|This essay by Robert R. Prechter originally appeared in
The Elliott Wave Theorist in December 2004.
According to leading physicists and mathematicians who propose a fractal nature to financial markets, forecasting specific market developments is impossible. You can get an idea of this viewpoint from two quotations from eminent scholars in this area:
Coastlines are good examples of random fractals. Stock prices are comparable to coastlines.
—Edgar E. Peters (1991, p.51)
I agree with the orthodox economists1 that stock prices are probably not predictable in any useful sense of the term.
—Benoit Mandelbrot and Richard Hudson (2004, p.6)
The conclusion that forecasting specific developments within the stock market fractal is impossible derives from the assumption that financial markets – like clouds, rivers and coastlines — form indefinite or “random” fractals, which have no specifiable or anticipatable pattern. In contrast, The Wave Principle of Human Social Behavior (1999) offers a new hypothesis: that price movements in the stock market form what is termed in that volume arobust fractal, which, while quantitatively variable, is a hierarchical iteration of a certain form, such as occurs in trees. Most fundamentally, the form in financial markets is the iteration of alternating movements of 5 and 3 waves of a certain description. At the next level of complexity, it comprises linked repetitions of five essential price patterns — termed impulse, flat, zigzag, triangle and diagonal triangle — which occur at specific points in the development of the wave structure. The description of this form and its sub-patterns constitutes a model of the stock market called the Wave Principle (WP). WP is described and illustrated in detail in the literature (Elliott 1938, 1946; Frost and Prechter 1978/2005; Prechter 1999).
What we may call the “Indefinite Fractal” model of Mandelbrot (1999) improves upon the Random Walk model and economists’ bell-curve assumptions regarding risk by quantifying more accurately the frequency of extreme events in financial markets. It has nothing to say about when such events will occur, however, so it has no real-time, practical forecasting value. Both of these models are compatible with the idea that movements in markets are unpredictable in terms of specific events, paths or patterns. Some models from the financial profession (such as the Cyclic model, which postulates that markets are the product of periodic, harmonic time cycles) do presume specific patterns and predictability, but they have not yet been adequately chronicled and assessed.
A Note On Some Models That Purport To Describe Financial Markets
A reasonable measure of the validity of various models of the stock market is how well they describe the past. Historical stock market prices and random walks yield very different results on randomness tests;2 in other words, random walks do not describe historical stock prices well with respect to what these tests measure. The Indefinite Fractal model of Mandelbrot successfully describes the stock market but only as far as it attempts to do so, which is not very far. It is limited to a mathematical expression of its “roughness.” WP postulates a specific form, and in doing so it subsumes the useful aspects of the Indefinite Fractal model.
Competing models from the financial profession sometimes fail adequately to account for past market action. For example, cycles sometimes repeat at a certain frequency and then inexplicably change frequency or disappear. WP, in contrast, accounts well for detailed stock market movement over the past 90 years and for all U.S. and English stock market data, which go back over 300 years, at large degrees of trend.3 WP’s results on randomness tests, moreover, are nearly identical to the results for historical stock market prices,4 implying a possible affinity between the WP model and past stock market action, at least in terms of what these tests measure.
A Useful Model for Forecasting Financial Markets
A more revealing question is how well various stock market models describe the future. Few models of stock market behavior can claim to be successful in specific market forecasting. The Wave Principle has a documented 70-year history of application. How has it fared? One way to test this question is to identify crucial turning points in the stock market and investigate whether WP provided an analyst at the time with enough information to make a correct assessment of future market prospects.
Figure 1 shows the stock market for the past seven decades. On it are marked the major and intermediate turning points from 1937 to the present.5 This study begins in 1937 because that year contains the first turning point to which any Elliottician’s outlook pertained.
