Sunday, January 28, 2018

From A Man Named Elliott in 1938

In the year 1938, an accountant and business consultant by the name of Ralph Nelson Elliott wrote and published a book entitled, The Wave Principle - copies of which can still be obtained. This was obviously long before Frost & Prechter reviewed and revamped aspects of the work. The charts below are based on Elliott's original steps in chart construction. And remember, this is from a book published nearly 80 years ago.

Figure 1 : S&P500 Cash Index - R. N. Elliott's "Base Channel"

Once waves 1 & 2 are identified, Elliott says, in The Wave Principle to draw in the "base channel" shown here in the dotted parallel lines. Next Elliott indicates in Figure 37 of that work, that when a FLAT correction appears as wave 2, then it indicates a "Strong Market". This is because the upcoming strong third wave is so powerful, that it distorts the b wave of correction before it and causes it to exceed the high. (This 1, 2 flat scenario was how this wave was identified on this site going back to posts dated in September 2017, ( The reason we initially chose this arrangement, is that it places waves 1 & 2 on the extremes of the channel boundaries - that is, wave 2 is the farthest wave to the right-hand side of the channel.

Modern day Elliott analysts recognize that when the flat correction subdivides in 3:3:3 as this one for wave 2 did, it should more properly be labeled w-x-y just as we did in September. Time and time again some people tried to get us to label it as 1,2 (i), (ii). We tried a few counts that way. None worked out. We stated several times this was likely an "exact smaller fractal" of the 2009 - 2012 move which also predicted a very strong market to follow it. The 1,2 (i), (ii) arrangement is currently the way that Elliott Wave International (at last monthly publication), and several popular websites are labeling the bottom. Elliott showed in another book, Nature's Law, diagram labeled Figure 50, that the overlapping waves in this manner would be "incorrect counting" due to the similarity in the lengths of the waves from the bottom.

Now, we showed on Friday of this week, such a "flat second wave" arrangement results in a 2.618 Fibonacci extension very near this level. Impressive.

Regardless, Elliott says, referring back to The Wave Principle,  the next step in charting is to revise the channel once wave 3 is located. Well, we are not certain wave three is over. But, with a 2.618 extension very near by, Friday, we took a stab at revising the channel. Based on that work, let's look at the sequence as Elliott might have.

Figure 2: S&P500 Cash Index - R.N. Elliott's Revised Channel

First, note that I placed a red diamond at the top right of the chart to indicate that wave x3 (the extended third wave) may not be over yet. Now, Elliott says that "this wave three must sub-divide as five smaller waves". The five smaller waves are the five waves of one lower degree. I can not find any particular reference yet - and I am still looking -  that says that each of these waves must be shorter than Minor wave 1. As I say, I just can't find it - implied though it may be.

Next, I often said in these posts that, based on Neely, when a wave retraces less than 32.8%, it is a good candidate for an extended first wave.  In particular, I said it often in the sequence of the rise from the November, 2016 lows. So, perhaps the five-wave sequence labeled as .i to .v is the five waves of minute i, which is the extended wave within the extended third wave. You can note as labeled that wave .v is very nearly the length of wave .i - a very common relationship among Elliott Waves.

With regards to wave degree, yes, this wave i is longer than wave Minor 1, but it's sub-components are not. And, after all, somehow wave 3 must become longer than wave 1. Exactly how this process happens is not at all clear to me yet. Elliott was quite nondescript on this topic, as are all later books with regard to degree. There are no clear rules for what is legal and what is not at this stage - and this topic would be fertile ground for future Elliott analysts to explore. There is no reason to assume that progress in Elliott work is over.

Then, there is another flat but very shallow retrace for wave minute ii. Again, using Elliott's comment from his book The Wave Principle, this would also indicate "a strong market", with it's higher b wave.

This minute i, ii arrangement may best explain what I referred to on Friday as "the right hand turn".

Clearly, the market re-accelerates into the end of 2017, in what is likely a third wave, or part of a third wave, currently labeled as minute iii. It was this clear, strong re-acceleration that cause me to write to Elliott Wave International and question the degree labeling issue, with the comment that "something seems wrong" and some suggestions for change.

Finally, in 2018, there seems to be another re acceleration at even a steeper angle which may be the fifth wave blow-off within extended wave three (x3) as recognition of the 2.618 Fibonacci extension grows. Again, the third wave may not be done yet, but we should be getting close.

And if wave i is the extended wave in the sequence, then wave iii is shorter than i, and wave v should be shorter than wave iii.

With regard to timing, and time-frames, this chart best indicates to me that we might be getting close to the end of a third wave.

Figure 3: S&P500 Cash Index - Fibonacci Time Relationships

What the above chart suggests is that the length of time of wave x3, would be near a 2.618 extension of the length of time of waves 1 & 2 combined. This is the most compelling time relationship I can find among the various peaks and troughs. So, one would have 2.618 in price, and 2.618 in time.

If and when wave x3 should end, then the chart in Figure 2 indicates there may be a wave 4 target location not only near the bottom of the channel, but also by the wave iv of one lower degree.

Will all this come to pass? As of this writing, we don't know. If it should, it sure seems like it would be a fitting tribute to a scholar, original thinker, and perhaps genius from 1938, and before.

Once again, the clear alternate for this count is A,B,C to Intermediate wave (1) of a diagonal.

Have a very nice weekend.


  1. Thanks. Very clearly presented.

  2. TJ, thanks once again for all the time and effort that this requires. As one of the many former EWI subscribers, I greatly appreciate the clear and thorough analysis.

    1. Welcome GVC. The information they provide is often invaluable. It's a matter of how it's used, I guess.

  3. Joe, the daily sentiment index for SP is 96% and for Naz97%. Apparently it’s as hi as in 2000 top. Would this coincide with a strong wave 3 then with wave 5 there would be a divergence in the DSI? Your thoughts. Thanks and thanks for your education and openness in your interpretation compared to other sites.

    1. Hi Samuel. Yes, I would think that there should be a sentiment divergence in Wave 5. And I agree, all kinds of sentiment indexes are reaching maximums, including the 10-day put/call ratio.

  4. Joe this one is a 'Master Class' post!! Many many thanks.