The late Zoran Gayer of Australia was advancing Elliott Wave theory based on more modern mathematics of living systems that come from the investigations at the Santa Fe Institute and elsewhere on Chaos Theory. Many seemingly random systems - such as the stock market, viz the famous book, A Random Walk Down Wall Street - are actually following an underlying order. The randomness or "chaos" patterns itself around a deeper pattern, and goes through times of unpredictability followed by times of order. Many systems run their most efficient right at the edge of chaos, at the border between predictable and chaotic. Living systems also show emergent order, where seemingly independent actions begin to organize themselves into a coherent system.
Chaos Theory may soon postulate that there is an underlying Self-Organizing Principle to the Universe - systems tend toward order not chaos. If such a Principle were developed, it would rank with the Laws of Gravity, Conservation of Energy, and Entropy as one of the monumental achievements of science.
Elliott was one of the first to develop a theory of order from the seeming chaos of the market. His mathematics reflected the thinking of his time, a mathematics based on classical physics, linear thinking and statistics. Prechter has greatly expanded the thinking of Elliott in his search for the underlying causality of the Elliott Waves, with his new social science of Socioeconomics. Prechter incorporates quantum physics and other innovations into his new science, and was one of the first to recognize that the underlying nature of stock movements is fractal - meaning that the patterns repeat at small and large scale in the market (eg. minutes, days, weeks, decades). Fractal geometry is at the core of Chaos Theory; and yet Prechter has not taken the math of Chaos one step farther to actually modify the wave patterns charted by Elliott in the '30s.
Zoran has taken that bold step, and here is an exposition of some of his thinking. This is worth studying as it may give better guidance to the moment of market change - the Bifurcation Point at the edge of chaos - than classic Elliott Wave theory. Zoran refers to his approach as EWP:
The market is comprised of two types of moves. The first is the thrusting DIRECTIONAL (IMPULSE) move with no or little overlap. The second is NON-DIRECTIONAL (so called CORRECTION) with OVERLAPPING MOVES. The market moves from one plateau to the next. The moves between plateaus are fast with little overlap. These moves generally do not retrace more than 61.8%. The moves within the plateaus overlap and usually retrace in excess of 61.8%. Moves within plateaus are often contained within trend lines. DIRECTIONAL MOVES always break out of containing trend lines of the NON DIRECTIONAL PATTERNS (of the same degree).
This concept is a little different from classical Elliott. The basic move is the DIRECTIONAL (thrust) that completes at the bifurcation of the NON-DIRECTIONAL MOVE (Elliotts correction). The basic move is from one BIFURCATION to the next.
The classic Elliott 5 wave pattern is composed of a number these cycles, one bifurcation to the next. The DIRECTIONAL plus the NON DIRECTIONAL is the move in CHAOS THEORY that is termed here a FRACTAL. The simplest market cycle is one DIRECTIONAL MOVE (THE IMPULSE) plus one NON-DIRECTIONAL MOVE (THE CORRECTION). Application of this concept creates different labeling positions to classical Elliott. The positions for completion of the thrust are often on the third low or high. In traditional Elliott the completion of the thrust is on the first low or high. In this labeling the up moves and down moves are treated the same. In traditional Elliott, they are not. The correction is said to complete on the third low or high while the impulse completes the first high or low.
Once the count is correct there is little change required with most modifications being minor and more in line with intraday trading. All one has to do is set up the parameters to identify when the assumed labeling is going to be wrong. The new changes will then fit into a new order. The principle that markets are constantly seeking order is a prime driving point in the interpretation. All living things seek order. Some would say that even insentient things seek order. The very existence of sentient beings is dependent on order. Their evolutionary survival is dependent on it. In man, this has reached heights of complexity in religious, political and economic thought.
The mind of man is a complex pattern making and recognition machine. Most of the mind is visual, with only a small component verbal. Thus order seeking will be more with visual perception than one based on verbal and logic extrapolations. Complex verbal communication was a later development in evolution. The next strongest sense of order is time. The changing of season is paramount importance in most species to their survival. Both pattern structure and time cycling are major primordial influences in the financial markets. They are there because it is an expression of our fundamental nature. That man is driven by primal influences may not be flattering. However, we are all captured by what we are. We have minor choices on the surface to influence our destiny. We can change little of what we are. An excellent example is the sexual drive. We have a choice of partners and preferences but we have no choice about the hormones that drive us to this activity. None can escape its influence. Yet we all view ourselves as self actualizing independent individuals.