Computations to determine major turning points are based upon daily closing readings in the Dow Jones Industrial Average (DJIA) or in the DJIA divided by the Producer Price Index, an index called the “constant-dollar Dow,” and are rounded to the nearest one percent. A Major Bottom is defined as any price point that (1) follows a price decline of at least 40 percent without an intervening lower price point and (2) precedes a price rise of at least 200 percent without an intervening lower price point. A Major Top is defined as any price point that (1) follows a price rise of at least 200 percent without an intervening higher price point, (2) precedes a price decline of at least 25 percent (i.e., to an intermediate bottom) without an intervening higher price point and (3) precedes a price decline of at least 40 percent that allows for intervening higher price points but not by more than one percent per ensuing year.6 Figure 1 marks the Major Tops and Bottoms that occurred either in the DJIA or the constant-dollar Dow. The only time that these two indexes differed significantly from each other was in the 1968-1982 period. The DJIA made a Major Bottom in December 1974; the constant-dollar Dow made a Major Bottom in 1982 (see Figure 12).
Computations to determine intermediate turning points are based upon daily closing readings in the DJIA7 and are rounded to the nearest one percent. An intermediate bottom is defined as any price point that (1) follows a decline of at least 25 percent without an intervening lower price point, (2) precedes a rise of at least 30 percent without an intervening lower price point and (3) is not a Major Bottom. An intermediate top is defined as any price point in the DJIA that (1) follows a rise of at least 30 percent without an intervening higher price point, (2) precedes a decline of at least 25 percent without an intervening higher price point and (3) is not a Major Top. I have added one instance (called “update”) to this list: the low in 1953. The reason is that this year marked the return of an Elliottician to the forecasting scene after a five-year hiatus, and his publication that year presented both a near term and long term perspective on the stock market based on WP, confirming and updating the outlook presented at the Major Bottom of 1942.
Overall, our test period contains 6 major turning points and 15 intermediate ones, which are marked in Figure 1. Figure 2 shows those same major and intermediate turning points marked with the success or failure of the opinion that the recognized expert Elliottician of the time offered in print. The details of these market forecasts are listed in Table 1.
To summarize, WP provided a basis for a successful market opinion for 6 out of 6 major turning points at which an Elliottician expressed an opinion in writing, a 100 percent accuracy rate. It is 5 out of 5 if we discount the inferred opinion of 1937. WP provided a basis for a successful market opinion for 11 out of 15 intermediate turning points for which comment is available or inferable, a 73 percent accuracy rate. If we discount the three inferred outlooks, then the result is 8 out of 12, a 67 percent accuracy rate. (The evidence for my inferences is fully provided in ensuing discussions.) The exceptionally accurate assessment of 1953 (not to mention many others) is not counted in these totals. In four of the five cases of error (every one except intermediate o), the Elliottician involved accurately assessed the wave structure at one larger degree but simply missed the smaller-degree turn.
It is fortunate for our purposes that during the first 60 years since the WP’s discovery in the 1930s, there has been only one noted Elliottician publishing at a time. The only exception was 1975-1979, when both Russell and Prechter were commenting intermittently, but in that case the two practitioners were in complete agreement. In other words, for this study we are not choosing, and indeed cannot choose, among competing market outlooks based upon WP, as there were none.8 Table 2 lists the times when each analyst was publishing market forecasts based upon WP.
The track record in Table 1 is not a matter of simply recording a bullish or bearish statement. Analysts issue such statements all the time, and they change their minds often enough that someone could easily produce well-timed “accurate” excerpts from written material on such a basis. The most important column in this table is the one labeled, “If yes, degree understood?” A “yes” in this column means that the Elliottician of the time correctly assessed the relative price extent and/or the degree label (which amounts roughly to the same thing) of the forthcoming move in the opposite direction. This is no mean feat; compared to the quality of most forecasts, getting the degree of a new or coming trend right — after correctly forecasting or recognizing the change in direction in the first place — is a rare achievement. (Keep in mind that by the data, and virtually by definition as well, these market turning points are junctures at which most economists, analysts and investors share a strong conviction that the old trend of largest degree will not reverse direction.)
The notes on the right side of Table 1 state in capsule form some insights that the forecasters added to their outlooks. These insights are not culled from countless varying statements but rather were the essence of the Elliottician’s forecast at the time. Attending this study are excerpts from the published market outlooks, to provide detail and context. Appendix A and the endnotes provide every necessary reference for those who wish to peruse the original material in full. The reader is invited to study the original material to satisfy himself that the added assessments in Table 1 and the related excerpts are fair and accurate.
