NATURE’S LAW

THE SECRET OF THE UNIVERSE

by
R. N. ELLIOTT
 RENCE INDICATIONS!

Reference to chapters, pages, diagrams, etc. will be indicated as

follows:

(C) Chapter. For example, “C 24” means Chapter No. 24.

(D) Diagram. For example, “D 4” means Diagram No. 4.

(FSS) Numbers of the Fibonacci Summation Series

(OT) Orthodox top.

(G) Graph. For example, “G X” means “Graph X”.

(P) Page. For example, “P 5” means Page 5.

(PD) “P2 D4” means Page 2, Diagram 4.

(PG) “P3 G6" means Page 3, Graph 6.

(PPD) “P4 P6 D8” means Page 4, Paragraph 6, Diagram 8.

(R) Ruling ratio of the Fibonacci Summation Series, such

as .62 or reciprocal 1.62.

Publisher’s Note: In the original monograph, nearly every sentence

was treated as a separate paragraph and numbered. We have taken
the liberty of condensing the style of arrangement for easier read-
ing. The references to text areas by codes as described above have
been eliminated.

FOOTNOTES
1 Elliott’s talent for ordering and labeling comes out even here.

Copyrianted materia
 INTRODUCTION

RHYTHM IN NATURE’
No truth meets more general acceptance than that the uni-
verse is ruled by law. Without law it is self-evident there would
be chaos, and where chaos is, nothing is. Navigation, chemistry,
aeronautics, architecture, radio transmission, surgery, music —
the gamut, indeed, of art and science — all work, in dealing
with things animate and things inanimate, under law because
nature herself works in this way. Since the very character of
law is order, or constancy, it follows that all that happens will
repeat and can be predicted if we know the law.
Columbus, maintaining that the world was round, predicted
that a westward course from Europe must eventually bring his
ships to land and despite scoffers, even among his own crew,
saw his prediction realized. Halley, calculating the orbit of the
1682 comet, predicted its return which was strikingly verified
in 1759. Marconi, after his studies in electrical transmission,
predicted that sound could be conveyed without wires, and to-
day we can sit in our homes and listen to musical and other
programs from across the ocean. These men, as have countless
more in other fields, learned the law. After becoming thus posted,
prediction was easy because it became mathematical.
Even though we may not understand the cause underlying
a particular phenomenon, we can, by observation, predict that
phenomenon’s recurrence. The sun was expected to recurrently
rise at a fixed time thousands of years before the cause operat-
ing to produce this result was known. Indians fix their month
by each new moon, but even today cannot tell why regular in-
tervals characterize this heavenly sign. Spring plantings are
witnessed the world over because summer is expected as next in
order; yet how many planters understand why they are afforded
this constancy of the seasons? In each instance the rhythm of
the particular phenomenon was mastered.
Man is no less a natural object than the sun or the moon,
and his actions, too, in their metrical occurrence, are subject to
analysis. Human activities, while amazing in character, if ap-
proached from the rhythmical bias, contain a precise and natu-

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 Nature’s Law 217

ral answer to some of our most perplexing problems. Further-

more, because man is subject to rhythmical procedure, calcula-
tions having to do with his activities can be projected far into
the future with a justification and certainty heretofore unat-
tainable.
Very extensive research in connection with what may be
termed human activities indicates that practically all develop-
ments which result from our social-economic processes follow a
law that causes them to repeat themselves in similar and con-
stantly recurring serials of waves or impulses of definite num-
ber and pattern. It is likewise indicated that in their intensity,
these waves or impulses bear a consistent relation to one an-
other and to the passage of time. In order to best illustrate and
expound this phenomenon it is necessary to take, in the field of
man’s activities, some example which furnishes an abundance
of reliable data and for such purpose there is nothing better than
the stock exchange.
Particular attention has been given to the stock market for
two reasons. In the first place, there is no other field in which
prediction has been essayed with such great intensity and with
so little result. Economists, statisticians, technicians, business
leaders, and bankers, al] have had a try at foretelling the future
of prices over the New York Stock Exchange. Indeed, there has
developed a definite profession with market forecasting as its
objective. Yet 1929 came and went, and the turn from the great-
est bull market on record to the greatest bear market on record
caught almost every investor off guard. Leading investment in-
stitutions, spending hundreds of thousands of dollars yearly on
market research, were caught by surprise and suffered millions
of dollars loss because of price shrinkage in stock holdings that
were carried too long.
A second reason for choosing the stock market as an illus-
tration of the wave impulse common to social-economic activity
is the great reward attendant on successful stock market pre-
diction. Even accidental success in some single market forecast
has yielded riches little short of the fabulous. In the market ad-
vance from July 1932 to March 1987, for illustration, an aver-
age of thirty leading and representative stocks advanced by
373%. During the course of this five-year movement, however,
there were individual stocks whose per cent advance was much

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218 R. N. E..iott’s MASTERWORKS

larger. Lastly, the broad advance cited above was not in a straight
upward line, but rather by a series of upward and downward
steps, or zig-zag movements of a number of months’ duration.
These lesser swings afforded even greater opportunity for profit.
Despite the attention given the stock market, success, both
in the accuracy of prediction and the bounties attendant thereto,
has necessarily been haphazard because those who have at-
tempted to deal with the market’s movements have failed to rec-
ognize the extent to which the market is a psychological
phenomenon. They have not grasped the fact that there is regu-
larity underlying the fluctuations of the market, or, stated oth-
erwise, that price movements in stocks are subject to rhythms,
or an ordered sequence. Thus market predictions, as those who
have had any experience in the subject well know, have lacked
certainty or value of any but an accidental kind.
But the market has its law, just as is true of other things
throughout the universe. Were there no law, there could be no
center about which prices could revolve and, therefore, no mar-
ket. Instead, there would be a daily series of disorganized, con-
fused price fluctuations without reason or order anywhere
apparent. A close study of the market, however, as will be sub-
sequently disclosed, proves that this is not the case. Rhythm, or
regular, measured, and harmonious movement, is to be dis-
cerned. This law behind the market can be discovered only when
the market is viewed in its proper light, and then is analyzed
from this approach. Simply put, the stock market is a creation
of man and therefore reflects human idiosyncrasy. In the pages
which follow, the law, or rhythm, to which man responds will be
disclosed as registered by market movements that fluctuate in
accordance with a definite wave principle.
Nature’s Law has always functioned in every human activ-
ity. Waves of different degrees occur whether or not recording
machinery is present. When the machinery described below is
present, the patterns of waves are perfected and become visible
to the experienced eye. This machinery is:
A. Extensive commercial activity represented by corpora-
tions whose ownership is widely distributed.
B. A general market-place where buyer and seller may con-
tact quickly through representatives.
C. Reliable record and publications of transactions.
 Nature’s Law 219

D. Adequate statistics available on all matters relating to

corporations.
E. Daily high and low range charted in such a manner as
will disclose the waves of all degrees as they occur.

The daily range of stock transactions was inaugurated in

1928 and the hourly record in 1932. These are necessary in or-
der to observe the Minor and Minute waves, especially in fast
markets.
Contrary to teachings of the Dow Theory, a popular device
for gauging stock market movements, “Nature’s Law” does not
require confirmation by two averages. Each average, group, stock
or any human activity is interpreted by its own waves.

FOOTNOTES
1 Except for minor revisions, this Introduction is the same as
chapter I of The Wave Principle.
 CHAPTER I

THE GREAT PYRAMID GIZEH

Many years ago I endeavored to ascertain the meaning of

the word “cycle,” but no one could define it. Curiosity led to a
study of graphs, and I discovered rhythm in fluctuations (as dis-
closed in my Treatise published in 1938). Later I found that the
basis of my discoveries was a law of Nature known to the de-
signers of the Great Pyramid Gizeh, which may have been con-
structed five thousand years ago.
There are several pyramids in Egypt and elsewhere, but
Gizeh is the original, and the only one that discloses symbols.
Other pyramids were subsequently built to serve as crypts for
the bodies of kings and their families. As early as 820 B.C., Al
Mamoun, a Turkish Caliph, erroneously supposed that Gizeh
housed the bodies of former pharaohs and that hoards of gold
might be found. This proves that even at that early date the
symbols of Gizeh were unknown. The period of Gizeh’s construc-
tion was not only pre-literary but pre-hieroglyphic. Hieroglyph-
ics are present in other pyramids but not in Gizeh.
Immense sums of money have been expended to learn the
symbols of Gizeh, especially during the past fifty years. Their
definitions are remarkably correct insofar as today’s knowledge
permits an understanding. Much of this knowledge is compara-
tively recent and indicates that the scientific symbols embodied
in Gizeh must have been supernatural or that previous civiliza-
tions existed which equalled or exceeded today’s development.
It is possible that a high degree of civilization previously existed
on the Western Hemisphere, especially from Mexico to Argen-
tina. The Bible mentions giants and quite recently jaws of gi-
ants have been found that may have weighed four or five hundred
pounds.!
Insofar as I have been able to learn, Egyptologists overlooked
certain important symbols contained in the Great Pyramid, such
as the ratio of the elevation to the base of the pyramid which is
61.8% and the number of inches of the elevation which is 5,813.
(Note the numbers 5, 8, and 13, mentioned below in the Summa-
tion Series.) The unit of measurement in Egypt was, and is, the
“inch” as we know it today.
 Nature’s Law 221

The outlines of a side view is that of a cycle, that is, 3 lines;

in a pyramid there are 5 surfaces, four above ground and one at
the bottom; from the apex 8 lines are visible; total surfaces and
lines: 13.
Fibonacci, an Italian mathematician of the thirteenth cen-
tury, visited Egypt and on his return disclosed a summation
series as follows:1 2 3 5 8 13 21 34 55 89 144.... Any two
adjoining numbers equal the next higher — for example, 5 + 8 =
13. The ratio of any number to the next higher is 61.8%. (The
lower numbers produce a ratio slightly at variance). Therefore
the elevation to the base of the pyramid provides a ratio that
rules the entire series.
The seeds of a sun flower are located in curved rows that
intersect each other. The highest number of intersections is 144.
This is also the number of Minor waves in a complete cycle of
the stock market (bull and bear markets). Numbers of the series
are present in the human body, botany, production, animals,
music and waves of human activities including the stock mar-
ket.
Pythagoras, a Greek philosopher of the fifth century, B.C.,
visited Egypt and on his return disclosed the diagram and title
shown in Chapter 2.

