Elliott Wave Theory
Elliott Wave Theory, proposed by Ralph Nelson Elliott in the 1930s, holds that market prices move in recognisable fractal patterns — five-wave impulse sequences in the direction of the dominant trend and three-wave corrective sequences against it — governed by Fibonacci ratios.
Ralph Nelson Elliott observed that the stock market did not move randomly but instead traced repetitive wave patterns across multiple timeframes simultaneously. He identified a basic cycle consisting of a five-wave motive sequence followed by a three-wave corrective sequence, totalling eight waves before the pattern repeats at a higher degree.
In the five-wave impulse pattern, waves 1, 3, and 5 move in the direction of the larger trend while waves 2 and 4 are corrective retracements. Three inviolable rules govern the impulse: Wave 2 must not retrace more than 100 percent of Wave 1; Wave 3 must not be the shortest of waves 1, 3, and 5; and Wave 4 must not overlap Wave 1's price territory (except in diagonal triangles). The corrective three-wave pattern — labelled A, B, and C — moves counter to the impulse and takes many forms including zigzags, flats, triangles, and complex combinations.
Fibonacci relationships are central to the theory. Wave 2 commonly retraces 61.8 percent of Wave 1; Wave 3 often extends to 161.8 percent of Wave 1; Wave 4 frequently retraces to the 38.2 percent level; and Wave 5 often equals Wave 1 in length. These ratios appear because Elliott believed natural phenomena — including mass human psychology — are governed by the Fibonacci sequence and its associated golden ratio of 1.618.
The fractal nature of the model means each wave at any degree of trend contains a complete Elliott Wave structure at a smaller degree. Practitioners label waves across Grand Supercycle (multi-century), Supercycle (multi-decade), Cycle (years), Primary (months), Intermediate (weeks), Minor (days), Minute (hours), Minuette (minutes), and Sub-Minuette (seconds) timeframes simultaneously.
In Indian markets, Elliott Wave analysis has been most prominently applied to Nifty 50 index movements. Long-term wave counts by Indian practitioners frequently situated the 2003 to 2008 bull market as a Wave 3 at the Primary degree and the post-2009 recovery as a new multi-year impulse. However, wave counts are inherently subjective and two analysts looking at the same chart often arrive at different counts — which is the methodology's primary criticism. The theory is most actionable when a specific count implies a clear price level at which it would be invalidated, providing a definable risk parameter.