These data show that WP is an exemplary model for market forecasting at crucial market junctures. I am aware of no competing model that has offered — or can offer — any such value. One reason for this accuracy could be that WP accurately models the stock market.12
Excerpts from the Published Record
On the following pages appear the essence of each Elliottician’s forecast at each of the Major turning points, 1 through 6. (The most pertinent portions are marked in bold print.) This material shows that the forecasts of the past 70 years are consistent, not only with WP in general but also with the ongoing assessment of the market’s progress within the model. The analysts explained each time where the market was within the idealized WP structure and therefore what to expect in terms of market behavior. For the most part, subsequent market action proved the conclusions correct.
Figure 3 & 4
Major 1: March 1937 Top, R.N. Elliott (Implied Bearish)
There is no record of R.N. Elliott’s outlook for the stock market in March 1937, but, as cited in Table 1, his market assessment of the time is implied. On November 28, 1934, Elliott sent a letter to investment counselor Charles J. Collins introducing his model and added, “Incidentally, permit me to forecast that the present major bull swing will be followed by a major bear collapse. This is not an opinion but simply the application of a rule.”
It is clear from this otherwise vague language that in referring to “the present bull swing” Elliott was not yet bearish. Figure 3, showing the DJIA from the 1932 low through November 1934, illustrates the market’s wave labels that Elliott implied at the time. “The present major bull swing” refers to the as-yet-unfinished five-wave “impulse” pattern upward from 1932. Based on an application of WP, he would have turned bearish no earlier than late 1936 and would have been bearish at the peak. Figure 4 shows the subsequent “major bear collapse” of 1937-1938 and thereafter.
Elliott’s first publication confirmed that he maintained the view of the market’s position that he implied in 1934. Near the end of his 1938 book, published in August, he stated flatly, “March 31 was the bottom of wave A of the bear market,” shown as wave in Figure 4. (This observation attends the juncture labeled “intermediate a” in Table 1.) This comment clearly indicates by the tenets of WP that he expected the rally in force at the time, wave , to be followed by a lower low in wave . As you can see in Figure 4, he was correct. Therefore, we may presume that his view of the five waves up/three waves down pattern beginning at the 1932 low was consistent during this period and grant that at the 1937 high he was likely to have been bearish and to have understood the degree of the turn. If you believe that this assessment assumes too much, you may mark this juncture N/A in Figure 1. One thing is for sure from his writing and his model: He would certainly not have joined the majority of investors and analysts in being bullish at the 1937 peak given that he was expecting “a major bear collapse.”
Major 2: April 1942 Bottom, R.N. Elliott (Bullish)
Elliott’s outlook in 1941 and 1942 was unequivocally bullish for decades to come, and he was correct. He issued his forecast in the midst of World War II and despite the conventional view among economists that there would be “a post-war depression.” Below are his comments from August 1941, which he reiterated in October 1942, six months after the bottom.
August 11 and 25, 1941
Ralph Nelson Elliott, recognizing the end of the wave (IV) corrective process (later labeled wave II of (V)) and forecasting the entire wave (V) advance:
The earliest available stock record is the Axe-Houghton Index, dating from 1854. The essential “change” characteristics of the long movement from 1854 to September 1929 are shown in the accompanying graph [Figure 6]. The wave from 1857 to 1929 may be either Supercycle wave (I), (III) or (V), depending upon the nature and extent of development of the country before 1854.13 There is reason to believe, however, that the period from 1857 to 1929 can be regarded as Supercycle wave (III). The market since 1929 has outlined the pattern of a gigantic thirteen-year triangle Figure 5 of such tremendous scope that these defeatist years may well be grouped as Supercycle wave (IV) of an order dating back to as early as 1776. My observation has been that orthodox triangles appear only as the fourth wave of a [five-wave trend].14
Nature’s inexorable law of proportion accounts for the recurrent 0.618 ratio of swing-by-swing comparison, [as you can see from] the following tabulation of important movements since April 1930:
These ratios and series have been controlling and limiting the extent and duration of price trends irrespective of wars, politics, production indices, the supply of money, general purchasing power, and other generally accepted methods of determining stock values. This feature proves that current events and politics have no influence on market movements.