FOOTNOTES
1 Since proved to be otherwise, of course!
 CHAPTERII

NATURE’S LAW
Nature’s Law was known at least five thousand years ago.
Egypt was “in flower”by at least 1,500 B. C. and is the oldest of
today’s list of nations. It is not known when the Egyptian pyra-
mids were built. The Great Pyramid Gizeh was constructed at
least five thousand years ago. Some students advance evidence
that it existed before the threat of floods that prompted Noah to
build the ark. Other students believe that it may be thirty thou-
sand years old.
In Life magazine (December 3, 1945) there appears a very
interesting article entitled “The Building of the Great Pyramid.”
Mr. Be] Geddes prepared models of different stages of construc-
tion and pictures of them are shown. The report was prepared
for the Encyclopedia Britannica. It says that the total weight of
material used was 3,277,000 tons, whereas the material used in
the Empire State Building, the tallest building in the world,
weighs only 305,000 tons.
The marvelous ingenuity, skill, time and labor expended by
the designers and builders of the pyramids to erect a perpetual
symbol demonstrates the supreme importance of the messages
they desired to convey to posterity. That era was pre-literary
and pre-hieroglyphic, therefore symbols were the only means of
recording.
For centuries the pyramids have been exhaustively investi-
gated, especially during recent years. Insofar as I have observed,
Egyptologists overlooked an important, perhaps the most im-
portant symbol. I refer to the outer lines of the pyramid Gizeh.
Pythagoras was a renowned Greek philosopher of the fifth
century, B. C. The older cyclopedias give a very detailed descrip-
tion of his activities. The Encyclopedia
Britannica shows a diagram and cryp-
tic title which may be the only record he
left. It was made after he returned to
Greece following a prolonged visit to
Egypt. The diagram and title appear in
Figure 1. It is fair to assume that the :
Pythagoras diagram refers to a pyramid. The Secret of the Universe
Figure 1
 Nature’s Law 223

The original measurements of the

Great pyramid of Gizeh are estimated to
have been: base 783.3 feet, elevation 484.4 Z
feet, ratio 61.8%. The elevation, 484.4 feet,
equals 5,813 inches (5-8-13 FSS).
Looking at a pyramid from any one of 3
the four sides, $3 lines are visible. The dia- Figure 2
gram in Figure 2 is a complete cycle. View-
ing the pyramid from any one of the four corners as in Figure 3,
5 lines are visible. A pyramid has 5 surfaces — four above ground
and the bottom. From the apex, a pyramid shows 8 lines, as shown
in Figure 4.

Figure 3 Figure 4

Fibonacci was an Italian mathematician of the thirteenth

century, A. D. He was better known in his day as Leonardo de
Pisa. He visited Egypt and Greece, and on his return to Italy
disclosed what is known as a summation series. This series of
numbers follows: 1 2 3 5 8 13 21 34 55 89 144...
Any two adjoining numbers equal the next higher number,
for example, 5 + 8 = 18. Any number divided by the next higher
number gives a ratio of .618, for example, 8/13 = .618. Any num-
ber divided by the next lower number gives a reciprocal of 1.618.
In the lower numbers the ratios are not exact, but close enough
for practical purposes. To simplify reading, I will hereafter re-
fer to the former as .62 and the latter as 1.62.
Note that the first five numbers of the Summation Series,
1, 2, 3, 5, and 8, are shown in the complete diagram of a pyramid.
224 R. N. Eviotr’s MASTERWORKS

The late Jay Hambidge, an American artist, visited Egypt,

Greece and Italy and wrote several very important and inter-
esting books. By permission of Yale University Press, I quote
pages 27 and 28 of his book entitled Practical Applications of
Dynamic Symmetry:

Botanists use the disk of the sunflower as a sort of general

illustration of the law of leaf arrangement. It exhibits the phe-
nomenon in nearly two-dimensional form. The seeds are dis-
tributed over the sunflower disk in rhomboidal shaped sockets
and the complex of these sockets forms a design of intersect-
ing curves, the pattern being something like the old-fashioned
chasing on watchcases. This pattern of curves is the interest-
ing feature of the sunflower seed arrangement.
First. The curve itselfis a definite kind of curve. As a mat-
ter of fact it is quite like the curve of shell growth. It is regular
and possesses certain mathematical properties. These proper-
ties are a necessary consequence of uniform growth as will be
explained presently.
Second. When these curves are counted it will be found
that a normal sunflower disk of five or six inches in diameter
has 89. Winding in one direction there are 55 and in the other
direction there are 34. That is to say, the normal head exhibits
55 curves crossing 34. The two numbers are written 34 + 55.
Below the apex flower of the stalk there are usually secondary
flowers, smaller in size. The curve-crossing numbers for these
are generally 21 + 34. Lower of the stalk may be tertiary flow-
ers of late development. The curve-crossing numbers of these
are 13 + 21.
At Oxford, in England, sunflowers have been nourished to
produce abnormal disks and the curve-crossing numbers have
increased from 34 + 55 to 55 + 89. Professor Arthur H. Church,
a leading modern authority on this fascinating subject, tells
us of a gigantic disk raised at Oxford whereon the curve-cross-
ing numbers were 89 + 144.
Around the seed complex of the flower disk there is an ar-
rangement of florets. Like the seeds, these exhibit curve-cross-
ing numbers. They are usually 5 + 8.
If we begin at the bottom of the plant stalk and count the
actual number of leaves up to the flower disk, we are likely to
find, as we wind our progress around the stalk, that we pass a
certain number of leaves before we find one imposed directly
over the one first counted, and that this number and the num-
 Nature’s Law 225

ber of revolutions about the stalk, are constant between each

leaf imposition. These will represent curve-crossing numbers
belonging to the same series of numbers exhibited by the seeds
and florets.
The numbers we have mentioned belong to what is called a
summation series, so called because each number represents
a sum of preceding numbers of the series, in this case 2. This
series of numbers is: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, ete.
Each member of this series is obtained by adding together the
two preceding numbers.
If we take any two members of this series and divide one
into the other as, say 34 into 55, we obtain a ratio, and this
ratio is constant throughout the series; that is to say, any lesser
number divided into any greater number which immediately
succeeds it produces the same ratio. This ratio is 1.618 plus, a
number with a never ending fraction. If we reverse the opera-
tion and divide 55 into 34, we obtain the number .618 plus. It
will be noticed that the difference between these two results is
1 or unity.
It will also be noticed that when we make these two divi-
sional operations that there is a slight error. This is due to the
fact that the series is not quite accurate when expressed in
whole numbers. There should be a very small fraction. But as
the error is within that of observation in the growing plant,
the whole number is retained to facilitate checking.
It is an extraordinary coincidence that this ratio of 1.618 or
.618 is a ratio which fascinated the ancient Greeks exceed-
ingly. Extraordinary, because they could have had no suspi-
cion that it was connected with the architecture of plants. It
was called by them extreme and mean ratio.
During the middle ages it was given the name Divine Sec-
tion and in fairly recent time, Golden Section.

From experience I have learned that 144 is the highest num-

ber of practical value. In a complete cycle of the stock market,
the number of Minor waves is 144, as shown in the following
table and in Figure 7, Chapter 4:

Number Bull Bear Total

of Waves Market Market (complete cycle)
Major 5 3 8
Intermediate 21 13 34
Minor 89 55 144
226 R. N. ELLIott’s MASTERWORKS

All are Fibonacci numbers and the entire series is employed.

