Elliott Wave Theory is a theory of nature, specifically of how nature progresses forward in time. It governs mankind's progress and regulates our advancements and corrections in a predictable way. It applies to all of nature. Nature is not random chaos. Why would mankind's advancing and regressing be any different?
These waves play out on a large scale of time, regulated by Fibonacci sequences. Each 5 wave advancement is in itself consisting of 5 sub wave structures and so on. This is why you see me counting nested waves on the very small scale even intraday!
The buying and selling of stocks is not a rational one. Elliott Wave theory proposes that financial markets are a very useful "dashboard gauge" of where we are on the long-term structure. The stock market is sort of like the speedometer in our cars.
Perhaps the most important concept about Elliott Wave Theory is the idea that the theory is one of "social mood". Social mood is not the result of outside events. Elliott Wave theory postulates that social mood is not exogenous, it is instead collectively a subconscious result of all our moods together. Its nature. We are connected in more ways than you think. The theory states that social mood moves first, and our actions follow. If Social mood is in a wave three of five up, positive aspects of our human nature expand (such as buying stocks, being friendly and welcoming). When social mood contracts in 3 waves, negative moods and traits dominate (stocks get sold, business contracts, riots, wars, etc.).
Social mood moves first, actions (and our faulty explanations) follow. I will stress that outside human events have nothing to do with nature's advancing through the universe. Our human nature, governed by Elliott Wave Theory, is what moves us to take actions.
This is very counterintuitive and is why the theory is dismissed out of hand. Why of course the stock market dropped 12,000 points people will say! We are in a pandemic! No! The wave structure was counted to the top, mankind was due to start a very big negative social mood wave, and selling of the stocks was a result of that social mood. We, as a human social unit, shut the economy down. We, as a society, got fearful and defensive. The governments finally acted at the end of wave (1) down not at the top! (another important point is that government actions always occur at the end of trends, not before!)
People will also claim that if that cop did not do what he did, there wouldn't be riots. Again, no! Being human we need rational reasons for why things happen when really its just nature's course advancing us and contracting us in predictable ways. My take is that we are on the verge of wave (3) down after a brief wave (2) respite and the mood will be more negative than wave (1) because wave (3) is almost always the strongest wave. I propose there would have been riots one way or another. We always feel the need to rationalize on why mood is changing but you only need to know that its going to change no matter what and try to figure out when and for how long and at what degree. Instead, we offer faulty explanations of why things are as if they were the actual cause of the mood change itself.
This is what makes financial headlines so ridiculous. China fears cause market to tumble! Pandemic hope cause markets to rise! No! These are just silly fodder! Housing crisis causes 2009 Great Recession! Portfolio insurance (1987) - bad! Causes overnight market crash! Again, No! Social mood moves, markets crash (or advance), then we invent excuses or reasons for why it moved. We interpret the results as a reason of why. Free yourself from this way of thinking!
Think of the car speedometer example above, the speedometer doesn't move first, we make it move. We press on the gas first, and then the gauge tells us how fast we are going, and the odometer tells us how many miles we have travelled. Elliott Wave theory is kind of like that. Social mood moves first in waves of 5 and corrections of 3, and our speedometer (stock market waves) follows those waves of mood. Kind of like how we get fat. Our fat metabolism gets screwed up (insulin from carbs), we gain fat mass, and then we overeat because we are getting fatter. We get slothy because more food energy is diverted to the fat. Therefore we don't get fat because we overeat and are slothy. They instead are the results of getting fat.
The pandemic response was a result of our (predictable) changing mood to a large degree of negative mood trend - proposed Supercycle wave (a) down. We voluntarily, as a society, contracted and got fearful. We (social mood) caused the lockdowns. The riots are no different. Its a real life example of where social mood may be and its another example that the proposed Supercycle wave (a) down is going to be tremendously negative.
Elliott Wave theory is actually very liberating in this regard. When we let go of the fact that nature is in command, we can be more at peace within ourselves. That may sound weird, but once you accept the theory, it helps you liberate your mind so you will not consume yourself when things do what they do. Social mood theory explains why we are in a massive credit bubble. Social mood theory explains why that most assuredly will completely collapse.
ROBERT PRECTHER AND THE LONG TERM COUNTS
Besides Elliott himself there is no other person more responsible for the continuing advancement of Elliott Wave theory for the past 50 years than Robert Prechter, founder of Elliott Wave International and The Socionomics Institute. The man is a genius and has never stopped working to interpret and provide insight to where we likely are in the grand scheme of things.
His founding book along with Robert Frost, "Elliott Wave Principle - Key to Market Behavior", first published in 1978, is the book I read that introduced me to Elliott Wave Theory. It was comforting to know that nature is responsible for our social mood and it explains why things occur as they do. It explains that mood moves, and events happen as a result. He meticulously explains the wave structure, how to count, how the waves move and how it relates to Nature's laws.
I adhere to his interpretation of where the long term counts are. That's one reason I use his wave markers notational structure also. (If you see brackets [ ] around a number, its actually supposed to be a circle but Stockcharts doesn't let me make my own custom built numbers).