Since the causes of this phenomenal market behavior originate in the relativity of the component cycles compressed within the triangular area, it is distinctly encouraging to be able to point out that the rapidly approaching apex of the triangle should mark the beginning of a relatively long period of increasing activity [i.e., price increase] in the stock market. Triangle wave E [shown as on the chart] is well advanced, and its termination, within or without the area of the triangle, should mark the final correction of the 13-year pattern of defeatism. This termination will also mark the beginning of a new Supercycle wave (V) (composed of a series of cycles of lesser degree), comparable in many respects with the long [advance] from 1857 to 1929. Supercycle (V) is not expected to culminate until about 2012.15 (See dashed line in the graph Figure 6.)16
R.N. Elliott, 1941
Note: The DJIA touched its low eight months later, in April 1942, during the darkest days of World War II. It has not looked back since.
Major 3: February 1966 Top, Charles J. Collins (Bearish)
Observe from Collins’ assessment that he identified with exceptional precision the end of the third wave from 1932. So while he expected a sizable bear market carrying the DJIA into the 500s, he knew that a bigger decline, one akin to 1929-1932, would not occur until the fifth wave ended later.
Charles Joseph Collins, identifying the end of wave III and forecasting the extent of wave IV:
|In the count of Supercycle wave (V) from 1932, I find that two Cycle waves have been completed and a third may have completed in January 1966 or, if not (see subsequent discussion), then it is in the process of completion. These Cycle waves are illustrated in Figure 7.|
Charles J. Collins, 1966
Cycle wave III, beginning 1942, which is the wave of current interest, I break down as shown in Figure 8. Incidentally, the upward slant of Primary wave between 1956 and 1962 carries inflationary implications.
Primary wave (1962-1966?) of Cycle wave III is shown in [Figure 9] by giving the monthly swings of the Dow Industrials. Since Intermediate wave (3) of this Primary wave extended, it would appear that Intermediate wave (5), and thus Primary wave as well as Cycle wave III, ended in January 1966, as the market has subsequently developed a downthrust.
The third wave of Primary wave extended, and Elliott states that an extension will be retraced twice. Such being the case, this would call for the “C” wave of Cycle wave IV to carry back at least to 770-710 on the Dow, in other words, to the approximate area within which the extension of Intermediate wave (3) began (see points 1 and 2 of [Figure 9]). The decline could carry further, however, under Elliott’s rule that the correction of a wave should normally carry back to around the terminal point of the fourth wave of the five lesser waves that characterized the swing. The terminal point of the fourth Primary wave of Cycle wave III (see [wave in Figure 8]) was established in 1962 at 524 on the Dow. Purely as a speculation, might not the “A” wave of Cycle wave IV carry to the 770-710 area, the “C” wave to around the lower 524 point, with a sizable intervening “B” wave?17
Note: This was a successful call of the Cycle degree top that had just occurred after 24 years of rise. It was also a successful forecast of the extent of the first decline into the 1966 daily closing low, which was 744.31, and also an excellent forecast of the ultimate low eight years later in 1974 at 577.60, basis daily closing figures.
Major 4: December 1974 Bottom, Richard Russell (Bullish)
Richard Russell identified the end of wave IV from 1966 to 1974, which he identified throughout as one large bear market. A bigger story than the opinion expressed below, however, is his graphic depiction of the final wave down in the bear market (his first one attends the market juncture labeled “intermediate j” in Table 1), which he updated repeatedly until the bottom.
Richard Russell, 1973
Figure 10 shows one of his graphs, from November 9, 1973, just days after the DJIA peaked in a counter-trend rally. So he not only called the low in 1974 but forecasted it. The DJIA bottomed on December 6. Here is his commentary from 14 days later:
December 20, 1974
|The extent of the damage brought in by the bear market is shown in this chart [Figure 11]. This unweighted chart shows the disastrous story of the last number of years. There’s been only one worse collapse in Wall Street history. The 1-2-3 notations should be clear to all who followed my earlier discussion of the Elliott Wave Principle. Bear markets come in major 1-2-3 waves. According to the chart, this major downward zigzag could be completed.18|
Note: In Elliott Wave Principle (1978), Frost and Prechter re-affirmed the fact that wave IV’s low had occurred in 1974 and would not be exceeded until wave V ran its course.