The length of waves may vary, but not the number. Note the
FSS numbers in the following:
— The bodies of humans follow the numbers 3 and 5. From
the torso there are 5 projections — head, two arms and two legs.
Each leg and arm is subdivided into 3 sections. Legs and arms
terminate in 5 toes and fingers. The toes and fingers (except the
big toe) are subdivided into 3 sections. We have 5 senses.
— The monkey is the same as a human except that his feet
are the same as his hands, that is, his big toe is the same as his
thumb. Most animals have 5 projections from the torso — head
and four legs, total 5. Birds have 5 projections from the torso —
head, two feet and two wings.
— Music: The best example is the piano keyboard. “Octave”
means eight. Each octave is composed of 8 white keys and 5
black keys, total 13.
— Chemical elements: There are approximately 89 primary
elements.
— Colors: There are 3 primary colors. Blending produces
all other colors.

Miscellaneous Observations:
— The Western Hemisphere is composed of 3 subdivisions,
North, Central and South America.
— In the Western Hemisphere there are 21 Republics, all
of which are members of the Pan-American Union. North
America is composed of 3 countries, Canada, Mexico and the
United States. South America is composed of ten Republics and
three European colonies, total 13. Central America was, previ-
ous to the Panama Canal, composed of 5 Republics.
— The United States was originally composed of 13 states.
Today there are 55 subdivisions as follows: 48 states, District of
Columbia, Philippines, Panama Canal Zone, Puerto Rico, Alaska,
Hawaiian Islands and the Virgin Islands.
— On the Declaration of Independence there are 56 signa-
tures. The original number was 55. The last was added later.
— Main branches of the Federal Government: 3.
— Highest salute of the Army: 21 guns.
— Voting age: 21 years.
— The Bill of Rights contains: 13 points.
 Nature’s Law 227

— The colors of the national flag are: 3.

— The Washington Monument in Washington, D. C. (The
cornerstone was laid July 4, 1848.):
Total cost, $1,300,000. 13
Height of shaft, 500 feet. 5
Height of capstone, 55 feet. 55
Base of shaft, 55 feet square. 55
Top rim of shaft, 34 feet. 34
Steps of foundation (number): 8
Windows (two on each side): 8
The capstone is in the form of a pyramid with a base 34 feet
square and a height 55 feet (ratio .618).
— The Axis was composed of 3 partners. Germany domi-
nated 13 countries in rapid succession but stalled on the four-
teenth, Russia. Mussolini served as dictator for 21 years.
— In 1852 Commodore Perry paid a courtesy visit to Japan
and invited the “Son of Heaven” to abandon absolute isolation-
ism. In 1907, 55 years later, Japan seriously threatened the
United States. In 1941, 34 years later, and 89 years from 1852,
Japan attacked Pear] Harbor.
 CHAPTER III

HUMAN ACTIVITIES
The expression “human activities”! includes such items as
stock prices, bond prices, patents, price of gold, population, move-
ments of citizens from cities to farms and vice versa, commodi-
ties prices, government expenditures, production, life insurance,
electric power produced, gasoline consumption, fire losses, price
of seats on the stock exchange, epidemics, and real estate. The
main item of interest is the price of securities, which everyone
should understand, at least to some degree.
It behooves us to prepare for the “rainy day.” Permanent
improvements, such as for example, the construction of build-
ings, conservation projects, roads, bridges, factories, homes, etc.
should await cyclical lows for the double purpose of low cost to
the owner and employment of labor. Fluctuations in economic
welfare are as unfailing as the earth’s revolution.

FOOTNOTES
1 See the charts in the final pages of The Wave Principle.
 CHAPTER IV

DISTINCTIVE FEATURES
OF HUMAN ACTIVITIES
All human activities have three distinctive features — pat-
tern, time and ratio — all of which observe the Fibonacci Sum-
mation Series. Once the waves can be interpreted, the knowledge
may be applied to any movement, as the same rules apply to the
price of stocks, bonds, grains, cotton, coffee and all the other
activities previously mentioned.
The most important of the three factors is pattern. A pat-
tern is always in process of formation. Usually, but not invari-
ably, the student is able to visualize in advance the type of
pattern. This facility is furnished by the type of pattern that
preceded. See Chapter 8, “Alternation.”
A perfect diagram of a stock market cycle is shown in Fig-
ures 5, 6 and 7. It is divided primarily into “bull market” and
“bear market.” Figure 5 subdivides the bull market into five
Major! waves and the bear market into three Major waves. The
diagram of the bull market in Figure 6 subdivides Major waves
@, @ and 6 into five Intermediate waves each. Figure 7 subdi-
vides Intermediate waves 1, 3 and 5 into five Minor waves each.
In Figure 5, the bear market is subdivided into three Major
waves indicated by the letters @), ®) and ©. In Figure 6, down-
ward waves (A) and © are subdivided into five Intermediate
waves. Wave() upward is divided into three Intermediate waves.
In Figure 7, the Intermediate waves are subdivided into five
Minor waves.
In other words, a bear market is the reverse of a bull mar-
ket, except that a bear market has three Major waves down,
whereas in a bull market there are five Major waves upward.
Corrections in both bull and bear swings are more difficult to
learn.
As the discoveries disclosed herein are original, new expres-
sions had to be coined. In order to explain the patterns and their
corresponding expressions, perfect diagrams are shown in vari-
ous degrees. The word “degree” means relative importance, so to
230 R. N. ELLiotT’s MASTERWORKS

Bull Market Bear Market

Figure 6
 Nature’s Law 231

6)
>

3 e
2

«) 5 ie ! y A 2
B B 4
5

A ° ? ;
Y 1/4 C 2
B ® ©
2
A Minor Degree
1 C
@
2

Figure7

speak. For example, “Major” degree refers to those waves in Fig-

ure 5. “Intermediate” degree refers to waves in Figure 6. “Mi-
nor” degree refers to waves shown in Figure 7. See Chapter 2 for
numbers of waves.

FOOTNOTES
1 The term “Major” is used throughout the next several chapters
as a substitute for the term “Primary,” which was introduced in the
first monograph.
2 Elliott has improved the wave labeling system used in the first
monograph.
 CHAPTER V

CORRECTIONS

Patterns of corrections are the same, regardless of their di-

rection or size. In a bull swing, corrections are downward or
sidewise. In a bear swing, corrections are upward or sidewise.
Therefore, corrections will be diagramed for both bull and bear
swings. The diagrams first shown apply to upward swings. Dia-
grams underneath apply to downswings and will be “inverted.”
Therefore, whenever the expression “inverted” appears, it ap-
plies to the downward main trend.
In Figures 5, 6 and 7 it will be noted that there are three
degrees of waves: Major, Intermediate and Minor. Likewise there
are three degrees of corrections, as is natural.
There are three types of corrections: Zig-zag,! Flat and Tri-
angle.

Zigzags
Figures 8, 9 and 10 are corrections of an uptrend.

Minor Intermediate

Figure 8 Figure 9
 Nature’s Law 233

Major

Figure 10

Figures 11, 12, and 13 are inverted (corrections of a down-

trend).

Figure 11 Figure 12
234 R. N. ELLiotr’s MASTERWORKS

Major

Figure 13

Flats
The next illustrations are flats of Minor, Intermediate and
Major degree, both ordinary (Figures 14, 15 and 16) and inverted
(Figures 17, 18 and 19). These diagrams are given the name
“flat” for the reason that their usual appearance is flat. At times,
they slant downward or upward.
As a matter of fact, these patterns might be called “3-3-5.”
In the last analysis, they are three wave patterns, i.e., A, B and
C, whereas a bull pattern is a “5-3-5-3-5” for waves 1, 2, 3, 4 and
5.
The pattern of a human being is “5-3-5-3.” There are 5 pro-
jections from the torso (head, two arms and two legs); the arms
and legs are subdivided into 3 sections; the ends of arms and
legs are subdivided into 5 fingers or 5 toes; each finger and toe is
again subdivided into 3 sections.
Whether or not wave C of an inverted flat is elongated or
not it still remains corrective. It is possible, however, to know
when an elongated wave C will occur by reading carefully Chap-
ter 8, “Alternation.”
 Nature’s Law

Mvnor

Figure 14

Intermechate

\
a b
c
@ ©

Figure 16
R. N. ELwIoTT’s MASTERWORKS

Minor
A

Figure 18

Major

Figure 19
 Nature’s Law 237

Complex Corrections
A Minor correction would be composed of three waves down,
as in Figures 20 and 21,

Figure 20 Figure 21

A double sidewise correction would be composed of seven

waves as in Figure 22. A triple sidewise movement would have
eleven waves sidewise as in Figure 23.

wewe =
f
AAA
A
i él Ps

’ 13 5 7 , 13579 N

Figure 22 Figure 23

In other words, a sidewise correction to an up trend always

ends in a down wave’, whether it is composed of one, three, seven
or eleven waves. They are named as follows: three waves is a
“single three,” seven waves is a “double three” and eleven waves
is a “triple three.”
The same number of waves upward are corrective, as in
Figures 24, 25 and 26.

AQ »

» ‘ 8 ° \
\\ \’ 4 \‘
‘ \ ‘,
¥\ 2 . 2 .

Figure 24 Figure 25 Figure 26

238 R. N. Evviotr’s MASTERWORKS

Occasionally these threes are mixed in upward and side-

wise, or downward and sidewise, as in Figures 27 and 28 (double
threes mixed),’ and 29 and 30 (double threes upward).

