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ELLIOTT WAVE PRINCIPLE KEY TO MARKET BEHAVIOR by FROST and PRECHTER With a Foreword by Charles J. Collins PUBLISHED BY New Crassics Lisrary www.elliottwave.com ELLIOTT WAVE PRINCIPLE KEY TO MARKET BEHAVIOR Copyright © 1978-2006 by Robert Rougelot Prechter, Jr. Printed in the United States of America For information, address the publishers: New Classics Library Post Otfice Box 1618 Gainesville, Georgia 30503 USA www.elliottwave.com ‘The material in this volume up to a maximum of 500 words may be reprinted without written permission of the authors provided that the ‘source is acknowledged. The publisher would greatly appreciate be- ing informed in writing of the use of any such quotation or reference. ‘Otherwise all rights are reserved. ISBN: 978-0-932750-75-4 Library of Congress Control Number: 2004116120 PUBLISHER'S NOTE FOR THE 207 ANNIVERSARY EDITION (1998) Elliott Wave Principle came out in November 1978, with the Dow at 790. While reviewers immediately regarded it as the definitive textbook on the Wave Principle, it handily missed the best-seller list by several hundred thousand copies. Neverthe- Jess, due to the spiraling interest in the book’s content and the success of its long range forecast, it has sold more copies every year, achieving the status of a Wall Street classic. Like the Wave Principle itself, this book has stood the test of time. What's more, Elliott Wave Principle has gotten better as it has evolved. The book fulfills its purpose as a comprehensive text ‘more satisfactorily with each new edition, as Robert Prechter has meticulously refined, enhanced and expanded it through the years. This effort has borne fruit. In the 1970s, A.J. Frost had often recounted Hamilton Bolton’s observation in the 1960s that “For every 100 people who know Dow Theory, only one has ever even heard of Elliott.” In the summer of 1986, Frost called Prechter to say, “the tables are finally turning.” Until a few years ago, the idea that market movements are self-similarly patterned was highly controversial, but recent scientific discoveries have established that self-similar pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo “punctuated growth,” thatiis, periods of growth alternating with phases of non-growth or decline, building into similar patterns of increasing size. Nature is replete with such “fractals,” and ‘as we demonstrated in this book twenty years ago, and as RN. Elliott revealed some sixty years ago, the stock market is no ‘exception. Itis hard to believe that twenty years have gone by since we introduced the world to Frost and Prechter’s vision of a great bull ‘market in stocks. While its extent has been much more than they originally expected, the authors maintain their labeling of the advance as Cycle wave V. Today, the market’s character is exactly ‘as Prechter said it would be in his depiction of fifteen years ago: “At wave V's end, investor mass psychology should reach manic proportions, with elements of 1929, 1968 and 1973 all operating together and, at the end, to an even greater extreme.” Here in 11998, every market statistic and every investor's racing heartbeat, reflect exactly that condition. ‘This edition again keeps intact every word involving expecta tions for the future precisely as it originally appeared, allowing new readers to investigate both the successes and errors in the forecast presented by Frost and Prechter those many years ago. Inreferring to that forecast, investment analyst James W. Cowan says, “Even allowing for minor stumbles, that 1978 prediction ‘must go down as the most remarkable stock market prediction. of all time.” It remains to be seen whether this great bull market will be followed by the biggest bear market in U.S. history and thus fulfill the second half of the book’s forecast. The authors, to be sure, stick by their scenario, New Classics Library, Publisher ACKNOWLEDGMENTS ‘The authors have tried to spell out everything that has been said of Elliott that is worthwhile saying. The book wouldn't be here, however, ‘without the help of several people whom we will always remember with gratitude. Anthony Boeckh of Bank Credit Analyst fame generously ‘opened his files. Jo-Anne Drew labored hours over the first draft and lent hher artistic talents to its production. Mr. and Mrs. Robert R. Prechter, Sr, meticulously