Richard Russell, 1973
Major 5: August 1982 Bottom, Robert Prechter (Bullish)
The bull market that began in 1974 took so long to get going that inflation pushed the constant-dollar Dow to a new multi-decade low in August 1982. Four weeks after the low, Prechter sketched out the future and called for the DJIA to quintuple from the August 1982 low in wave V.
September 13, 1982
|This is a thrilling juncture for a wave analyst. For the first time since 1974, some incredibly large wave patterns may have been completed, patterns that have important implications for the next five to eight years. The technical name for wave IV by this count is a “double three,” with the second “three” an ascending triangle. [See Figure 12.] This wave count argues that the Cycle wave IV correction from 1966 ended last month (August 1982). The lower boundary of the trend channel from 1942 was broken briefly at the termination of this pattern. A brief break of the long term trendline, I should note, was recognized as an occasional trait of fourth waves, as shown in R.N. Elliott’s Masterworks.19
Robert Prechter, 1982
The task of wave analysis often requires stepping back and taking a look at the big picture and using the evidence of the historical patterns to judge the onset of a major change in trend. Cycle and Supercycle waves move in wide price bands and truly are the most important structures to take into account. [They indicate that] a period of economic stability and soaring stock prices has just begun. One must conclude that a bull market beginning in August 1982 would ultimately carry out its full potential of five times its starting point, thus targeting 3885.20
Note: Here Prechter identified the end of a 16-year period of loss for the constant-dollar Dow a month after the DJIA’s bottom at 777 and projected a climb to what was then generally perceived as an unattainable height.
November 8, 1982
|Surveying all the market’s action over the past 200 years, it is comforting to know exactly where you are in the wave count. [See Figure 13.]|
April 6, 1983
A normal fifth wave will carry, based on Elliott’s channeling methods, to the upper channel line, which in this case cuts through the price action in the 3500-4000 range in the latter half of the 1980s. Elliott noted that when a fourth wave breaks the trend channel [as this one did in 1982; see Figures 13 and 14], the fifth will often have a throw-over, or a brief penetration through the same trend channel on the other [i.e., top] side
What might we conclude about the psychological aspects of wave V? As the last hurrah, it should be characterized, at its end, by an almost unbelievable institutional mania for stocks and a public mania for stock index futures, stock options, and options on futures. In my opinion, the long term sentiment gauges will give off major trend sell signals two or three years before the final top, and the market will just keep on going. In order for the Dow to reach the heights expected by the year 1987 or 1990, and in order to set up the U.S. stock market to experience the greatest crash in its history, which, according to the Wave Principle, is due to follow wave V, investor mass psychology should reach manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.21,22
Note: A financial mania is a rare event, occurring on average about once a century. As far as I am able to determine, this is the only prediction of a financial mania ever attempted. It came to pass, even to the expected extent, as in the 1990s, speculation, valuation (by dividend yields, price/earnings ratios and book values) and the breadth of stock ownership reached an “even greater extreme,” by a substantial margin, than those of 1929, 1968 and 1973. Also as anticipated, the DJIA produced a “throw-over” of the upper channel line of the Supercycle-degree advance and met its upper channel line at Cycle degree (see Figure 14). On the error side, the entire process took a decade longer and carried higher than Prechter projected. In 1982, he had projected a quintupling from 777, and after the DJIA achieved that multiple, it tripled to reach its high in 2000.
Major 6: January 2000 Top, Robert Prechter (Bearish)
Prechter published a detailed analysis and wave interpretation in December 1999, explaining the “Grand Supercycle” degree of the peak. He identified this juncture as the culmination of the entire Supercycle structure that Elliott, Bolton, Collins, Frost, Russell and he had negotiated, which was wave (V) of a larger five-wave structure dating from the late 1700s. Whether this assessment is correct remains to be revealed by the ultimate extent of the bear market. Reducing the impact of Prechter’s analysis is the fact that he had forecasted tops at numerous times during the 1990s. (For details, see View from the Top.)
An Overview of the Long Term Elliott Wave Case for Stocks
Evidence at Supercycle Degree
By “Supercycle” degree, we mean the size of wave that has taken the Dow Jones Industrial Average up from its low at 41.22 in July 1932 up to the present. [Figure 14] shows that we can certainly label the Supercycle advance as a five-wave structure.
