Wave Principle: In the Beginning with Bob Prechter

By Elliott Wave International's Robert Prechter, Prechter's Market Perspective
Oct 21, 2005

The back-to-back, 100-point swing in the Dow this week shows how much the markets are driven by human psychology. Humans behave in certain ways, and these behaviors are patterned. In the case of financial markets, these patterns are perfectly recorded for all to see in a price chart. Anybody can see these patterns of behavior if they know what to look for. In the beginning, Bob Prechter tried many forms of technical analysis before he struck on the Elliott Wave Principle, because he could see the patterns. For anyone interested in why it sparked him intellectually, here's an excerpt from his question-and-answer book, called Prechter's Perspective.

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As you tried different kinds of technical analysis before hitting on the Wave Principle, did you investigate any technical approaches that didn't work?

Bob Prechter: Sure. There are some widely followed theories on Wall Street that I've delved into quite deeply and decided are complete fantasies. It was only the Wave Principle that really stopped me cold and said take a deeper look.

What was it about Elliott that captured your attention?

Bob Prechter: I had seen some mentions of the Wave Principle in a few market newsletters and a couple of obscure books, and I decided that either this was someone's elaborate fantasy or it was an amazing discovery. I wanted to reject it from what evidence I could find or include it as part of my growing arsenal of technical analytical methods.

How long did it take you to develop your 'eye' for discerning these waves?

Bob Prechter: About 30 minutes – when I plotted my first hourly chart covering a few months. Apparently, there is such a thing as an eye for patterns. One person told me he had trouble finding the fives and threes. The key is to keep a chart. Most people have no trouble seeing the Principle at work.

You accepted it just like that?

Bob Prechter: When you begin to see the five-wave impulses and the three-wave corrections unfold over and over, it does not take long for you to say either, 'I see, but I refuse to believe it,' or, 'This is obviously what's happening; let's see how far it continues.' It took about a year and a half of applying it until I knew that Elliott was absolutely right. I'm pretty hard-headed, and it takes substantial reason for me to accept a new idea. By that time, I decided I had seen what amounted to proof. I then said to myself, 'This is unbelievable. How come no one is commenting on this? The market is pulling back to points he said it should pull back to in the patterns. It is rising up to levels he said it should, in ways he said it should.'

What was it that convinced you?

Bob Prechter: The Wave Principle proves itself when you merely keep a chart. Once I did that, I recognized what was going on rather quickly. The wave patterns are repetitive and at times, over protracted periods, they are easily discernible.

Is it possible that you were simply projecting the patterns you read about in Elliott's work onto the market?

Bob Prechter: No. For instance, I have used cycles for many years as well, and in that field, I am more of the opinion that some projection is required for the theory to maintain itself. Certainly fundamental analysts project their biases and unfounded conclusions into the market without realizing it and without checking historical correlations that would dissuade them from the effort. I didn't waste any time doing that because I recognized the invalidity of the process from the outset. Elliott is a different story. I observed and forecasted the market in light of the theory, and the results convinced me.

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