Upward Downward

Figure 27 Figure 28

Upward Mixed 3

Figure 29 Figure 30

Triangles
Triangles are composed of five waves, or better said, five
legs. In the larger types, each leg will be composed of three waves
each as shown in Figures 31 and 32.

Correction of up trend Correction

of down trend

Figure 31 Figure 32
 Nature’s Law
239

small types, the legs are often compos

ed 3
of just one wave. The main guide
to the |
Figure 33

angle is forming until the fifth wav

e has started.
There are three types of triangles,‘ sh
own in Figure 34.

Ascending bottom and

flat top:

Descending top and

ascending bottom:

Figure 34
240 R. N. ELLiott’s MASTERWORKS

The fifth leg may terminate within or without the outline

of the triangle,* as in Figures 35 and 36.

Figure 35 Figure 36

The fifth wave should be composed of three waves unless

the triangle is very small. On one occasion a triangle consumed
only seven hours. The largest triangle occurred between Novem-
ber 1928 and April 1942, thirteen years.® This latter movement
will be discussed in other chapters.
The movement subsequent to the fifth leg of a triangle is
called a “thrust.” It will be composed of five waves and in the
direction of legs 2 and 4 of the triangle.
Triangles are infrequent. When they appear, their position
has always been wave 4 of a movement of any degree, up or
down, as shown in Figures 37 and 38.7

thrust, 2
] 4

2 thrust
wusi
5

Figure 37 Figure 38

The fifth wave, which follows a triangle, is called a “thrust”

and is composed of five waves similar to those of waves 1 and 3.
As shown above, the fifth wave exceeds the top of wave 3, as in
Figure 37, or the bottom of wave 3, as in Figure 38.
 Nature’s Law 241

FOOTNOTES
1 Figures 10 and 18 are actually drawings of “double zigzags,”
which Elliott displays in chapter 6. Either Elliott mis-drew his illus-
trations here or he decided that double zigzags were more common in
Major degree than regular zigzags. For an illustration of a true zigzag
of Major degree, refer to the @-@®-© section of Figure 7, as well as
Figure 15 in the Financial World articles and Figure 27 in The Wave
Principle.
2 Elliott overlooked this statement when drawing the illustra-
tions in Figures 27 and 28. He inadvertently left out an additional
“three” in each correction, which cannot therefore serve to reinstate
the nee previously in motion.
Id.
4 The illustrations depict ascending, descending and symmetri-
cal (contracting) triangles. For reasons not stated, Elliott omits dis-
cussion of the reverse symmetrical (expanding) type.
5 The fifth triangle wave may terminate beyond the triangle
boundary, but not beyond the level of termination of the third tri-
angle wave.
8 See footnotes 1-8 in chapter XI.
7 They are also found in the B wave position.
 CHAPTER VI

EXTENSIONS

An extension may appear in any one of the three impulses,

i.e., waves 1, 3 or 5, but never in more than one, as shown in
Figures 39, 40 and 41 (upward) and Figures 42, 43 and 44 (in-
verted).

Figure 39 Figure 40 Figure 41

Figure 42 Figure 43 Figure 44

It will be noted that in each instance there are a total of

nine waves, counting the extended wave as five instead of one.
On rare occasions, an extended movement will be composed of
nine waves, all of equal size, as illustrated in Figures 45 and 46.

Figure 45 Figure 46
 Nature’s Law 243

Extensions occur only in new territory of the current cycle.

That is, they do not occur as corrections.

Extensions of Extensions

eae al he
extension

Figure 47

Extension in Wave 5 and Double Retracement

Extensions are “double retraced,” that is, a correction will
pass over the same ground twice, down and up. It is not neces-
sary to give any consideration to this feature when the exten-
sion occurs in the first or third wave, but only when the extension
occurs in the fifth wave. If the extension occurs in the first wave,
the double retracement will be taken care of automatically! by
waves 2 and 3. If the extension occurs in the third wave, double
retracement will be taken care of by waves 4 and 5. See Figure
48 for illustration of an extension in wave 5 and subsequent
double retracement.
If an extension is of small degree, retracement will occur
immediately. But if it is of Intermediate or Major degree, double
retracement may not occur until the entire advance has been
completed. When a movement occurs at high speed, the same
territory is retraced at almost the same speed in reverse.
244 R. N. EL.iotr’s MASTERWORKS

2 Retracemem Second

Figure 48

Erroneous Counting
The three impulse waves, 1, 3 and 5, are seldom of the same
length. One of the three is usually considerably longer than ei-
ther of the other two. It is important to note that wave 3 is never
shorter than both? waves 1 and 5. For example, when wave 3 is
shorter than either‘ wave 1 or 5, as in Figure 49, the correct
method of counting is as in Figure 50.

Erroneous Counting Correct Counting 3

Figure 49 Figure 50

Note that wave 4 overlapped wave 1, which it should not

do. Overlapping means that the end of wave 4 was lower than
the top of wave 1. Inverted, the example would appear as in
Figures 51 and 52.
 Nature’s Law 245

Figure 51 Figure 52

Overlapping within “complex” waves merits careful study.

Occasionally complex waves develop into “double threes” or
“triple threes,” as diagrammed in Chapter 5.

Enlargement of Corrections
It is important to graph a movement in the daily range in
order to know whether or not the first upward movement is com-
posed of three or five waves. The weekly range might not dis-
close this fact. For example, in Figures 53 and 54, an inverted
flat is shown in both daily and weekly range.® Note that in the
weekly range, the precise composition of the first wave up is not
disclosed, and the student might erroneously assume that it was
composed of five waves in the daily. The weekly range of an
inverted flat would appear as being composed of seven waves,

Daily range © Weekly range

Figure 53
246 R. N. ELuiott’s MASTERWORKS

whereas it would be an inverted flat, i.e., A, B, (1, 2, 3, 4, 5) C, as

shown in Figure 53.
Similar behavior may occur in zig-zags. A zig-zag does not
elongate, but it may enlarge or double, so to speak, as illustrated
in Figures 56 and 57. Whether a zig-zag is single or double, its
corrective character remains the same.

Daily Range-Single Weekly Range-Double

A 6

C ©
Figure 55 Figure 56

Daily Range -Double

Figure 57

Sidewise Movements
As will have been noted, all corrective movements regard-
less of the degree are composed of three waves. Sidewise move-
ments follow the same behavior, and are of the same character,
 Nature’s Law 247

corrective. Figure 58 shows two types of sidewise movements®

following an advance. In Figure 59, the main trend is down-
ward.

Figure 59

FOOTNOTES
1 Certainly part of an extension in the first or third wave will be
retraced, but it will not be retraced in the same manner as those
within fifth waves. Only after fifth waves will the first retracement
return as far back as the low of wave two of the extension.
2 Degree does not affect patterns. This statement is a reference
to an irregular top that is supposedly followed by double retracement,
and results from Elliott’s odd interpretation of the 1928-1930 period.
; He means, “shorter than wave 1 and shorter than wave 5.”
Id.
5 These figures are hardly flat in appearance. The overall out-
line suggests a double zigzag. This discussion probably results from
Elliott's tendency to count extended fifth waves when in fact the third
is extended, thereby leaving a couple of “extra” waves at the end that
he counted as A and B.
6 The first illustration in each of Figures 58 and 59 is a flat. The
second merely shows the look of any flat when the data filter is not
small enough to show its subdivisions.
 CHAPTER VII

IRREGULAR TOPS
B A movement that exceeds the
OT top of a fifth wave (the orthodox top)
j is an “irregular” top (see Figure 60).!
/ Suppose that the five waves up in
/ Figure 61 are of Major degree. The
/ top of the fifth wave would be the
/ A “orthodox” top (OT). The first move-
ment from point “5” down would be
Figure 60 composed of three waves and let-
tered “A.” The second movement
would be upward and exceed the top of 5. This movement would
be lettered “B.” Like wave A, it would be composed of three waves.
The next movement would be composed of five waves down and
lettered “C.”

Figure 61

Waves A, B and C all constitute one correction, notwith-

standing the fact that the end of wave B may be higher than
wave 5. This occurred between November 1928 and July 1932.”
A perfect understanding of this feature is important.
If wave A is a simple zig-zag, wave B will be an inverted
flat. This is a case where the law of Alternation gives a warning.
“Alternation” is the subject of the next chapter.
 Nature’s Law 249

FOOTNOTES
1 An “irregular top” is simply the higher price recorded by wave
B of an irregular flat correction.
2 See footnote 5 in chapter IV of The Wave Principle.
 CHAPTER VIII

ALTERNATION

According to the dictionary, alternation is “occurrence or

action of two things or series of things, in turn.” Alternation is a
law of nature. For instance, leaves or branches usually appear
first on one side of the main stem and then on the opposite side,
alternating their position. The composition of the human body
follows the same rule: 5-3-5-3. An endless list of examples could
be cited, but the object of this discussion is the habit of alterna-
tion in human activity.
Bull and bear markets alternate. A bull market is composed
of five waves and a bear market of three waves. Thus, five and
three alternate. The same rule governs in all degrees.
A bull movement is composed of five waves. Waves 1, 3 and
5 are upward. Waves 2 and 4 are downward or sidewise. Thus,
the odd numbers alternate with even numbers.
Waves 2 and 4 are corrective. These two waves alternate in
pattern. If wave 2 is “simple,” wave 4 will be “complex,” and vice
versa. A “simple” correction in the smaller degrees is composed
of one wave downward. The “complex” is composed of three waves
downward or sidewise. See Figures 62 and 63.

