Elliott Wave Structure

The Elliott Wave structure is based on the premise of crowd psychology in markets. The theory states that investor's psychology will swing from optimism to pessimism and vice versa in predictable wave forms.

In one of Ralph Elliott's works, "The Basis of the Wave Principle," Elliott's model states that stock market prices fluctuate between five waves and three waves at all degrees of trend, as the illustration shows above shows. Within the main price trend, waves 1, 3, and 5 are called "motive" waves, and each motive wave itself subdivides in five waves. Waves 2 and 4 are counter trend waves or "corrective" waves, and subdivide in three waves. In a bear market the main trend is downward, therefore the structure is reversed, so it would be five waves down and three up. Motive waves always move with the main trend, while corrective waves move against it.