The Elliott wave theory was proposed in the early 1930s by R.N. Elliott, a stock market speculator. Elliott focused on classifying market activity according to a set of cycles and ratios of movements. As with the waves on the ocean, market activity ebbs and flows in cycles that repeat and can be subdivided into smaller cycles.

The theory states that markets move in repetitive patterns: a five-wave advance (impulse waves) and a three-wave decline (corrective waves, labeled with letters). This cycle of eight waves can be seen in all time frames from intraday to what Elliott called the “grand supercycle” of over 200 years. Each wave in a cycle can be subdivided into smaller cycles.

The diagram in Figure 35.1 shows how an eight-wave ...

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