According to Mr. Elliott, the markets move because of investors’ psychology, or crowd psychology. The most basic principle of this theory is that market movements are based on crowd behavior. The crowd’s mood swings from optimism to pessimism, and these changes in sentiment create repetitive patterns. After staring at 75 years’ worth of data on the charts and markets for days and nights, Mr. Elliott reached his aha moment.
Elliott claims to have discovered that a trending market moves in what he calls a five-three wave pattern.
The first five waves are impulsive (moving either up or down).
The next three waves are corrective (generally moving in the opposite direction from the ...