Figure 62 Figure 63

In the larger degrees, such as complete bull and bear mar-

kets, the corrective waves are correspondingly larger. Prepara-
tion for the final downswing is often tedious. First there is a
downward movement of some importance, which I letter with a
 Nature’s Law 251

capital A. This is followed by an upward swing and designated

as wave B. The third and last movement downward is wave C.
Wave A may be a zig-zag pattern. In this event, wave B will bea
flat, inverted. If wave A is a flat, wave B will be a zig-zag, in-
verted. (In any event, wave C will be composed of five waves
down. It may be severe and approach the starting point of the
previous bull market.) Thus, waves A and B alternate.
The thirteen-year triangle furnishes another example of
alternation. From November 1928 to March 31, 1938 is a flat.!
From March 31, 1938 to October 1989 is a zig-zag, inverted. From
October 1939 to May 1942 is a flat.”
An irregular top is one in which wave B exceeds the top of
the fifth wave of the previous bull market, as explained in Chap-
ter 7. Even these alternate. The top of 1916 was irregular, 1919
regular, 1929 irregular, 1937 regular.
Up to 1906, the Rails led upward movements. For 34 (FSS)
years, from 1906 to 1940, the Industrials led upward movements.
Since 1940, the Rails have been leading.

FOOTNOTES
1 See footnotes 4 and 5 in chapter XI of Nature’s Law.
2 Actually, this period is either a “five,” or contains the last part
of a triangle for wave B, then a five-wave C. Either count completes
the A-B-C from 1937. See footnote 8 in chapter XI of The Wave Prin-
ciple.
 CHAPTER
IX

SCALES
To employ either semi-logarithmic or arithmetic scale and
not the other as a general practice is erroneous and deprives the
student of their value and utility. The arithmetic scale should
always be employed unless and until log scale is demanded.
In a movement of five waves upward, a “base line” is drawn
against the ends of waves 2 and 4, then a “parallel line” against
the end of wave 3. Figure 64 shows the example.

Figure 64
Usually wave 5 will end approximately at the parallel line
when arithmetic scale is used. However, if wave 5 exceeds the
parallel line considerably, and the composition of wave 5 indi-
cates that it has not completed its pattern, then the entire move-
ment from the beginning of wave 1 should be graphed on semi-log
scale. The end of wave 5 may reach, but not exceed the parallel
line. For example, if the same figures were graphed on both
scales, the pictures would appear as in Figures 65 and 66.
When semi-log scale becomes necessary, inflation is
present.! If semi-log scale is used and inflation is not present,
wave 5 will fail to reach the parallel line by a good margin, as
illustrated in Figure 67.
Nature’s Law 253

Figure 67
254 R. N. ELLIott’s MASTERWORKS

FOOTNOTES
1 “Inflation” as later defined by Elliott in chapter 12 is not
monetary inflation as we know the term (see footnote 1 in chapter
XII). The deciding factor in arithmetic vs. semi-log channeling is
simply the shape of the wave. If arithmetic scale is correct, then the
move is developing with reference to points advanced. If semi-log
scale is correct, the move is developing with reference to percentage
advanced. Anyone can be given the same starting point and ending
point and a specific time frame and draw a perfect Elliott wave on
both arithmetic and semi-log scale.
 CHAPTER X

EXAMPLES

Demonstrations of Nature’s Law in previous pages have been

made to facilitate an understanding of the graphs that follow.
8 8
BESS
1

1 .
o

1857
Figure 68

Figure 68 is an outline of the Axe-Houghton-Burgess Index

from 1857 to 1932, drawn on semi-logarithmic scale. This is the
largest degree for which records are available. Note the five
waves from 1857 to November 1928. Note the base line drawn
against waves 2 and 4 and the parallel line drawn against wave
3. The end of wave 5 touches the parallel line in November 1928.
The movement as a whole was inflationary; therefore, semi-
log is essential. However, arithmetic scale is essential when
graphing the several bull markets individually.
Note that the decline to 1932 just reached the beginning of
wave 5 in 1896. It was at this 1896 low point that the decline
from 1929 to 1932 stopped — in other words, a normal correc-
tion. Lack of knowledge of past history is the cause of the erro-
neous use of the expression “The Great Depression,” and
therefore emphasizes the vital importance of history in this as
well as all other activities.
Figure 69 is a detail of wave 5 of Figure 68, drawn on semi-
log scale. It is divided into five waves of the next lower degree.
256 R. N. ELviotr’s MASTERWORKS

420. a 1929

200 r 905
3°
140 |. 1
120.
100 4
1921
2
1907
45.
1896 1932

Figure 69

Figure 70 is a graph of the Dow-Jones Industrials for the

period 1921 to 1928, drawn on semi-log scale. Note the base line
drawn against waves 2 and 4, the parallel line drawn against
wave 3, and that wave 5 just touches same.
The movement from 1857 to
November 1928 is composed of five
waves, as shown in Figure 68. The
fifth wave from 1896 is subdivided
into five waves, as shown in Fig-
ure 69. The fifth wave of this move-
ment, starting from 1921, is again
subdivided into five waves, as
shown in Figure 70. In other words,
the entire movement from 1857 is
subdivided three times.
In Figure 71, the Dow-Jones
Industrial Average is drawn on
arithmetic scale and again? the
amplitude of waves 1 and 3 is 62%
Figure 70 of wave 5.
From 1857 to 1928, there were
seven bull markets and six bear markets, total 13 (FSS).° All
bull markets from 1857 to 1928 were normal in extent. Remem-
ber that from 1921 to 1928 there were three bull markets and
two bear markets, not one bull market. The two bear markets
were sub-normal.
 Nature’s Law 257

The time factor is important because it usually confirms

and conforms to the pattern. For example, from 1928 to 1942 is
13 (FSS) years. From 1937 to 1942 is 5 (FSS) years. Both periods
end simultaneously. The entire movement from 1928 to 1942 is
one pattern, a triangle. Each wave of the triangle is 62% of its
predecessor. All three factors — pattern, time and ratio — are
perfect, and in accordance with the Fibonacci Summation Se-
ries. See Figure 71.
In the previous pages, Nature’s Law has been explained.
The numbers of the FSS apply in three ways: number of waves,
time (number of days, weeks, months or years), and ratio of the
FSS numbers, 62%.

FOOTNOTES
1 For a look at the Grand Supercycle, see Figure 1 of “The
Future Pattern of the Market” in the Selected Essays section of this
book, as well as Figure 98 in the final pages of Nature’s Law.
2 “Again,” meaning as in the 1896-1928 advance shown in Fig-
ure 69 and the 1932-1937 advance shown in Figure 72. This recur-
rence is remarkable.
3 Apparently Elliott is counting the first wave up as one bull
market and the third and fifth waves up as three bull markets each.
 bZ aunbly
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 CHAPTER XI
THE THIRTEEN YEAR TRIANGLE’
The orthodox top of November 1928 is 299; the bottom of
1932 is 40; net travel: 259 points. The travel from 1932 to 1937 is
from 40 to 195, net 155 points. The ratio of 155 to 259 is 60%.
From the orthodox top of November 1928 to July 1932 is
wave (1) of the thirteen-year triangle. From July 1932 to March
1937 is wave ©) of the triangle, as shown in Figure 71. From
March 1937 to March 1938 is wave ©) of the triangle.
This index moved to 195 in March 1937 for reasons other
than pattern, ratio and time. The advance from 1921 to 1928
was an extension of the fifth wave starting in 1896. As shown in
Chapter 6, an extension is “doubly retraced.” The decline to 195,
from September to November, 1929 was part of the first retrace-
ment. The advance from 40 to 195 during 1982 to 1987 com-
pleted the double retracement.” Note the precise meeting at 195
of November 1929 and March 1937 in Figure 71.
It should be emphasized that the amplitude of the move-
ment from 1932 to 1937 of 155 points is not that of a typical bull
market.’ Its extent was forced by the four powerful technical
forces described above, i.e.,
— The necessity of recovering 62% of the down movement
from November 1928 at 299 to July 1932 at 40.
— To complete double retracement of the 1921-1928 exten-
sion.
— The time element, sixty months or 5 years.
— Pattern.
In fact, the movement complied with four requisites — wave
pattern, amplitude, double retracement and time — all of which
are based solely on FSS.
The ratio of amplitude of the 1921-1928 period is such that
the advance of waves (1) and @) traveled 98 points, or 62% of
wave (5), 160 points.
Note the horizontal lines across the bottom of Figures 71
and 72:
— 1921 (beginning of inflation) to 1942 (end of deflation):
21 years.
— 1921 to 1929: 8 years (62% of 18 years).
260 R. N. ELLIOTT’s MASTERWORKS

— July 1921 to November 1928: 89 months.

