Guide to Elliott Wave Analysis

The Elliott Wave Analysis

What is Elliott Wave?

Elliott Wave is a form of technical analysis that was developed by Ralph
Nelson Elliott in the 1930s. Elliott observed that financial markets move in
recognizable patterns which are created by underlying investor behaviors of
fear and enthusiasm.

Elliott used the data from the Dow Jones Industrial Average to discover
that the ever-changing path of stock market prices reveals a structural
design that in turn reflects a basic harmony found in nature. From this
discovery, he developed a rational system of stock price analysis. He
isolated patterns, or “waves”, of directional movements that recur in
markets and are repetitive in nature, but are not necessarily repetitive
in time or amplitude. He then described how these structures link
together to form larger versions of the same patterns, and how those in
turn are the building blocks for patterns of the next larger size, and so on. His
descriptions constitute a set of empirically derived rules and guidelines for
interpreting market movement.

The Elliott Wave Theory

An Elliott Wave has two basic phases: an impulse or motive phase, and a
reactionary or corrective phase. The impulse phase always moves in the
direction of the trend, whereas the corrective phase moves against it. This
would mean in a bullish market, the impulse phase will be moving upward
while the corrective phase will be moving downward. In a bearish market the
opposite will occur, meaning the impulse phase will move downward and the corrective phase will angle up.

Each phase is made up of waves. A complete Elliott wave is made up of eight

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