Evidence at Cycle Degree
By “Cycle” degree, we mean the size of wave that has taken the Dow Jones Industrial Average up from its low at 577.60 in December 1974 up to the present. This wave, like so many Elliott waves, has taken a classic shape. …The trend channel for Cycle wave V shown in [Figure 15] is constructed according to Elliott’s primary approach, which is to connect the lows of waves two and four and then draw a parallel line touching the top of wave three. The action during 1997-1999, moreover, has been quite similar to that of 1928-1929. Prices have clustered near the upper trendline, breaking through it briefly in what Elliott called a “throw-over.” As noted often in these pages, a throw-over is more likely when a market first slips below the lower trendline early in the wave’s development, as this one did in 1982.
Robert Prechter, 1999
Evidence at Grand Supercycle Degree
By “Grand Supercycle” degree, we mean the size of wave that has taken stock prices up from their low in 1784 up to the present. [Figure 16] shows our depiction of the Grand Supercycle advance. …While comparative statistics are hard to come by, [Figure 17] shows one measure that supports our case for a top of no less than Grand Supercycle degree in the making. Here, stock valuation is expressed in terms of annualized dividend yield so that the lower the dividend payout, the higher stocks are priced, and vice versa. Note that the degrees of terminating Elliott waves correlate with the varying extremes in dividend yield. Cycle degree extremes have produced over- and undervaluation at about 3% and 6.5% yield respectively, while Supercycle degrees have produced more extreme figures. Now look at 1999, where the dividend yield for the DJIA is only 1.5%, the lowest in the history of the data. Since we have record of a Supercycle overvaluation on the chart (in 1929), and since this one is higher, it must reflect a developing top of higher than Supercycle degree, i.e., one of at least Grand Supercycle degree.
Note: The constant-dollar Dow fell 40 percent from its high in 2000, fulfilling the requirement for listing this peak as a Major Top. The S&P 500 Composite and the Wilshire 5000 indexes fell 49 and 50 percent respectively from 2000 to 2002, and the NASDAQ fell 78 percent. The DJIA fell 38.7 percent from 2000 to 2002; according to Prechter’s assessment based on WP, the bear market has far further to go.
See “A Track Record of Wave Principle Application to the Stock Market – Part II” for details of the intermediate turning points, excerpted from the original publications.
1 One should be cautious of agreeing with “orthodox economists” on anything at all relating to finance.
2 See working paper “Idealized Elliott Waves and Random Walk Tests,” by Robert R. Prechter and Deepak Goel (2004).
3 “Cycle” degree and above.
4 See Endnote 2.
5 Hard as we may try to quantify movements in the stock market for the purposes of statistical studies, quantitative definitions can be inadequate and misleading. A perfectly defined concoction of aluminum pipes does not define actual living trees any more than quantitative parameters define waves in the stock market. The Wave Principle is a hierarchical fractal of a specific yet variable form, which requires description and whose relationships rest on relativity, not specific values. Turns of Cycle degree such as in 1937, 1966, 1974 and 1982 have one implication, turns of Supercycle degree such as in 1932 (or in 1942 by Elliott’s assessment) have another, and turns of Grand Supercycle degree (such as Prechter believes attends 2000) have another. These turns are not equally important as implied by the term “Major” but rather are quite different in terms of expected outcome. In each case documented here, WP practitioners understood the degree, i.e., the relative size, of each turn that they identified or forecasted. This is why Elliott in 1942 correctly called for decades of rise, why Bolton, Collins, Frost, Russell and Prechter called for specifically limited market movements of designated extents and why Prechter in recent years has been calling for the largest bear market since at least 1929-1932. A statistical study of this type cannot fully express the value of WP. Expressing it properly would require a detailed discussion of wave degrees, and the reader would have to possess a detailed knowledge of WP. Perhaps one day we will have the proper tools to model WP, in all its richness, mathematically. For the time being, to the extent that one can mathematically model another robust fractal — actual trees — with equations, one should be able to model actual waves.
