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Elliott waves - in a nutshell
A Summary of the Elliott Wave Principle
The wave principle is the observation, first made by Ralph Elliott, that market prices make fractal patterns over time. "Fractal" means that if one observes the market over very small time periods one can see certain specific price patterns being continuously produced and repeated. As time rolls on, though, not only do these same patterns continue as before, but they make larger versions of themselves. As each layer is allowed to proceed over time, it too repeats itself at a larger scale. We end up with about 12 layers, or "degrees" of these patterns, all operating simultaneously all the time in today's market. Elliott discovered that there was a limited number of patterns involved, and he was able to formulate the rules by which they are formed, and the rules by which they mutate into larger versions of themselves. This gives us probably the most powerful market forecasting tool there is, because it enables us to look at the market at a number of different but simultaneously operating levels, and analyze each level. When they all coincide at a turn, a very powerful call can be made.
Elliott discovered that the patterns divided into two basic types: impulse waves and corrective waves. Impulse waves consist of five (or some variation based on five) alternating waves of price movement, after which a corrective wave will start. There are three types of corrective wave: the zigzag, the flat and the triangle. The basic idea is illustrated in the diagrams below. Corrective waves usually terminate somewhere within the span of the fourth wave of the previous impulse wave. This illustrates a "zigzag" correction. The dotted arrows indicate that after the correction is finished, another impulse wave in the direction of the arrow will follow.
This illustrates a "flat" correction.
And lastly here is a "triangle" correction.
The final diagram illustrates how the fractals build up. Once there have been three impulse waves and two corrective waves, making five waves in all, the fractal kicks up one degree and a bigger correction starts at that higher degree. Therefore the more complex and long lasting the up trend, the more complex and long lasting the ensuing down trend. For a fuller explanation, see Elliott Wave Basics.
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