Elliott wave theory

A framework set out by Ralph Nelson Elliott in the nineteen thirties, which holds that collective market behaviour unfolds in recognisable sequences rather than randomly. Its basic unit is a motive phase of five waves moving with the larger trend, followed by a corrective phase of three moving against it. Each wave of that sequence is said to contain the same structure at a smaller scale, so the pattern is described at several degrees on one chart at once.

Labelling is done by an analyst applying guidelines rather than by a calculation. Three are treated as rules in most versions: the second wave does not retrace the whole of the first, the third is never the shortest of the three motive waves, and the fourth does not trade into the territory of the first. Beyond those, Fibonacci proportions are conventionally used to project where a wave might end, and alternation, channelling and volume behaviour are used as supporting evidence.

This is one of the areas where practitioners disagree fundamentally, and the disagreement is about method rather than detail. Critics observe that a labelling is not unique: several counts fit the same chart, an alternate count is kept in reserve, and a count that fails is relabelled after the event, which makes the framework hard to test. Supporters treat it as a way of organising observations about structure and proportion, not as a forecasting rule, and note that the guidelines do rule some counts out. A reader meeting a wave count is meeting one analyst's interpretation, not a measurement.