Named after Ralph Elliott, who said that the stock
market moves in predictable patterns that reflect the basic harmony of nature.
The Elliott Wave Theory describes the stock market’s behavior as a series of
waves up and another series of waves down to complete a market cycle. Those
cycles are grouped into eight waves, with five of those following the main
trend, and three being corrective trends. After the eight moves are made, the
cycle is complete. Stock market behavior can be predicted by identifying those
patterns, the Elliott Wave Theory says.
Elliot’s theory was described in 1938
when The Wave Principle was published. A 1978 book called the Elliott Wave
Principle, written by Robert Prechter and A.J. Frost, is now considered the
definitive text on the subject.