6 This parameter takes care of the fact that a bear market sometimes contains a slight new high in a market index. Such new highs are not where an investor wishes to change his investment position. If, for example, an index rises persistently over a 10-year period and then goes sideways for 10 years, an investor would want to exit his investment at the initial peak, not at a minor new high six years into the new sideways trend, which would result in foregoing substantial opportunity cost. This parameter does not affect our test results. Without it, the Major Top of 1966 would become a Major Top in 1973, at which time the DJIA exceeded the 1966 high by five percent. As you can see from Table 1, the assessment at that time was also correct.
7 Constant-dollar prices are hardly relevant at the intermediate level, so I did not include the constant-dollar Dow in these computations.
8 In the late 1980s, the popularity of WP swelled, and a handful of other “market letter” publishers began to use WP as a primary analytical tool.
9 After Elliott’s death in January 1948, Garfield Drew, in New Methods for Profit in the Stock Market, commented on Elliott’s market outlook in 1948 as reported by stock broker John C. Sinclair, Elliott’s “collaborator” at the time of his death.
10 Russell sometimes quoted or conferred with Frost, but his call at the 1974 low appears to be his own. Having learned WP from Bolton, he had commented on it very briefly nine times from 1964 to 1970. From 1976 to 1979, he mentioned WP infrequently, and when he did so sometimes cited the opinions of others. He published a few more comments in 1980, quoting Prechter. Russell also analyzed gold in WP terms from 1973 through 1980. All his WP comments are on the record, as listed in Appendix A.
11 Prechter began publishing Elliott wave reports irregularly for Merrill Lynch in 1976 and then began publishing monthly in 1979 as The Elliott Wave Theorist.
12 If you, the reader, know of any competing stock market model that has provided a basis for a superior forecasting record judged by criteria similar to those in this report, or if you disagree with my representation of the WP track record, please contact me with such information.
13 Data prior to 1854 were unavailable at that time.
14 Elliott accomplished this forecast with very limited data, encompassing only 1857 to 1942. He could not see the entire Grand Supercycle wave structure up to that time, which began in 1784. He could see the triangular nature of the corrective process from 1929, which shows up in PPI-adjusted “constant dollar” data. Triangles, he had already observed, appear only in the fourth wave position. From his intimate knowledge of how smaller patterns had linked together, then, he knew where the market was in its larger pattern despite having only a partial recording of it. Frost and I later attained the pertinent back data and validated his conclusion in Elliott Wave Principle.
15 Elliott’s “2012” forecast was an offhand remark that meant, “it will be the same degree, and therefore about as long, as Supercycle wave (III).” 2012 is the year when the two waves’ lengths would be exactly the same. He did not actually expect that precise a match, which is why he said, “about 2012.” What he meant to convey was that he was predicting a Supercycle rise closer to seven decades rather than a Cycle degree rise closer to one decade or a Grand Supercycle closer to twenty.
16 Elliott, Ralph Nelson. (1941, August 11). “Market apathy – cause and termination.” (Educational bulletin). And (1941, August 25). “Two cycles of American history.” Interpretive Letter No. 17. Republished: (1993). R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Ed. Gainesville, GA: New Classics Library.
17 Collins, Charles J. (1966). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994). The Complete Elliott Wave Writings of A. Hamilton Bolton.Robert R. Prechter, Ed. Gainesville, GA: New Classics Library.
18 One might say that his use of the word “could” was equivocal. I do not, given the preceding two-year context. Regardless, in early January he said that a new bull market had begun.
19 See R.N. Elliott’s Masterworks, Figure 18, p. 110.
20 Prechter, Robert R. (1982, September 13). “The long term wave pattern — nearing a resolution.” The Elliott Wave Theorist.
21 Prechter, Robert R. (1983, April 6). “A rising tide — the case for wave V in the Dow Jones Industrial Average.” The Elliott Wave Theorist.
22 Prechter’s comments from this time are reprinted in the Appendix to Elliott Wave Principle.
Additional Source Material
In addition to the sources cited in the Notes and Appendix A, the following works are referenced herein:
Frost, Alfred John and Robert R. Prechter (1978). Elliott Wave Principle — Key to Market Behavior. Gainesville, GA: New Classics Library.
Mandelbrot, Benoit. (1999, February). “A Multifractal Walk Down Wall Street” Scientific American.
