What’s the Elliott Wave Theory?


Nov. 27 2019, Updated 6:44 p.m. ET

Introduction to the Elliott Wave Theory

The Elliott Wave Theory was developed by R.N. Elliott in the 1930s. The theory proposed that market trends moves in repeated cycles.

The cycles are classified based on how long they last. The cycles include:

  • Grand Super cycle – This is the longest wave. It takes place over many centuries.
  • Super cycle – This wave lasts for many decades. It lasts ~40–70 years.
  • Cycle – This wave lasts from one to several years.
  • Primary – This wave last for a few months to a couple of years.
  • Intermediate – This wave lasts for a few weeks to a few months.
  • Minor – This wave lasts for a few weeks.
  • Minute – This wave lasts for a few days.
  • Minuette – This wave lasts for a few hours.
  • Subminuette – This wave lasts for a few minutes.

A cycle has two phases:

  • Impulsive phase
  • Corrective phase

The above chart shows two phases of the Elliott Wave for Home Depot’s (HD) stock.

The impulsive wave is shown in the above chart. It consists of five waves. It forms higher highs in the uptrend and lower highs in downtrend.

The corrective wave is shown in the above chart. It consists of three waves. It forms lower highs in an uptrend and higher highs in a downtrend.

We’ll discuss the psychology behind the Elliott Wave Theory in the next part of this series.

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Applying technical analysis concepts

The technical analysis concepts can be applied to stocks like Cabot Oil & Gas (COG), Concho Resources (CXO), EOG Resources Inc. (EOG), and Laredo Petroleum (LPI). These companies are part of the S&P Oil & Gas Exploration & Production ETF (XLE).


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