Elliott Wave Theory

KnovaWave is one of the foremost Elliott Wave practitioners today; we utilize the Elliott Wave theory in our Proprietary KnovaWave Trading methodology. We believe the Elliott Wave Principle provides you with one of the most objective and disciplined method available for trading. Only a handful of patterns exist, sometimes easy to recognize especially in strong impulsive waves. The still validated patterns tell you where the market is heading; in what way (or structure) this will happen and under what circumstances the pattern will produce a stronger probability. Also the pattern will tell you when it is no longer valid due to price action. The Theory will also allow for several alternative counts.

The key to understanding of the Elliott Wave theory is determining the probabilities of alternative scenarios. This provides for risk management and stress reduction, you know where you are wrong. However it is the minute degree that traders tend to ignore that is so critical. The KnovaWave rules are designed specifically to fill this void.

Elliott Wave Theory – an introduction

Elliott Wave Theory was originally espoused by R.N.Elliott in the 1920?s and made popular through the work of Frost and Prechter through their many books and market calls. Robert R. Prechter calls have since become legendary, and he has gone on to become a best selling author. Frost and Prechter predicted, in the middle of the crisis of the 70s, the great bull market of the 1980s. Not only did they correctly forecast the bull market but Robert R. Prechter also predicted the crash of 1987 in time and pinpointed the high exactly. He followed up with the ensuing bull market and resultant bear market. Digging deeper Mandelbrot proved the existence of fractals in his book “The Fractal Geometry of Nature” in the 1980s. He recognized the fractal structure in numerous objects and life forms, a phenomena Elliott already understood in the 1930s.

Nature’s Design

Elliott Wave Theory interprets market actions in terms of recurrent price structures. The Wave Principle” is Ralph Nelson Elliott’s discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature. From this discovery, he developed a rational system of market analysis.

Elliott isolated thirteen patterns of movement, or “waves,” that recur in market price data and are repetitive in form, but are not necessarily repetitive in time or amplitude. He named, defined and illustrated the patterns. He then described how these structures link together to form larger versions of those same patterns, how they in turn link to form identical patterns of the next larger size, and so on.

In a nutshell, then, the Wave Principle is a catalog of price patterns and an explanation of where these forms are likely to occur in the overall path of market development. Elliott?s descriptions constitute a set of empirically derived rules and guidelines for interpreting market action. Elliott claimed predictive value for The Wave Principle, which now bears the name, “The Elliott Wave Principle?.

Master Elliott Wave tactitican Robert Prechter in an interview in 1998 best describes this;

“Elliott’s most important discovery was that the patterns that develop in the stock market occur at all degrees of trend. The larger patterns are made up of components that are themselves composed of smaller ones. The same patterns on a smaller scale combine to create any one of those patterns on a larger scale. The larger pattern will combine with several others of the same degree to create an even larger pattern and so on. He described in detail exactly what those patterns look like. He identified 13 of them. Only recently has data been available for general stock prices back to the late 1700s, and the patterns are there as well.

The market has a life of its own. It is mass psychology that is registering. Changes in feelings show up directly as price changes in the barometer known as the DJIA, or the S&P; 500, or any other index. The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, to change their psychological orientation from bullish to bearish and back again.”

Basically, Market cycles are composed of two major types of Wave:

  1. Motive Waves (There are two types of motive waves: impulses and diagonal triangles) For every motive wave, it can be sub-divided into 5 – wave structure (1-2-3-4-5), while for corrective wave, it can be sub-divided into 3 – wave structures (a-b-c). Their structures are called “motive” because they powerfully impel the market.
  2. Corrective Wave . Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1-1. Their structures are called “corrective” because they can accomplish only a partial retracement, or “correction,” of the progress achieved by any preceding motive wave. The internal structure of the patterns, this will enable you to recognize a pattern within a pattern.

KnovaWave recognizes the immense value of the Elliott Wave Theory, but also the complexities and even skepticism of the theory. We have developed educational and membership structures for true understanding and incorporation in trading and investment plans. The importance of the theory in our methodology is aptly described by Robert Kelley of E.W.I., a former technical analyst at J.P. Morgan Chase & Co.;

“It’s the single best tool for technical analysis because it provides a framework of expectations and tells you when you’re wrong.’’
Source: Bloomerg Financial News

Furthermore we recognize that it is not be all and end all of a trading or investment plan. Our KnovaWave Plus* line emphasises this within KnovaWave Methodology, for more on our methodology click here.

We provide forecasts on stocks and indexes, foreign exchanges, commodities, sector analysis and fixed interest markets. There exist a multitude of market analysis services, which predict where a stock may go in price and time. The chaotic nature of markets is volatile and change rapidly, these longer term objectives are all nice in theory and usually contain unrealistic drawdowns and stop losses. We are aware of the need for timely analysis and as such provide daily updates in a user-friendly audio video format, which is both educational and designed to have you at the market. We present the material as an ongoing resource for educational purposes. This provides for immediate use in your own market analysis and trading.

Fig.1.1 Recognizable Patterns

Building a strategy to cover long and medium term analysis, and overview intraday charts for both the short-term and long-term trader and to gauge all measures of wave degree will keep your objective as a trader or investor. Stay informed on a daily basis, a necessity for serious traders utilizing the Elliott Wave Theory in volatile markets. Wave structures of the largest degree are composed of smaller sub waves, which are in turn composed of even smaller sub waves, and so on, which all have more or less the same structure (impulsive or corrective) like the larger wave they belong to. Elliott distinguished nine wave degrees ranging from two centuries to hourly.

Understanding KnovaWave with access to live markets can keep you informed right up to the sub-minute detail with an ever objective and consistent wave count.

Elliott Wave theory can get very complex- especially in corrective waves, it is essential not to lose the theory’s objectivity. Determine alternatives for both internal wave structures and look for other confirmations through the KnovaWave Dynamic Gann methodology, indicators and Fibonacci ratios.