The Fascinating History of Elliott Wave

There are few parts of Technical Analysis that you can credit to a single individual, but Elliott Wave Theory has that distinction.

The theory’s founder is Ralph Nelson Elliott, who was born in Marysville, Kansas, in 1871 and later moved to San Antonio, Texas.

Elliott began his career as an accountant in the mid-1890s. After executive positions at private companies and a successful consulting business, the U.S. Department of State appointed Elliott to the post of Chief Accountant for Nicaragua (which at the time was under American control).

During his time in Central America, Elliott contracted a debilitating illness, which forced him into early retirement at age fifty-eight. About this time, he decided to dedicate himself to the study of the American stock market.

When Elliott began his study of the markets, it was generally believed the markets were random and chaotic. Elliott, however, suspected that there was some underlying order to how they moved, and he proposed that market prices unfolded in specific patterns and trends. This was considered a revolutionary idea at that time.

He began his study by examining 75 years of historical stock market data using yearly, monthly, weekly, daily, hourly and half-hourly charts. Remember, this was in the 1930s, before any computing power was available to help go through charts and keep records. All that analysis was done by hand and carrying it out singlehandedly was an accomplishment in itself.

As his research progressed, he began to form rules he could apply to the markets and as his confidence grew, he began to share his ideas publicly. On March 13, 1935, an ordinary Wednesday, he sent out a telegram after market close stating that the American stock market is making a final bottom.

The very next day, Thursday, March 14, 1935, the Dow Jones Industrial Average made its lowest closing price for that entire year. In fact, the market began a rise that lasted almost two years and almost doubled the value of the Dow. Elliott, using the market rules he had developed, had pinned the bottom of the market to within one trading day.

What makes this even more remarkable was the time in history Elliott made the prediction. In 1935, America was in the middle of The Great Depression and the idea that the markets could rise seemed unthinkable.

A few months after predicting the low in March of 1935, Elliott wrote “The Elliott Principle” with Charles J. Collins. Collins himself was the recipient of Elliott’s telegram that Wednesday afternoon predicting the low of the market.

With the book, Elliott Wave Theory was officially born.

After Elliott’s death in 1948, many financial professionals continued to give predictions based on Elliott Wave. In the early 1970s, a young analyst at Merrill Lynch, Robert Prechter, discovered Elliott’s work and re-introduced it to the public through his own newsletters and books.

Prechter won the U.S. Trading Championship in 1984 using Elliott Wave with a then-record 444% return in four months in a monitored, real-money options trading account. Prechter also successfully predicted the long-term U.S. bull market that began in 1982 and the crash of October 1987. CNBC in 1989 named him "Guru of the Decade".

Today, Prechter is considered the world’s best-known Elliott Wave analyst and his own book, also called “The Elliott Wave Principle” is considered the modern bible to understanding this topic.

There are many criticisms of Elliott Wave and Prechter himself has made erroneous predictions. That said, Elliott Wave Theory is considered an important part of Technical Analysis and is part of the curriculum of the Chartered Market Technician designation.