Mandelbrot, Benoit and Richard L. Hudson. (2004). The (Mis)Behavior of Markets. New York: Basic Books.
Peters, Edgar E. (1991). Chaos and Order in the Capital Markets. New York: John Wiley & Sons, Inc.
Prechter, Robert R. (1999). The Wave Principle of Human Social Behavior and The New Science of Socionomics. Gainesville, GA: New Classics Library.
Prechter, Robert R. (2002). View from the Top. Gainesville, GA: New Classics Library.
SOURCES OF ORIGINAL MATERIAL
Elliott, R.N. (1934, November 28). Letter to Charles J. Collins. Reproduced (1978/2005): Elliott Wave Principle. Frost and Prechter. Gainesville, GA: New Classics Library, p. 14.
Elliott, R.N. (1941, August 25). “Two Cycles of American History.” Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 204-210.
Bolton, A. Hamilton. (1966). “The Elliott Wave Principle of Stock Market Behavior: 1966.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Ed. New Classics Library, pp. 355-366.
Russell, Richard. (1973-1974). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 211-234.
Prechter, Robert R. (1983, April). “Long Term Forecast Update, 1982-1983.” The Elliott Wave Theorist. Republished (1995/2005): Elliott Wave Principle. Gainesville, GA: New Classics Library, p. 203.
Prechter, Robert R. (1999, December). “An Overview of the Long Term Elliott Wave Case for Stocks.” The Elliott Wave Theorist. Republished (2002): View from the Top. Gainesville, GA: New Classics Library, pp. 75-90.
Elliott, R.N. (1938). The Wave Principle. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, p. 144.
Elliott, R.N. (1939, April 11, through 1940, April 8). Interpretive Letters and Confidential Bulletins. Republished (1993): R.N. Elliott’s Market Letter (1938-1946). Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 46-66, particularly the graph on p. 64.
Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Ed., New Classics Library, pp.302-303; also R.N. Elliott, Interpretive Letters and Confidential Bulletins, April 28, 1942 through July 23, 1946. Republished (1993): R.N. Elliott’s Market Letters (1938-1946). Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 132-139.
Elliott, R.N. (1946). “The 1942-1945 Bull Market.” Nature’s Law. Republished (1980/1994): R.N. Elliott’s Masterworks. Robert R. Prechter, Ed., New Classics Library, p. 303, final sentence. Also, Drew, Garfield. (1948). “A Final Forecast by the Late R.N. Elliott.” New Methods for Profit in the Stock Market (2nd edition). Boston: Metcalf Press.
update: Bolton, A. Hamilton (1953). “Elliott’s Wave Principle: 1953” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 39-45.
Bolton, A. Hamilton. (1961-1962). “The Elliott Wave Principle.” The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 220, 228, 233.
Frost, Alfred John. (1962, December). Unpublished paper. Published (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library. pp. 67-72.
Collins, C.J. (1966). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1994): The Complete Elliott Wave Writings of A. Hamilton Bolton. Robert Prechter, Ed. Gainesville, GA: New Classics Library, p. 353.
Frost, Alfred John. (1968). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 133-134.
Frost, Alfred John. (1970). “The Elliott Wave Principle of Stock Market Behavior.” Supplement to The Bolton-Tremblay Bank Credit Analyst. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 158, 163-164.
Russell, Richard. (1973). Dow Theory Letters. Republished (1996): The Elliott Wave Writings of A.J. Frost and Richard Russell. Robert R. Prechter, Ed. Gainesville, GA: New Classics Library, pp. 215-221.
Prechter, Robert R. (1977, February). “The Elliott Wave Principle: Application to Today’s Market.” The Elliott Wave Theorist. Not available in book form; for labeling, see Fig.4-13 in Elliott Wave Principle.
Prechter, Robert R. (1978, March). “The Elliott Wave Principle: Update.” The Elliott Wave Theorist. Excerpted in Elliott Wave Principle, pp. 141-144.
Prechter, Robert R. (1981, April 12). The Elliott Wave Theorist.
Prechter, Robert R. (1987, October 5). The Elliott Wave Theorist.
Prechter, Robert R. (1987, October-December). The Elliott Wave Theorist.
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