— September 1929 to July 1932: 34 months.
— July 1932 to July 1933: 13 months.
— July 1933 to July 1934: 13 months.
— July 1934 to March 1937: 34 months.
— July 1932 to March 1937: 5 years.
— March 1937 to March 1938: 13 months.
— March 1987 to April 1942: 5 years.
— 1929 to 1942: 13 years (62% of 21 years).
The pattern and description of triangles are shown in Chap-
ter 5. The triangle between November 1928 (the orthodox top)
and April 1942 is the symmetrical type. It differs from the ordi-
nary type because it is composed of two patterns, flat and zig-
zag. First there was a flat, then a zig-zag and again a flat.* This
was necessary because of its immense size, the alternation of
patterns, the necessity of advancing to 195 in 1937 in order to
complete a double retracement of the inflationary extension from
1921 to 1928, the necessity of completing its pattern by 1942 (21
years from 1921), the necessity of maintaining the ratio of 62%,
and the necessity of retracing the entire fifth wave from 1896 to
1928, all of which is a very large order.

FLAT ! is FLAT
B C B
mpl | Aw AYA
A Cc B A Cc

Now.1928 to Mar. 1938 Mar’38 to Oct’39'Oct.’39

to April 42
Figure 73
 Nature’s Law 261

The thirteen-year triangle from 1928 to 1942 was composed

of three patterns, as follows:
— November 1928 to March 1938: a flat® (triangle waves
@, @, and @).
— March 1938 to October 1939: a zigzag, inverted (triangle
wave (4)).
— October 1939 to April 1942: a flat (triangle wave ©).
Note the alternation of patterns: flat, zig-zag and flat. Many
other examples of similar nature could be cited. Both the flat
and the inverted zig-zag are described in Chapter 5. They and
the corresponding triangle wave are reproduced in Figure 73.
Figure 74 is a graph on arithmetic scale of the Dow-Jones
Industrial Average from November 1928 to April 1942. Each
vertical line represents the monthly range.
Triangle wave (1) from 1928 to 1932 is composed of waves
(), ® and ©. Wave ©) is composed of three waves down from
November to December, 1928. They were fast and therefore vis-
ible only in the daily range. Wave @®) is an irregular top in the
form of an inverted flat. Wave © is composed of five waves down
from September 1929 to July 1932 (see numbers on chart), and
consumed 84 months.
Triangle wave (2) from 1932 to 1937 is a typical bull pattern
because it is composed of five waves.® However, due to its abnor-
mal size, it may be classed as an inverted flat’ of very large
degree because it forms part of a “corrective.” Wave (1) consumed
5 years.
Triangle wave @) was down in five waves from 1937 to 1938
and lasted 13 months. Triangle waves (1), @, and @ therefore
constitute a flat, from November 1928 to March 1938.
Triangle wave (4), 1938 to 1939, is an inverted zig-zag.
Triangle wave) from 1939 to April 1942 is a flat.® It droops
and is very long. Its extreme length was necessary in order to
coincide with the overall time period of 13 years from 1928 and
21 years from July 1921.
As stated in Chapter 5, the fifth wave of a triangle may or
may not be confined within the outline of a triangle. In this case
it exceeded the outline.? Nevertheless, it is a perfect flat of three
waves, marked (4), @), and ©. Wave ©®) is 62% of wave (@) and
62% of wave ©. In other words, waves (@) and © are the same
length.
262 R. N. Eviort’s MASTERWORKS

DJIA Arithmetic Scale

Monthly Range
13 Year Triangle

Figure 74
 Nature’s Law 263

FOOTNOTES
1 Elliott’s troubles with interpretation in this volume are due
almost entirely to the concept of the thirteen-year triangle. While
many of the features in the 1928-1942 period are fascinating, and
while the concept helped Elliott call a major low in 1942, the thir-
teen-year triangle concept as such is invalid. The main problems are
that the 1932-1937 rise is a “five” and the 1937-1938 decline is a
“five,” thus eliminating them as possible triangle legs since all tri-
angle legs must be “threes.” The most persuasive argument that a
triangle had formed was the series of .618 retracements, all within
perfectly converging trendlines, an occurrence that was indeed quite
uncanny. However, this phenomenon can occur across different waves
(as it did from 1976 to 1979), and is not enough justification, by itself,
to claim that a true triangle is being formed. Unfortunately, Elliott
had made up his mind on an irrelevant point outside the Wave
Principle, namely that 1929-1932 was too short a time period to
correct the previous Supercycle. This assumption led him to the
thirteen-year triangle interpretation, which in turn led him into
trouble with the basics of wave form, as he tried to fit the subwaves
into his predetermined concept. This error of interpretation should
not detract from the reader’s enjoyment of Elliott’s fascinating dis-
coveries and analysis with regard to the period after the 1929 peak.
2 While these turning points are not coincidence, tying them to
the “double retracement” rule, at least as it is stated in theory, seems
to be stretching the rule too far. The extension within the fifth wave
of the 1921-1928 rise was doubly retraced as necessary, the top part
by Elliott’s A and B, and the rest by 1 of C and 2 of C. The reason that
the entire 1921-1928 rise failed to doubly retrace entirely by means of
an irregular correction is that, as Frost and I have concluded, 1921-
1929 was not itselfan extended wave. The extended wave in the 1857-
1929 sequence was the third, as is normal. Therefore the fifth would
have no reason to be doubly retraced by an irregular top. The fact that
the first retracement covered more than the entire fifth wave is
further evidence that the wave was not an extension. Even if we were
to consider it an extension, the ensuing fifth Supercycle wave would
constitute the second retracement eventually. Still, the action of the
market after the 1929 peak is intriguing, and one can see why Elliott
considered his double retracement rule satisfied.
3 True. This is the most dramatic bull market in U.S. history in
terms of percentage increase over time.
4 Elliott is describing all of the first three waves together as a
flat because the third wave of the triangle is so undeniably a “five.”
 264 R. N. Evuiott’s MASTERWORKS

5 Elliott breaks his own rules in this interpretation. If 1937-

1938 is the “C” leg of a flat, it must be a “five.” If it is a leg of his
triangle, it must be a “three.” He shouldn't be able to have it both
ways.
® Absolutely. You will notice that in Figures 72 and 74, Elliott’s
labels are not consistent with his triangle thesis, but with the correct
interpretation.
’ Frost and I discuss this error in our book. It is possible to
rationalize any five-wave move as a “three,” but only at the expense of
the utility of the Wave Principle and what we call the “right look.”
Flats are so called because they are flat. The B wave of a flat always
recedes deep into A-wave territory. In a five-wave move, there is no
overlapping of waves, by definition. Therefore the 1982-19987 advance
must be classified as a “five.”
6 Again, flats are flat and should not “droop.” Actually it is a
five-wave decline, with no overlapping, finishing off the zigzag that
began in 1937. To count it correctly, put 1 where Elliott has a, 2
where he has b, 3 where he has (@), 4 where he has ® and 5 where he
has ©. There is a slightly better count involving a triangle. Begin-
ning at the 1938 low, put @ where Elliott has ©, ® where he has the
next (4), © where he has the next ®, (@ where he has 1, and dG) where
he has 2. This triangle is wave B of the zigzag from 1937, with the
decline from its end then being wave C, which subdivides nicely into
a “five.” This count is illustrated below.
° It also exceeded the low of wave three of the triangle, which it
should not do.

saint © 1994 Robert R. Prechter, Jr.

198 | (2)

Alt: @nam © (5)

DRI RABBELE LOBE eOeess eee eee ee ee vv pyre

1936 1997 1938 1939 1948 1941

 CHAPTER XII

INFLATION
The term “inflation” is defined in the dictionary as “exten-
sion beyond natural limits.” One bull market does not exceed
“natural limits.” A series of bull markets, one above the other,
would be “beyond natural limits.” One bull market would not be
“above another” were it not for sub-normal intervening bear
markets.
Inflation! occurred during the "Twenties because of sub-nor-
mal bear markets. During this period there were three normal
bull markets and two sub-normal bear markets, total five. Warn-
ings of inflation occurred in the following order: normal wave 1,
sub-normal wave 2, normal wave 3, sub-normal wave 4, and pen-
etration of the parallel line by wave 5 on arithmetic scale (see
Chapter 9, Figure 65).
Figure 75 pictures a normal bull market and a normal bear
correction (waves a, b and c) which penetrates the base line sub-
stantially. Figure 76 pictures a sub-normal bear correction that
barely penetrates the base line.

Figure 75 Figure 76

Figure 77 shows the Dow-Jones Industrial Average from

1921 to November 1928 on arithmetic scale. Wave 5 penetrates
the parallel line. Penetration of the parallel line demands that
the entire picture from 1921 should be graphed on log scale.
Figure 78 pictures the same average (monthly range) on log scale.
Wave 5 touches but does not penetrate the parallel line.
266 R. N. ELLiott’s MASTERWORKS

Figure 77 Figure 78

There are three methods of ascertaining in advance at what

point, and at what time inflation will terminate: that described
above, ratio (described in Figure 71), and time (described in Fig-
ure 71).