EWP completes its thrust not at the thrust completion but at the fractural completion on the third high or low. Thus the labeling is different to traditional Elliott, which is not consistent in its up moves and its down moves. Note the labeling on the down move of last week [chart omitted]. Most Elliotticians would complete the wave 1 on the first low. EWP completes it on the third low which is the FRACTAL completion. What most Elliotticians would label as a C wave, EWP has labeled as wave 2. It is a NEW THRUST from the TRIPLE LOW. The THRUST fails if it cannot reach above 61.8% retracement. A robust thrust should not retrace more than 61.8%, nor should a NON-DIRECTIONAL MOVES (the plateaus) in a DIRECTIONAL move overlap.
We can fairly clearly surmise that wave two thrust will fail from larger time frame. One of the principles in CHAOS theory is that patterns will repeat in higher and low degrees or time frames. Thus we can surmise from larger degree patterns that wave 2 will fail and not move above a 61.8% retracement at its BIFURCATION POINT. Thus to be effective, the analysis must be in multiple time frames.
Within this broad construct, the Bifurcation Point is the key to market predictions. Simplified, it can distinguish a corrective wave from a change of trend wave better than the often convoluted wave numbers of orthodox wave theory. Four key rules:
- The break off the Bifurcation Point must go outside of the recently overlapping trading range
- The speed of the break must be faster (steeper) than the prior corrective waves
- The break should occur at a Fibonacci (0.382, 0.5, 0.618. 1.0. 1.618) or Repetition (0.5, 0.707, 1.0, 1.414, and 2.0) ratio of prior waves/projections
- The break is often at a triple-top or - bottom
The first rule takes the move outside whatever prior corrective action had been occurring. Corrections are made up of overlapping waves. By shooting past the trading range, this move is beyond the ongoing correction.
The second rule indicates a consensus market
opinion about direction. Corrections involve indecision and
uncertainty, while impulses track broad opinion. Recent examples are
sharp moves up in Oct02 when Congress passed the Iraqi war resolution,
and in Mar03 when the US went to war. When the uncertainty was removed,
the market moved.
The third rule may give us a way to predict bifurcations, rather than see them after the fact. Zoran often counts the end of a wave at a different point than Prechter. Prechter almost always picks the high or low point of a move. Elliott does not require this, and in many cases would find a different result:
- flat corrections occasionally see the B wave breach the start of wave A
- triangle corrections have an endpoint that is in between triangle high and low points
The fourth rule is means the Bifurcation Point is usually at the third low or the third high in a market movement. The triple-points need not be at the same level, and usually aren't. The triple-top or -bottom is a distribution pattern. The heads-and-shoulders triple is a well-known example of this. The failure of the third top or bottom to continue the move is due to market traders either getting out or getting into a position. Many market participants got out at the first top; then found themselves back in an upward move, and may have gone back in. The fall off the peak or head spooks them, and when the rebound of that fall gets back to where they first get on, they cut their losses and bail out.
Note: R. N. Elliott himself thought the wave action in the 1930s was a triangle, with the lowest point in 1932 merely the end of the A wave of an ABCDE triangle. Elliott died before the triangle ended, and Prechter has reinterpreted his work to make 1932 the bottom, although he recognizes the alternative count and occasionally re-analyzes it. Even Prechter at times calls an endpoint of a wave as other than the lowest or highest points. For example, the low point after the Crash of '87 was hit very quickly, but most Elliotticians including Prechter count the end of that corrective wave in 1991, after a multi-year triangle. (Interesting, Zoran finds the end even later and higher, in 1994.)
Fibonacci and Repetition ratios are much more precise when tracking moves from Bifurcation Points than with orthodox ewave count. A typical relationship is that an A wave and a C wave are of equal length, or related by 1.618; another is that wave 5 often equals wave 1. Consequently, they predict likely upcoming Bifurcation Points.