I am an Elliott Wave International affiliate and I highly encourage you to click my links to the left and explore their site and become a free club member. If you buy one of their excellent products I then get a commission if you signed up via my links. But that's not why I am a hardcore fan of Prechter and EWI. Simply put, there is no better long term analysis than his.
Where Mr. Prechter went slightly astray (and I because it was convincing at the time) is that we misinterpreted the then beginning of primary wave [5] in 2009. He had postulated that the orthodox top of Grand Supercycle wave [III] was in the year 2000 and that 2007 was a [B] wave (in any event it was a (B) wave just one degree lower) and that Supercycle wave (a) was forming a 3-3-5 expanded flat and that the flat would break deeper down in cycle wave c of supercycle (a). Therefore the original interpretation was that the 2009 low was merely Primary wave [1] of cycle wave c. It didn't happen that way. The credit bubble expanded even more...the 2009 low is now counted as the end of Primary [4] and the beginning of Primary [5] of cycle V of Supercycle (V) of Grand Supercycle wave [III].
Therefore the proposed top of Grand Supercycle wave [III] is not the year 2000, but 2020.
2000 - 2009 was an expanded flat just as he had postulated at the time. Except it was still part of the cycle wave V that started in the 1970's. It was still part of Supercycle (V) that started from the Great Depression of the 1930's. It was still part of Grand Supercycle wave [III] first started with the founding of the United States.
SUPERCYCLE WAVE (a) of GRAND SUPERCYCLE WAVE [IV]
So if 2020 marks the top of GS [III], what is next? Well, the theory tells us that Grand Supercycle wave [IV] follows [III] and is already starting. A grand supercycle wave is a very large multi-decade or even a century-long affair. You and I will likely not live to see the orthodox end of GS[IV].
Grand Supercycle wave [IV] "corrects" part of GS[III]. Specifically in wave counting, wave fours (of any degree) typically retrace into the price range of the previous subwave four of lesser degree. This is no doubt true on both the large scale of things and often the smaller too.
Being a corrective wave, GS[IV] can take many forms. It could be a multi-decade 3-3-5 flat. Or a combination wave. However, we can postulate that at minimum, it will consist of three (a)(b)(c) Supercycle sized waves.
Regardless, EW guidelines suggest that prices of the GS [IV] will at some point in its structure revert into the previous price range of Supercycle (IV) of [III]. The price at the top of that range is 377 DOW. Yes the 1929 peak is the top range of GS[IV]'s corrective target.
As I said, we won't be around to see GS[IV]'s orthodox ending (but we might see the price low ending) which may actually be in the distant future. But we don't need to. We must first start counting with the first corrective wave of GS[IV] and that would be Supercycle wave (a).
Supercycle wave (a) is likely going to take the shape of a sharp Cycle-sized a-b-c, 5-3-5 zigzag downward. Therefore going further, cycle wave a of (a) of GS[IV] would itself consist of [5] primary waves downward. Each primary wave [1], [3] and [5] would itself consist of (5) Intermediate sized waves down which is what you start to see on my charts.
This is where my charts do not quite align with that of Robert Prechter's and EWI (at the moment anyway). He is counting at 1 wave degree higher for the recent market drop. He and EWI, have the March 2020 low as Primary [1] down and that this rise is Primary [2]. He is likely correct, but it may be rushing things, we just don't know at this point. My wave degrees are one degree lower however for the time being it doesn't matter because both counts postulate that wave three down is almost upon us. My wave (3) is of Intermediate size, EWI is of Primary size which judging by scope of proposed destruction, is probably correct in the long run.
LONG TERM CHART 1.
These charts speak for themselves. They are EWI's specifically Robert Prechter's work. I use them as fair use to spread the cause of Elliott Wave theory. I have seen none better in my lifetime. I humbly ask Robert for permission if he happens to read my blog every once in a while.
This first chart shows GS[II] and [III] and all the subwaves. You can say that Cycle wave V extended from the 1970's (credit bubble). You can say that cycle wave V is the bubble wave. The mania wave.
His next chart is most brilliant. It adds an extra social mood gauge - it melds the producer price index to stock prices to create a smoother picture of the long term counts. What people pay for things (everyday items that people need to live - producer's price index) and what people pay to speculate (stock prices) melding together to create an elegant long term structure. Both of those elements together is perhaps a better indicator of the long term wave structure and where we are at.
The difference between the 2 charts and where they diverge in the sub-counting is that the financial speculation aspect (stock market) is a monster cycle wave V of (V) of [III]. We've been blowing this bubble hard since the 1970's. But they both imply the top of GS[IV] has arrived.
Can you see the blue virgin space at III of (III) of [III]?
I updated my weekly chart. This is a fuller count of things since 2000. Note the alt: a count.
And please sign up with Elliott Wave International through my links! Its the least you can do I just used their charts afterall.
Incidentally I use the Wilshire 5000 as my main counting index. Therefore my subwave counts invariably differ from EWI which is just fine. However, I find Prechter's long term charts so compelling, I adopted his wave labeling numbering system.
And its hard to argue against GS[III] topping out in 2020. The formation of this country was its beginning. Will its dissolution mark the end?