FOOTNOTES
1 Ellott is using a certain dictionary definition of inflation, not
the monetary one. By his definition, “inflation” occurs in a market
that undergoes acceleration in terms of points advanced per unit of
time. See footnote 1 in chapter IX.
 CHAPTER XI!il

PRICE OF GOLD
Another example of the importance of differentiating be-
tween the virtues of arithmetic and log scale is the price of gold.
The graph of this item covers one bull market from 1250 to 1939,
nearly seven centuries. In Figure 79, wave (2) is simple and wave
@) is complex. Note the letters @, ® and © of wave (@).

sa |f
+4
© 4168
Pie leis rey
Powe

88
>~e2sSsep
SBS

Cc a
fe]
SBS

L ,
= | | lL i | f j

1300 1400 1500 1600 1700 1800 1900 2000

Figure 79

In Figure 79, plotted on arithmetic scale, the price line ex-

ceeds the parallel line, therefore semi-log scale is demanded as
268 R. N. ELLiott’s MASTERWORKS

168

Logarithmic Scale
shillings
@

1250 1939 2300

Figure 80

shown in Figure 80. The parallel line on logarithmic scale indi-

cates the final top of inflation of any human activity.! When an
advance of five waves is completed within the channel on arith-
metic scale, inflation does not exist.
The gradual rise of wave (1) in Figure 79 suggests that the
market price of gold during that period was “free,” that is, not
fixed by any authority. Thereafter advances were abrupt and
corrections sidewise, which indicates that the price was domi-
nated by some authority, presumably political. Corrections may
move sidewise, downward, or downward and sidewise as shown
in wave (4) of Figure 79.
Under the law herein described, when a pattern has been
completed as indicated in Figure 80 on log scale by the contact
of wave G) with the parallel line, no further advance in price
will occur until after the price line has penetrated the base line
at some point. Therefore, the probability is that the present price
of gold, 168 shillings, will remain stationary, at least until it
contacts the base line about the year 2300, as indicated by the
junction of the dashed lines at the extreme right of the graph.”
 Nature’s Law 269

FOOTNOTES
1 True, if it is drawn using properly selected wave termination
points.
2 Some people have made a career of deriding Elliott for this
conclusion. Perhaps he should have avoided commenting from such
sketchy data. Certainly he should have been less dogmatic and de-
scribed alternative possibilities. Regardless, there is no problem for
the Wave Principle or its practice, since the penetration of the upper
parallel line immediately suggested an extended third wave in devel-
opment.
 CHAPTER XIV

PATENTS

The expression “human activities” includes every activity,

not only the stock market, but production, life insurance, move-
ments from cities to farms and vice versa, etc. as shown in mis-
cellaneous items listed in Chapter 3.
Occasionally some rather unusual items present themselves,
such as for example patents, which is a human activity but not
emotional.! Figure 81 is the record of applications for patents
from 1850 to 1942. Note the five waves. The fifth wave extended
from 1900 to 1929. The Industrial Average followed the same
pattern during almost the same period (see Figure 82). Note the
“correction” of patents from 1929 to 1942 in three waves, A, B
and C. Stocks followed the same pattern during the same pe-
riod, except that from 1928 to 1942 the “correction” was a tri-
angle instead of three waves A, B and C.
In early days, farming was the principal occupation. Here
and there a farmer might own a store or manufacture some-
thing as a sideline. Manufacturing was on a piece-work basis
and performed in the home. Natural resources, climate, genius
and democracy in the United States required the formation of
corporations to finance individual initiative. Inventions and the
introduction of machinery gradually changed everything. The
Louisiana Purchase, the conquest of California, the acquisition
of Texas and Oregon, together with settlement of boundaries
with Mexico and Canada, added immensely valuable territory.
Genius was (and still is) the principal asset. This is demon-
strated by the graph of patent applications from 1850 to 1942.
Note that the pattern coincides with that of the stock market.
The United States is radically different from any other country
in one vital aspect: our ancestors hail from all parts of the world.
They were dissatisfied with tyranny and politics of their home-
lands and came here to enjoy liberty and develop their genius.
 Nature’s Law 271

1929
5 \

| Correction,

oa C
194
7 §
As)
ic

a
SL©>)
ir

FOOTNOTES
1 The Wave Principle tracks more than emotional phenomena
because it is also a record of the progress of Man, which is arguably
patterned after his collective emotional swings. It can even be postu-
lated that the moods reflected by the averages cause progress; pre-
sumably Man will produce more and invent more when the dominant
mood is “up” rather than “down.”
 CHAPTER XV

TECHNICAL FEATURES

The movement of one activity is seldom, if ever, a reliable

guide for another. Figure 83 shows graphs of three indices —
the London Industrials, the Dow-Jones Industrials and produc-
tion in the United States. All are plotted from 1928 to January
1943. Production figures are from the Cleveland Trust Company.
The Dow-Jones Industrials (middle graph) registered a five-
wave triangle from November 1928 (the orthodox top) to April
1942. The amplitude of each of the second, third and fourth waves
of the triangle to its predecessor is approximately 61.8%. The
existence of the triangle is proved by its outline, the time ele-
ment, the composition of each wave, and the uniform ratio of
each wave to its predecessor. High speed inflation from 1921 to
1929 (8 years) caused the rapid decline to 1932 (34 months).
These, in turn, caused the symmetrical triangle, which simu-
lates a pendulum coming to rest.
The triangle disregarded the following events, which oc-
curred during its 13-year period: reversal from Republican to
New Deal administrations, devaluation of the dollar, repudia-
tion of the gold clause in Government bonds, the shattered two-
term precedent, the second World War which started in 1939,
and the rise in production, the index of which started upward in
1938 and finished its pattern of five waves in June 1941.
The London Industrials (top graph) did not follow New York
stocks in 1929. This index registered tops in January 1929 at
140 and in December 1936 at 143. The lows in 1932 and 1940
were the same, 61. From 1940 to January 1943, this index ad-
vanced to 131. Between January 26 and July 28 1939, the Lon-
don Industrial Average formed a triangle.
London stocks invaded the stratosphere in 1720, 1815 and
1899, approximately 89 years (FSS) apart. When and if English
stocks should inflate, it does not follow that ours will do so.
A production index prepared by the Cleveland Trust Co.
(bottom graph) registered tops in June 1929 at 116 and in 1936
at 112, and a low in 1938 at 63. From 63, a complete advance of
five waves finished its pattern in June 1941, before the D-J In-
dustrials started up from the end of the triangle in April 1942.
 Nature’s Law 273

Production
(Cleveland
Frnt Co.)
ee ee ae + rt 4 ‘_. r
At) WS

Figure 83

During the period from 1857 to 1928, we participated in

three wars, Civil, Spanish and World War I. Nevertheless, the
pattern of the Supercycle movement was perfect, as demon-
strated elsewhere.
Stocks and commodities have never inflated in unison.
Therefore, if commodities explore the stratosphere, it does not
follow that stocks will do likewise at the same time. Commodi-
ties inflated in 1864 and 1919, 55 years apart.!
The worthlessness of news is demonstrated in the next chap-
ter.” A financial writer said:

“The fact that security prices have been advancing on the

good news from Salerno and that they reacted in August on
similar good news from Sicily leads students to conclude that
the August reaction was due chiefly to technical considerations
rather than to military happenings.”
274 R. N. E.uiott’s MASTERWORKS

One day, London experienced a severe “blitz.” London stocks

advanced and New York stocks declined. Financial writers in
both places stressed the blitz as the cause. At the time, London
was in an uptrend and New York in a downtrend. Each followed
its pattern regardless of the blitz. The same wave behavior oc-
curred following Mussolini’s exit on July 25.
The above analysis proves that technical factors govern the
market at all times.

FOOTNOTES
1 And again in 1974! In terms of years, the Fibonacci number 55
is the length of the so-called Kondratieff Wave of economic activity.
2 Actually, chapter XVII.
 CHAPTER XVI

DOW-JONES RAIL INDEX

An examination of the Rail index is interesting, informa-
tive and profitable. Transportation is the most important hu-
man factor in our economy because of the great distances between
borders since the Louisiana Purchase, the settlement of bound-
aries with Mexico and Canada, and the additions of Texas and
California.
Be Sy S 3888 58
=
——

The bottom graph in Figure 84 is the ratio of the Rail index

to the Industrial index from 1906 to January 1944. This demon-
strates that, in relation to the Industrials, the Rails were per-
sistently weaker from 1906 to 1940 (34 years). The causes of
276 R. N. Evviott’s MASTERWORKS

this behavior were the excessive proportion of bonds to common

stocks, the Panama Canal which opened for business in 1914
(1906 + 8 = 1914), and the automobile and the airplane. These
three factors resulted in weakness of both rail bonds and stocks
to such an extent that in 1940, one third of rail mileage was in
receivership and another third on the borderline.
The second World War temporarily removed Panama Ca-
nal competition and otherwise increased rail revenue, both pas-
senger and freight. The extraordinary revenue that the Rails
enjoyed since 1940, especially after Pearl Harbor, enabled the
railroad companies to reduce their bonded indebtedness, and in
consequence, fixed charges. This benefit is permanent. See
Figure 85.

