Elliott Waves
Ralph Nelson Elliott, who discovered this analysis methodology, and for whom it was named, summarized his overall market perspective as follows:
“No truth meets more general acceptance than that the universe is ruled by law. Without law, it is self-evident there would be chaos, and where chaos is, nothing is . . . Man is no less a natural object than the sun or the moon, and his actions, too, in their metrical occurrence, are subject to analysis . . . Very extensive research in connection with . . human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern. . . The stock market illustrates the wave impulse common to social-economic activity . . . It has its law, just as is true of other things throughout the universe.”
“Civilization rests upon change. This change is cyclical in origin and characteristics. A rhythmic series of extreme changes constitutes a cycle. When a cycle has been completed, another cycle is started. The rhythm of the new cycle will be the same as that of the previous cycle, although the extent and duration may vary. The cycle progresses in accordance with the natural law of movement.”
So, Elliott recognized that life, as we know it, is cyclical, and constantly rhymes, if not repeats. But, Elliott went so far as to question the causes of these cycles, and has actually turned the common conception of “causation” on its head:
“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental important, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.”
In fact, Elliott even went so far as to state that “[a]t best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.” In effect, what Elliott was saying is that news does not “cause” the cycles, as most believe. Rather, news falls within the cycles.
While this clearly challenges the common perceptions of what moves markets, I would suggest that all those reading these words at least open their minds to this possibility, as it may very well change the way you invest forever. Ultimately, the more I delved into this perspective, and its appropriate, yet rigorous, application, the more truth and accuracy I have encountered as it relates to market actions.
As George Santayana said, “those who cannot remember the past are condemned to repeat it.” Well, it is clear that he believed that human actions through history repeat. And, if you can learn how to recognize the patterns that repeat, not only will you avoid making the same mistakes, you may even be able to profit from those patterns. Just something to think about.
