Elliott Wave Theory

Elliott Wave Theory, developed by Ralph Nelson Elliott in the 1930s, proposes that financial markets move in repetitive, fractal patterns driven by mass investor psychology and sentiment. The basic pattern consists of an eight-wave cycle: five waves in the direction of the main trend (the "impulse" or "motive" phase, labeled 1-2-3-4-5) followed by three waves against the trend (the "corrective" phase, labeled A-B-C). Within impulse waves, waves 1, 3, and 5 move with the trend while waves 2 and 4 are corrections. Wave 3 is typically the longest and strongest, never the shortest. Wave 2 never retraces more than 100% of wave 1, and wave 4 never enters the price territory of wave 1. These patterns are fractal — each wave contains sub-waves of the same pattern at smaller degrees. Corrective waves take many forms including zigzags, flats, triangles, and complex combinations. Practitioners often use Fibonacci ratios to project wave targets: wave 3 commonly extends 1.618 times wave 1, wave 5 often equals wave 1 in length, and wave 2 typically retraces 50-61.8% of wave 1. While the theory has passionate advocates who find it provides a comprehensive market roadmap, critics argue that wave counting is subjective — different analysts can produce different counts from the same chart, and the "correct" count often only becomes clear in hindsight.