Elliott Wave Degrees

Elliott Wave Theory proposes that waves come in several "degrees" and are themselves fractals of larger waves. The basic structure of motive and corrective waves applies to all waves. Practitioners of Elliott Wave use labels for different wave degrees, from those wave that occur matter of minutes to waves that taken hundreds of years to unfold. All waves are theorized to have a direct relation to the Fibonacci sequence in time and price.

The following labels were proposed by Ralph Nelson Elliott on his works on Elliott Wave Theory.

Grand supercycle - Hundreds of years
Supercycle - Several Decades (about 40-70 years)
Cycle - One year to multi-year waves
Primary - Few months to couple of years
Intermediate - Weeks to months
Minor - Week
Minute - Days
Minuette - Hours
Subminuette - Minutes

Orthodox Elliott Wave practitioners do not factor in inflation in their wave counts. Victor C. Ling of Elliott Wave Trends proposes wave counts adjusted for inflation.

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.

What is Elliott Wave Theory

 

Elliott Wave Theory is a form of financial market's technical analysis that forecasters use to identify trends and extremes in investor psychology. Elliott Wave Theory was developed in the 1930's by Ralph Nelson Elliott, an accountant by trade. His analysis of stock market price movements indicated that prices fluctuate in specific wave like patterns, thus the name "Elliott Wave". He published his works on his book The Wave Principlein (1938) and, in several articles in Financial World magazine. Elliott published his second and most comprehensive work in 1946 in a book called Nature’s Laws – The Secret of the Universe (1946). Elliott theorized that "because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable." Elliott's work fell into obscurity after the 1950's and his works were revisited in the 1970's by Robert Prechter, whose interpretation gained him notoriety in 1987 for predicting the crash that year.