The Elliott wave theory is a popular but easily misunderstood technical approach to forecasting prices. According to R.N. Elliott, the market moves in “waves” of various lengths. At the same time, the market may be moving down in a wave an hour in duration and up in a wave centuries long. Elliott believed that certain combinations and permutations cannot occur and, for this reason, it is possible to forecast prices by identifying the waves occurring at any one time.
It is difficult to say how reasonable the theory is, because it depends on a number of assumptions that are difficult or impossible to analyze. Many of the assumptions seem unreasonable, hence it seems likely that Elliott’s theory is of little or no practical value. On the other hand, the theory does have a number of properties that a successful market forecasting theory using public data should have. One of the most important of these properties is that the theory should be difficult to apply or, better yet, incomprehensible.