1.2 Basic Tenets
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The Wave Principle is governed by man’s social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.
Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.
The market’s progression unfolds in waves. Waves are patterns of directional movement. More specifically, a wave is any one of the patterns that naturally occur, as described in the rest of this chapter.
In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labelled 1, 3 and 5, actually affect the directional movement. They are separated by two countertrend interruptions, which are labelled 2 and 4, as shown in Figure 1-1. The two interruptions are apparently a requisite for overall directional movement to occur.
Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of Wave 1; Wave 3 is never the shortest wave; Wave 4 never enters the price territory of Wave 1.
R.N. Elliott did not specifically say that there is only one overriding form, the “five-wave” pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.