edited the final manuscript. Arthur Merrill of Merrill Analysis, Inc. gave us valuable advice and assistance in photography ‘and production. Others too numerous to mention have sustained us in our efforts with advice and encouragement. To all, please accept our ‘thanks. Background charta for some of the illustrations were provided courtesy of the following sources: Bank Credit Analyst, Montreal, Canada (Figures 2-11,55,83); RW. Mansfield, Jersey City, NJ (Figure 1-18); Merrill Lynch, Inc. (Figures 3-12; 68, 9, 10, 2; 7-8); Securities Research Co., Boston, MA. (Figures 1-13, 6-1 through 6-7), Trendline, a division of Standard and Poor's Corp., New York (Figures 1-14, 17,27, 97; 4-14). Figure 8-9 includes ilustra- tions eourteay of Fascinating Fibonaceis by Trudi H. Garland (drawings), ‘Mathematics by David Bergamini and the Editors of Life (spiral flower and Parthenon), Omni magazine, March 1988 (hurricane, whirlpool and shells), Seientific American, March 1969 (sunflower), Science 86 magazine, ‘May 1986 (pine cone), Brain /Mind Bulletin, June 1987 (DNA), Fibonacci ‘Quarterly, December 1979 (human body), Nova-Adventures in Seionce (atomic particles), Daniel Schechtman, Technion, Haifa, Israel (quasi crystal), Hale Observatories, Pasadena, CA (galaxy). Some charta in the ‘Appendix are provided by Ned Davis Research, Nokomis, FL; Foundation for the Study of Cycles, Wayne, PA; and The Media General Financial Weekly, Richmond, VA. All illustrations not otherwise cited were done by Bob Prechter (original book) and Dave Allman (appendices). The formidable job of lettering and paste-up was patiently performed by Robin Macheinski ‘The jacket design was conceived by the authors and crafted by graphics, artist Irene Goldberg of New Orleans, Louisiana. Production in later ‘editions was handled by Jane Bstes, Susan Willoughby, Paula Roberson, Karen Latvala, Debbie Iseler, Pete Kendall, Stephanie White, Leigh ‘Tipton, Angie Barringer, Sally Webb, and Pam Greenwood. ‘The authors have tried to acknowledge all source material used in ‘his book. Any omissions are accidental and will be corrected in future printings if brought to our attention, CONTENTS Publisher's Note forthe 20th Anniversary Edition ‘Acknowledgments Foreword ‘Authors’ Note PART I: ELLIOTT THEORY ‘Chapter One: The Broad Concept Basie Tenets Detailed Analytics Motive Waves Impulse Extension Truncation Ending Diagonal Leading Diagonal Corrective Waves Zigag, Flat Triangle Combination (Double and Triple Three) Orthodox Tops and Bottoms Reconciling Function and Mode Additional Terminology Frroneous Concepts and Patterns (Chapter Two: Guidelines of Wave Formation Alteration Depth of Corrective Waves Behavior Following Fifth Wave Extensions Wave Equality Charting the Waves Channeling Throw-over Seale Volume The “Right Look” Wave Personality Summary of Rules and Guidelines for Waves Learning the Basies Practical Application (Chapter Three: Historical and Mathematical Background of the Wave Principle ‘Leonardo Fibonacci da Pisa The Fibonacci Sequence The Golden Ratio The Golden Section The Golden Rectangle The Golden Spiral The Meaning of Phi Fibonacci inthe Spiraling Stock Market Fibonacci Mathematics in the Structure ofthe Wave Principle Phi and Additive Growth PART Il: ELLIOTT APPLIED (Chapter Four: Ratio Analysis and Fibonacci Time Sequences Ratio Analysis Retracements Motive Wave Multiples Corrective Wave Multiples Applied Ratio Analysis Multiple Wave Relationships Fibonacci Time Sequences, Benner’s Theory (Chapter Five: Long Term Waves and an Up-to-Date Composite The Millennium Wave from the Dark Ages The Grand Supercycle Wave from 1789 to Present The Supereyele Wave from 1932 (Chapter Six: Stocks and Commodities Individual Stocks Commodities Gold (Chapter Seven: Other Approaches tothe Stock Market snd Their Relationship o the Wave Principle Dow Theory The “Kondratiff Wave” Beonomie Cycle Cycles The Decennial Pattern News Random Walk Theory Technical Analysis The “Economie Analysis” Approsch [Exogenous Forces (Chapter Fight: Elliot Speaks The Next Ten Years ‘Nature's Law Appendix: Long Term Forecast Update, 1982-1983 Glossary of Terms Publisher's Postscript ‘This work. is dedicated to the memory of the late A. Hamilton Bolton in appreciation of his genius, of his unwavering professionalism, and for the great impetus he gave to the Elliott Wave Principle.