Elliott Wave Principle: Key to Market Behavior [Paperback]

 

 

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"The stock market is not a random, formless mess reacting to current news events but a remarkably precise recording of the formal structure of the progress of man" (page 113). Rather, it unfolds in waves, and "when presented clearly, the basic tenets of the Wave Principle are easy to learn and apply" (authors' note).

Authors Frost and Prechter certainly deliver on their second point, presenting clearly and in concise chapters: the broad concept; guidelines to wave formation; the historical and mathematical background; ratio analysis and Fibonacci time sequences (a most interesting section); long term waves (Millennium waves, grand super cycles etc.); stocks and commodities; and finally a critique of other approaches such as Dow theory, Kondratieff waves, technical analysis, random walk, and news driven and economics driven theories. For those less technically inclined, there are helpful suggestions to skip certain sections and chapters, but it's all here, in a neat package with ample charts and clear writing.

The authors are careful to note that the Elliot Wave theory is not a predictive tool, but rather it helps investors' relative convictions that the next market moves will be upwards or downwards, and by how much.

Because the book was originally written more than 30 years ago, the contemporary charts and examples are now dated, but the forecasts of then still distant market behaviour ("investor mass psychology should reach manic proportions", with a a Kondratieff wave inspired crash around the Millennium!) are surprisingly prescient and very interesting. Like Hyman Minsky's economic predictions made around the same time (1985), Frost and Prechter also foresaw worldwide banking failures and economic collapse at the market's peak.

Unfortunately the excellent writing is undercut by a fatal flaw -- there seems to be little evidence to support the work. For example, the authors note that the theory works for both stocks and commodities, but they examine index levels and ratios while ignoring dividend policies and rates for stocks, an important component of an investor's total return. They ignore indices other than the Dow and S&P500 (the NASDAQ was not yet in existence, and it's not clear if the theory applies to non-US indices), and they ignore the impact of foreign exchange on both domestic stocks and on commodities. The proof is best summed up in the book's final line, "As long as the market fulfills expectations, we can assume we're still on track." The proof is in the application of the theory.

Sweeping statements to support theories also lack empirical backing. For example, introducing the 50-60 year cycle of Kondratieff waves, the authors cite similar waves in Israelite and Mayan civilizations, but the brief reference leaves readers wondering whether these two civilization actually had such cycles, and if so, why those civilizations and not others. Didn't Kondratieff visit China or France?

Compared to the excellent and theoretically robust work by Minsky on the behaviour of markets and economies (driven by human nature, but unpredictable and unstable) and even the more straightforward but well documented work of Jeremy Siegel (Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies) or Dimson et al (Triumph of the Optimists: 101 Years of Global Investment Returns) for the upwards trajectory of stocks in the long run, this work is very weak. At best it demonstrates a correlation, not cause and effect ("a precise recording of the history of man?") but even the apparent correlations appear only when one zooms in or out to make a particular pattern appear. The data is mined with precision and thankfully, as few actually follow it, with little environmental impact.

In a concluding irony given their dismissal of fundamental analysis, the authors try to confirm their theory of patterns by noting the relative valuations of the market at different times (undervalued or overvalued). Most analysts would start with the fundamental and skip the charts. Those who are Elliot Wave adherents will undoubtedly have read this book already and enjoyed it. Those interested in this particular segment of markets history or in technical analysis can read this book, but it will be of little interest or use to the average investor.

This book is the easiest to read, most direct and to the point book that is solely on Elliott Wave. It tells all the possible moves, how they happen, and why. The book also goes into the very necessary explanation of Fibonacci and time relationships with regard to price. Many gold nuggets of information contained within this book; it is the most simple, complete Elliott Wave book you can get.

But the biggest problem is...most people just don't "get it"... Elliott Wave and Elliott's findings are SO MUCH MORE than the financial markets. The fundamental discoveries that govern the Wave Principle and thus the behavior of the financial markets are the very same fundamental forces at work throughout the entire universe. When you have a deep understanding of the Wave Principle, Socionomics, and science in general, you can begin to see how everything around us all ties together to form this awesome grand scheme of life and existance. A deep understanding of Elliott Wave and Fibonacci is the key to opening a whole new world of knowledge, application, and the birth of a new science.

After reading this book I've decided to study Elliot Waves very carefully. While the book is fairly short the job of constructing degrees and understanding the rules/guidelines will take time to master. The reason I feel it's worth the time is that only Elliot Wave provided a structured way to understand short and long term cycles. The stacking and governance by degree provide meaningful insight into predicting future price movement.

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4.0 out of 5 stars Great Foundation
This is the basic "Bible" of Elliott Wave Theory. I found this book when I was checking out www.wavespeak. Read more

Published on Nov 10 2003

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