🔸1.4 Essential Design
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Last updated
Now observe that within the corrective pattern illustrated as wave ② in Figure 1-3, waves (A) and (C), which point downward, are each composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (B), which points upward, is composed of three waves: A, B and C. This construction discloses a crucial point: Motive waves do not always point upward, and corrective waves do not always point downward. The mode of a wave is determined not by its absolute direction but primarily by its relative direction. Aside from five specific exceptions, which will be discussed later in this chapter, waves divide in motive mode (five waves) when trending in the same direction as the wave of one larger degree of which it is a part, and in corrective mode (three waves or a variation) when trending in the opposite direction. Waves (A) and (C) are motive, trending in the same direction as wave ②. Wave (B) is corrective because it corrects wave (A) and is countertrend to wave ②. In summary, the essential underlying tendency of the Wave Principle is that action in the same direction as the one larger trend develops in five waves, while reaction against the one larger trend develops in three waves, at all degrees of trend.
The phenomena of form, degree and relative direction are carried one step further in Figure 1-4. This illustration reflects the general principle that in any market cycle, waves will subdivide as shown in the table below.
Motive + | Corrective | = Cycle | |
(Impulse) | (Zigzag) | ||
Largest waves | 1 | 1 | 2 |
Largest subdivisions | 5 | 3 | 8 |
Next subdivisions | 21 | 13 | 34 |
Next subdivisions | 89 | 55 | 144 |
Figure 1-4
As with Figures 1-2 and 1-3, this larger cycle in Figure 1-4 automatically becomes two subdivisions of the wave of the next higher degree. As long as progress continues, the process of building to greater degrees continues. The reverse process of subdividing into lesser degrees apparently continues indefinitely as well. As far as we can determine, then, all waves both have and are component waves.
Elliott himself never speculated on why the market’s essential form is five waves to progress and three waves to regress. He simply noted that that was what was happening. Does the essential form have to be five waves and three waves? Think about it and you will realize that this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear movement. One wave does not allow fluctuation. The fewest subdivisions to create fluctuation is three waves. Three waves (of unqualified size) in both directions would not allow progress. To progress in one direction despite periods of regress, movements in that direction must be at least five waves, simply to cover more ground than the intervening three waves. While there could be more waves than that, the most efficient form of punctuated progress is 5-3, and nature typically follows the most efficient path.
Wave Degree: Notation and Nomenclature
All waves may be categorized by relative size or degree. The degree of a wave is determined by its size and position relative to a component, adjacent and encompassing waves. Elliott named nine degrees of waves, from the smallest discernible on an hourly chart to the largest wave he could assume existed from the data then available. He chose the following terms for these degrees, from largest to smallest: Grand Supercycle, Supercycle, Cycle, Primary, Intermediate, Minor, Minute, Minuette, and Subminuette. Cycle waves subdivide into Primary waves that subdivide into Intermediate waves that in turn subdivide into Minor waves, and so on. The specific terminology is not critical to the identification of degrees, although out of habit, today’s practitioners have become comfortable with Elliott’s nomenclature.
When labelling waves on a graph, some scheme is necessary to differentiate the degrees of waves in the market’s progression. We have standardized a sequence of labels involving numbers and letters, as shown in the table below, which has several virtues heretofore lacking. The progression is infinite in both directions. It is based upon an easily memorized repetition. Motive waves are labelled with alternating sets of three Roman numerals followed by three Arabic numerals. The corrective-wave labels similarly alternate between three upper-case letters and three lower-case letters. Roman numerals always go with lowercase letters, and Arabic numbers always go with uppercase letters. Finally, all Roman numerals are lowercase below the Minor degree and uppercase above the Primary degree, so that a quick glance at a chart reveals some perspective on its time scale. (Several charts in this book deviate from this standard, as they were constructed prior to its adoption.)
We may also refer to waves by their degree number. A wave of Cycle degree is a wave of degree six. The largest degree in progress, dating from the Stone Age, is degree zero (Epochal degree), so these numbers should serve all analytical endeavours. The most desirable form for scientific work would be 11, 12, 13, 14, 15, etc., with subscripts denoting degree, but it is difficult to read a large number of such notations on a graph. The above standard provides for rapid visual orientation.
It is important to understand that these names and labels refer to specifically identifiable degrees of waves. By using a nomenclature, an analyst can identify precisely the position of a wave in the overall progression of the stock market, much as longitude and latitude are used to identify a geographical location. To say, "The Dow Jones Industrial Average is in Minute wave ⓥ of Minor wave 1 of Intermediate wave (3) of Primary wave ⑤ of Cycle wave I of Supercycle wave (V) of the current Grand Supercycle" is to identify a specific point along the progression of market history.
All waves are of a specific degree. Yet it may be impossible to identify precisely the degree of developing waves, particularly sub-waves at the start of a new wave. The degree is not based upon specific price or time lengths but upon form, which is a function of both price and time. Fortunately, the precise degree is usually irrelevant to successful forecasting since it is the relative degree that matters most. To know a major advance is due is more important than its precise name. Later events always clarify the degree.
