cortés Douglas, Professor of Economics in the Catholic University of Chile. An earlier draft was edited by Robert Prechter. In its easy-to-read pages, this paper compares current unworkable theories of Macroeconomics with Elliott’s brilliant discoveries, still unknown in Academia today. For direct access to this gem, read his article.
My earlier essays on Elliott Waves on financialsense.com are: A Foggy Day in Uncharted Waters, Brilliant Minds, and Elliott Waves for the Masses. In the www.freebuck.com archive are: The Education of an Investor and Letters From Brilliant Minds (Ten letters from Readers with my comments).
FREE INFORMATION
There is quite a bit of information available at www.elliottwave.com, including beginner and advanced tutorials. Check to see if their 30-day free trial offer on periodicals is still available. Based on the general, current lack of interest in applying Elliott wave techniques, I am not worried about creating a flood of requests to this web site. Also, please be informed that I receive no compensation for writing this essay. I am not at all concerned about inducing too many readers to try the EW technique. In my opinion, it will never draw a crowd.
Go Top
© 2003 Robert B. Gordon, Sc.
D.
Dr,
Gordon's Editorial Archive
Robert
B. Gordon, Sc. D.
Sun City West, Arizona
September 11, 2003
Email