🔸4.3 Multiple Wave Relationships
Last updated
Last updated
Keep in mind that all degrees of trend are always operating in the market at the same time. Therefore, at any given moment, the market will be full of Fibonacci ratio relationships, all occurring with respect to the various wave degrees unfolding. It follows that future levels that will create several Fibonacci relationships have a greater likelihood of marking a turn than a level that will create only one.
For instance, if a .618 retracement of Primary wave ① by Primary wave ② gives a particular target, and within it, a 1.618 multiple of Intermediate wave (A) in an irregular correction gives the same target for Intermediate wave (C), and within that, a 1.00 multiple of Minor wave 1 gives the same target yet again for Minor wave 5, then you have a powerful argument for expecting a turn at that calculated price level. Figure 4-16 illustrates this example.
Figure 4-16
Figure 4-17 is an imaginary rendition of a reasonably ideal Elliott wave, complete with a parallel trend channel. It has been created as an example of how ratios are often present throughout the market. In it, the following eight relationships hold:
② = .618 x ① ;
④ = .382 x ③ ;
⑤ = 1.618 x ① ;
⑤ = .618 x Ⓞ → ③ ;
Figure 4-17
② = .618 x ④;
in ②, (A) = (B) = (C);
in ④, (A) = (C);
in ④, (B) = .382 x (A).
If a complete method of ratio analysis could be successfully resolved into basic tenets, forecasting with the Elliott Wave Principle would become more scientific. It will always remain an exercise to determine probability, however, not certainty. Nature’s laws governing life and growth, though immutable, nevertheless allow for an immense diversity of specific outcomes, and the market is no exception. All that can be said at this point is that comparing the price lengths of waves frequently confirms, often with pinpoint accuracy, that Fibonacci ratios are a key determinant of where waves will stop. It was awe-inspiring, but no surprise to us, for instance, that the advance from December 1974 to July 1975 traced just over 61.8% of the preceding 1973- 74 bear slide, and that the 1976-78 market decline traced exactly 61.8% of the preceding rise from December 1974 to September 1976. Despite the continual evidence of the importance of the .618 ratio, however, our basic reliance must be on form, with ratio analysis as evidence to support or challenge what we see in the patterns of movement. Bolton’s advice with respect to ratio analysis was, "Keep it simple." Research may still achieve further progress, as ratio analysis is still in its infancy. We are hopeful that those who labor with the problem of ratio analysis will add worthwhile material to the Elliott approach.
Fibonacci Time Sequences
There is no sure way of using the time factor by itself in forecasting. Elliott said that the time factor often "conforms to the pattern," for instance with regard to trend channels, and therein lies its primary significance. Frequently, however, durations and time relationships themselves reflect Fibonacci measurements. Exploring Fibonacci numbers of time units appears to go beyond an exercise in numerology, fitting wave spans with remarkable accuracy. They serve to give the analyst added perspective by indicating possible times for a turn, especially if they coincide with price targets and wave counts.
In Nature’s Law, Elliott gave the following examples of Fibonacci time spans between important turning points in the market:
In Dow Theory Letters on November 21, 1973, Richard Russell gave some additional examples of Fibonacci time periods:
Walter E. White, in his 1968 monograph on the Elliott Wave Principle, concluded that "the next important low point may be in 1970." As substantiation, he pointed out the following Fibonacci sequence: 1949 + 21 = 1970; 1957 + 13 = 1970; 1962 + 8 = 1970; 1965 + 5 = 1970. May 1970, of course, marked the low point of the most vicious slide in thirty years. Taken in toto, these distances appear to be a bit more than coincidence.
The progression of years from the 1928 (possibly orthodox) and 1929 (nominal) high of the last Supercycle produces a remarkable Fibonacci sequence as well:
A similar series has begun at the 1965 (possible orthodox) and 1966 (nominal) highs of the third Cycle wave of the current Supercycle:
Thus, we foresee some interesting possibilities with respect to DJIA turning points in the near future. These possibilities are further explored in Chapter 8.
Besides their significant frequency, there is reason to believe that Fibonacci numbers and ratios of time units in the stock market are something other than numerology. For one thing, natural time units are related to the Fibonacci sequence. There are 365.24 days in a year, just shy of 377. There are 12.37 lunar cycles in a year, just shy of 13. The ratios between these actual numbers and Fibonacci numbers are .9688 and .9515. When the Earth’s orbit and rotation were faster, these numbers would have been concurrently quite close to actual Fibonacci numbers. (Might the solar system have begun its periodicities at those frequencies?) Music of the spheres, indeed.
There are also 52.18 weeks in a year, just shy of 55. Weeks may not be natural time units, but the fact that there are four weeks in a month forces weeks into a near-Fibonacci relationship with months because Fibonacci numbers x 4.236 yields other Fibonacci numbers. Any duration of a Fibonacci number of months will be close to a Fibonacci number of weeks as well. For example, 13 months = 56 (55 + 1) weeks. There is no reason to believe that man-made time constructs such as minutes and centuries should follow Fibonacci time sequences, but we have not investigated such durations.
We have noted that the longer the duration of a wave sequence, the further it tends to deviate from a Fibonacci number of time units. The range of deviation itself appears to create a Fibonacci progression as the durations increase. Here are the typical time durations of wave sequences in natural units of time (days, weeks, months, years), along with their ranges of deviation:
In applying Fibonacci time periods to the pattern of the market, Bolton noted that time "permutations tend to become infinite" and that time "periods will produce tops to bottoms, tops to tops, bottoms to bottoms or bottoms to tops." Despite
this reservation, he successfully indicated within the same book, which was published in 1960, that 1962 or 1963, based on the Fibonacci sequence, could produce an important turning point. 1962, as we now know, saw a vicious bear market and the low of Primary wave ④, which preceded a virtually uninterrupted advance lasting nearly four years.
In addition to this type of time sequence analysis, the time relationship between bull and bear as discovered by Robert Rhea has proved useful in forecasting. Robert Prechter, in writing for Merrill Lynch, noted in March 1978 that "April 17 marks the day on which the A-B-C decline would consume 1931 market hours, or .618 times the 3124 market hours in the advance of waves (1), (2) and (3)." Friday, April 14 marked the upside breakout from the lethargic inverse head and shoulders pattern on the Dow, and Monday, April 17 was the explosive day of record volume, 63.5 million shares (see Figure 1-18). While this time projection did not coincide with the low, it did mark the exact day when the psychological pressure of the preceding bear was lifted from the market.
