Elliott Wave Principle — Frost & Prechter: COMPLETE

Ralph Nelson Elliott was born 1871 in Marysville, Kansas, and worked for over twenty years as an auditor and business executive — mainly for railroad companies in Central America. He was no chartist and no stock exchange man: he was a bookkeeper of the old school, used to seeing structure and periodicity in numbers. Frost & Prechter devote the book's introduction to this biography, and their point is important: Elliott came to market data without preconceived notions, with an auditor's eye that looked for patterns in columns.

In the middle of the 1920s he was hired by the US State Department to help put Nicaragua's state finances in order — an assignment that required precisely the ability to see systems in chaos.

Then came life's vendetta. At the end of the 1920s Elliott was struck by a serious anemia caused by a parasite he had caught in Central America. He was bedridden for long periods and was forced to give up his career. What he did next is one of the most improbable stories in the history of finance: from his sickbed he began studying the price data of the Dow Jones indexes — seventy-five years of weekly and monthly prices — with the same rigor with which he had once audited balance sheets.

Frost & Prechter argue that it was precisely the isolation and the patience that made the discovery possible: no screen, no noise, only paper, ruler and time. In 1934, at the age of 62, he could formulate what he called the wave principle.

Elliott wrote letters to Charles J. Collins, the editor behind one of the era's most respected market letters. Collins dismissed him at first as yet another self-taught system builder — until Elliott's forecasts hit. Famous is the telegram of February 1935: in the middle of a hard decline, when the market made new lows for the year and the mood was at its darkest, Elliott wired that the decline was about to end and a powerful advance awaited.

Days later the Dow index turned and nearly doubled over the following two years. Collins was convinced, wrote the foreword to Elliott's "The Wave Principle" (1938) and helped him publish twelve articles in the journal Financial World in 1939. Elliott's last great work, "Nature's Law — The Secret of the Universe", came in 1946. He died in 1948, believing he had found nature's own rhythm in market prices.

The path from Elliott to the book you are now reading about runs through two men. The Canadian analyst A. Hamilton Bolton wrote the 1960 appreciation "The Elliott Wave Principle — A Critical Appraisal" and followed the wave count in annual supplements to his market letters until his death in 1967. His partner A.J. Frost — a technical analyst of the old school in Hamilton, Ontario — continued the work. Robert Prechter, a young psychologist from Yale who worked as a technical analyst at Merrill Lynch, had found Bolton's book in a library and became obsessed.

Frost and Prechter began a correspondence via Collins, met in 1977 and wrote "Elliott Wave Principle" together, published in November 1978. The book saved Elliott's legacy from oblivion — and gave the Swedish course you are now reading its most important theoretical skeleton.

Charles Dow, founder of Wall Street Journal and of the indexes that bear his name, formulated around the turn of the century 1900, in his editorials, a picture that came to be called Dow theory. His most famous idea is the market's three movements: the primary trend — the tide, lasting years; the secondary swell — weeks to months; and the daily ripples — the noise no one should trade on.

Dow also taught that the indexes discount everything: every known piece of information, every expectation, is already in the price. The trend is confirmed by volume, and the industrial and railroad indexes must confirm each other for a signal to be valid. This is the foundation of all modern technical analysis.

Dow also described a stock exchange that moves in three phases up and three phases down — a qualitative sketch of accumulation, participation and euphoria. Frost & Prechter note in the book's first chapter that Elliott, who studied the works of Dow's successors carefully, asked himself a simple question: if the market has swell and tide, what exact shape does the swell have? When Elliott counted through his data he found the answer: five waves in the direction of the primary movement, three against it.

Dow's three phases became Elliott's five waves; Dow's corrections were given a fixed anatomy. Dow's intuitions that corrections often retrace roughly one third to two thirds of the preceding swell also anticipated the Fibonacci measures that Elliott later systematized chapter after chapter.

The difference, however, runs deeper than the counting apparatus. Dow's theory is qualitative: it says that trends and phases exist, but gives no template for where a phase begins or ends. Elliott's wave principle is formal: it gives exact shape, relative proportion and nesting depth to the same movements, and it applies — unlike Dow's requirement of two confirming indexes — to every freely traded asset with liquid public pricing.

Frost & Prechter summarize the difference by saying that Dow theory describes the sea, while the wave principle describes the wave: the same phenomenon, but at different levels of precision. At the same time Elliott agrees with Dow about the most important thing of all — that the cause of price movement lies in the market's own collective psychology, not in the news about it.