Saturday, January 1, 2005

Elliott Wave Theory

We firmly believe that Elliott Wave Theory is one of the many excellent technical tools available to study the behavior of financial markets. However, we do not believe that it is reliably effective as a standalone tool for developing trading or investment strategies.

With that out of the way, let us share with you some of the history behind the theory.

The Genesis

In the late 1920's, Ralph Nelson Elliott, an astute, well respected, highly sought after businessman, developed what is today widely accepted as the broadest, most comprehensive, and intriguing theories in the behavioral, and mathematical study of financial markets.

Through his hidden genius, and keen observation, Elliott sought out to demonstrate how price fluctuations in the stock market, (which were previously accepted to behave in chaotic, or random fashion) in fact displayed a consistent and recognizable order. He aptly described these repetitive fluctuations in price as "waves."

He concluded that this fractal order, or repetitive cycle, was simply a broad based reflection of investor’s collective, varied, and vacillating emotions. The sequential price patterns he identified, particularly those which mark terminals at Cycle Degree and higher, are in effect, historical footprints which reveal to us at precisely what stage of dynamic advance, or pause, that the markets have recorded throughout the course of modern financial history.

Through his tenacious effort in the cataloging of numerous patterns, tenets, and guidelines which led to his discovery, Ralph Nelson Elliott achieved the seemingly impossible. Not only did he succeed in quantifying that markets do indeed trade in repetitive cycles, but as a result of this extraordinary achievement, he left behind a precious gift for future generations to come.

The Treasured Gift

The gift, made available to us through the diligent and tenacious efforts of Mr. Robert Prechter Jr. CMT, (founder of Elliott Wave International) and A.J Frost, who in 1978 co-authored the first printing of the "Elliott Wave Principle" Key to Market Behavior. 

Frost & Prechter’s' translation of Elliott’s' masterworks can be described as nothing short of a brilliant masterpiece, replete with market gauging principles based on dynamic symmetry, rooted in mathematical law, and at the time - unbeknownst to Elliott, in full confluence with every element of Fibonacci's Summation Series at its very core.

Given the fractal nature of Elliott’s' repetitive dynamic wave formations, proper application of his principles provides us with a richly textured and unique perspective, as to the historical significance of any developed price series. It conveys to us with high probability, just how such price history is most likely to have meaningful impact, and effect on the present and future course of price action.

In a much broader, and philosophical context, the historical study of Capital Markets via Elliott Wave, is a most fascinating way in which to recognize, document, record, and more importantly, "anticipate" - the various degrees, and stages of progression, achievement, challenges, and historic advancement of mankind itself. 

The study and discipline of Elliot Wave Theory is immensely unique in that no other method of technical analysis provokes deeper thought, retrospection, or fosters a rebirth of wisdom imparted through lessons of the past. Nor does any other method of technical analysis provide such a dynamic model for developing, monitoring, and formulating high probability forecast assessments of both present and future market conditions.