A Brief Description of Why Waves Come in 5s and 3s

Good things come in 3s -- but what about 5s? When it comes to Elliott wave analysis, each full cycle consists of five motive waves and three corrective waves. In bull markets, that means the motive wave trends up (up, down, up, down, up) while the corrective wave trends down (down, up, down). In bear markets, the opposite is true: The motive wave trends down while the corrective wave trends up.

EWI's Basic Tutorial is the best source for a quick rundown of how these waves and numbers fit together -- both on price charts and in nature, thanks to the Fibonacci sequence (1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144…) Here are two excerpts to help you understand why 3s and 5s are the basic building blocks of wave patterns on price charts.

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Number of Waves at Each Degree
Impulse + Correction = Cycle

Largest waves 1+1=2

Largest subdivisions 5+3=8

Next subdivisions 21+13=34

Next subdivisions 89+55=144

As before, the termination of yet another eight-wave movement (five up and three down) completes a cycle that automatically becomes two subdivisions of the wave of next higher degree. As long as progress continues, the process of building to greater degrees continues. The reverse process of subdividing into lesser degrees apparently continues indefinitely as well. As far as we can determine, then, all waves both have and are component waves.

R.N. Elliott himself never speculated on why the market's essential form was five waves to progress and three waves to regress. He simply noted that that was what was happening. Does the essential form have to be five waves and three waves? Think about it and you will realize that this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear movement. One wave does not allow fluctuation. The fewest subdivisions to create fluctuation is three waves. Three waves in both directions does not allow progress. To progress in one direction despite periods of regress, movements in the main trend must be at least five waves, simply to cover more ground than the three waves and still contain fluctuation. While there could be more waves than that, the most efficient form of punctuated progress is 5-3, and nature typically follows the most efficient path.

Variations on the Basic Theme

The Wave Principle would be simple to apply if the basic theme described above were the complete description of market behavior. However, the real world, fortunately or unfortunately, is not so simple. From here through Lesson 15, we will fill out the description of how the market behaves in reality. That's what Elliott set out to describe, and he succeeded in doing so.

Wave Degree

All waves may be categorized by relative size, or degree. Elliott discerned nine degrees of waves, from the smallest wiggle on an hourly chart to the largest wave he could assume existed from the data then available. He chose the names listed below to label these degrees, from largest to smallest:

Grand Supercycle
Supercycle
Cycle
Primary
Intermediate
Minor
Minute
Minuette
Subminuette

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First we must ask, can we both theorize and observe that there is indeed a principle that operates on the same mathematical basis in the heavens and earth as it does in the stock market?

The answer is yes. The stock market has the very same mathematical base as do these natural phenomena. The idealized Elliott concept of the progression of the stock market is an excellent base from which to construct the Golden Spiral, as Figure 3-10 illustrates with a rough approximation. In this construction, the top of each successive wave of higher degree is the touch point of the logarithmic expansion.

This result is possible because at every degree of stock market activity, a bull market subdivides into five waves and a bear market subdivides into three waves, giving us the 5-3 relationship that is the mathematical basis of the Elliott Wave Principle. We can generate the complete Fibonacci sequence, as we first did in Figure 1-4, by using Elliott's concept of the progression of the market. If we start with the simplest expression of the concept of a bear swing, we get one straight line decline. A bull swing, in its simplest form, is one straight line advance. A complete cycle is two lines. In the next degree of complexity, the corresponding numbers are 3, 5 and 8. As illustrated in Figure 3-11, this sequence can be taken to infinity.

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