Net Income DJ Rail

Ist Class Railroads Price Index
PY 40+
125+ |
357
100
30+

tor
25+

20" 223
30 a i i 4

25r Figure 86

OF The Rails registered their

deficit, , , 44 ratio low point in 1940, and from
1940 '4] '42'43 then to July 1943 advanced as
Figure 85 shown in Figure 86. The Indus-
trials bottomed two years later
in April 1942, at the end of the thirteen-year triangle.
During the 34 (FSS) year period between 1906 and 1940,
the Rails reversed downward before the Industrials and reversed
upward after the Industrials. Since 1940, this practice reversed;
that is, the Rails have been first to reverse upward and last to
reverse downward. This practice may continue for some years.
 CHAPTER XVII

THE VALUE OF NEWS

Wall Street has an adage that “news fits the market.” This
means that, instead of the news “making the market,” the mar-
ket foresees and appraises the importance of the underlying
forces that later may become news. At best, news is the tardy
recognition of forces that have already been at work for some
time and is startling only to those unaware of the trend.
The forces that cause market trends have their origin in
nature and human behavior and can be measured in various
ways. Forces travel in waves, as demonstrated by Galileo, New-
ton and other scientists. These forces can be computed and fore-
cast with considerable accuracy by comparing the structure and
extent of the waves.
The futility in relying on anyone’s ability to interpret the
value of any single news item in terms of the stock market has
long been recognized by experienced and successful traders. No
single news item or series of developments can be regarded as
the underlying cause of any sustained trend. In fact, over a long
period of time the same events have had widely different ef-
fects, because trend conditions were dissimilar.
This statement can be verified by a casual study of the forty-
five year record of the Dow-Jones Industrial Average. During
that period kings have been assassinated, there have been wars,
rumors of wars, booms, panics, bankruptcies, New Era, New
Deal, “trust busting,” and all sorts of historic and emotional de-
velopments. Yet all bull markets acted in the same way, and
likewise all bear markets evinced similar characteristics that
controlled and measured the response of the market to any type
of news as well as the extent and proportions of the component
segments of the trend as a whole. These characteristics can be
appraised and used to forecast future action of the market, re-
gardless of the news.
There are times when something totally unexpected hap-
pens, such as an earthquake. Nevertheless, regardless of the
degree of surprise, it seems safe to conclude that any such de-
velopment is discounted very quickly and without reversing the
indicated trend under way before the event.
278 R. N. Evviott’s MASTERWORKS

One of the safeguards in this respect is the willingness of

experienced traders to “sell on good news and buy on bad news,”
especially when such news runs counter to the prevailing trend.
This factor tends to upset the expectancy of the public for the
market to react directly and in the same manner to similar news
at different times.
Those who regard news as the cause of market trends would
probably have better luck gambling at race tracks than in rely-
ing on their ability to guess correctly the significance of out-
standing news items. Mr. X.W. Loeffler of Westwood, New Jersey,
publishes a graph of the Dow-Jones Averages listing the impor-
tant news events in chronological order (price $1). Examination
of this graph shows clearly that the market has advanced and
declined on the same kind of news. Therefore, the only way to
“see the forest clearly” is to take a position above the surround-
ing trees.
War starts worldwide forces so powerful that they would
seemingly dominate all other considerations and drive the mar-
ket farther and farther in the same direction. At various times
war incidents receive front page display. Sharp breaks in the
market during August and September, 1937, again in March,
August, and September, 1938, and in March-April 1939 all coin-
cided with war developments. Yet when war was actually de-
clared on September 1, 1939, the market advanced violently on
tremendous volume. The only satisfactory explanation for this
curious behavior is derived from the technical position of the
market cycle at these times.
In 1937, 1938 and early 1939, the market had completed
important rallies and was resuming the downward trend at the
time of the war incidents. Consequently, these “war scares” were
construed bearishly and served simply to accelerate the down-
ward trend. On the other hand, the market was in an entirely
different position in September 1939 when the war started.
Charts show that a downward phase started in the latter part of
July 1939, as a correction of the upward movement from mid-
April of that year. This downward phase was fully completed a
week before September 1, and in fact the market advanced briskly
during this short period about ten points from the wave bottom
of August.
 Nature’s Law 279

On the actual announcement of the war, the market fell

sharply during the day to a level fractionally below the August
bottom and then bounded upward with amazing speed. Those
who bought selected stocks at the bottom in August and on the
secondary war-scare bottom reaped large profits compared with
those who tried to buy stocks in the wild scramble that followed.
The late comers in most cases were sorry they had bought, be-
cause they paid top prices and sold out at substantial losses.
Actually, the peak of the market for the steels and other pri-
mary war stocks was reached in less than two weeks after the
start of war. Since then, the market has more consistently placed
a bearish construction upon the outlook for war stocks and war
profits because of the broad bear cycle, which was resumed in
the fall of 1939. In contrast, the effect of World War I (1914-
1918) was primarily bullish due to the type of price cycle from
mid-1913.
When France collapsed early in June 1940, most people felt
that the war would be very short and Hitler would inevitably
overrun England. Waves, however, had indicated in May, when
the Dow-Jones Industrial Average reached 110.61, that the worst
of the phase was over and that stocks should be bought for a
substantial intermediate recovery. Even in the midst of the
highly emotional news from Europe during the first half of June,
the Average reacted only to 110.41.
At the time of the November 1940 election, sensational news
announcements were published regarding huge expenditures to
be made for defense and to aid England. Most economists and
observers reasoned this would set inflationary forces in motion,
and bought stocks. At the same time, however, waves indicated
that the inflation would not benefit stocks from a price stand-
point, and the upward movement since June having been com-
pleted, much lower stock prices would develop. Subsequently,
the market declined nearly fifty points.
The general belief that current news affects the market is
widespread and even exploited. If current news were respon-
sible for fluctuations, cycles would not occur. Whenever one is
inclined to believe in “news,” I recommend careful review of the
pattern and wave ratios in Figure 71, then recall the events and
opinions expressed at numerous times during that twenty-one
year period.
 CHAPTER XVIII

CHARTING

Students might benefit by detailed suggestions which I have

found essential. Model charts are shown in Figure 87.
Accurately observing the lower degrees of waves of a move-
ment requires the daily range of price fluctuations. This high-
low range was inaugurated by Dow-Jones in 1928.
The chart spacings recommended for the purpose of em-
phasizing price fluctuations are a vertical quarter inch for one
point of the Industrial Average, a vertical half inch for one point
of the Rail Average, and a vertical half inch for one point of the
Utility Average. Such spacings on a chart facilitate accurate
interpretation. The quarter inch scale is subdivided into fifths,
thus eliminating any guesswork as to the exact spot at which to
locate the daily range and hourly record.
Likewise it is important to space the distance between days
as shown on the model charts. When each vertical line of the
chart is employed, instead of every other line, the result is that
lines of the price range are too cramped for comfortable reading.
Do not leave any space for holidays or Sundays.
Precisely the same scale and forms are recommended for
the hourly record — one quarter of an inch horizontally for a
session of five hours, or one of the smallest squares for each
hour. Do not leave any space following a two hour session on
Saturday. Do not show the opening figure. The high-low range
for the day should be shown at the end of the last hour of each
session. All of these recommendations are portrayed in Figure.
87.
Never economize in chart paper at the expense of clarity.
When a movement begins on one sheet and terminates on an-
other, clarity is jeopardized. The same is true when a movement
is discontinued at the top of the sheet and started again at the
bottom.
Chart paper which will properly clarify interpretations of
waves is manufactured by Keuffel & Esser, and is for sale by
them and by large stationery stores, It is available in these sizes:
by the yard 20" wide, in sheets 8 1/2" x 11," and in sheets 10" x
15." Two weights of paper in all three sizes are offered.
 Nature’s Law 281

It is suggested that charts 10" x 15” be used, and that not

more than two averages be charted on one sheet. For example,
on one sheet 10” x 15" the daily range of the Industrials and
daily volume should be shown, and on another sheet 10” x 15,"
the daily range of the Rails and Industrials. Use two other sheets
10° x 15,” one for the hourly record of the Industrials and the
hourly volume of the whole market, and another for the hourly
record of the Rails and Utilities, a total of four sheets for the
entire program.

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t ove os Saeeenmene
it AI W«
| ae se | ee => bat @
T tie4: 4 i 4
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J Ea 6B feces
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— ; cor =) =
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le 4 f +4
it = oo 4 +]
ee I T vane .
Vat TI 101 1
ie - mt i i >
4 a | i + - _ + -4+-—_4
+ 1 TT J 1m mI T = ceee
ms 1 t Ty T I T ttt
T I Tt ttt ——
—~ od

—
4 pe 4 beds
t a T —
Be De 4 a i 7
I 2 ¥
&
Tt ie
T T T
aan T T ]
: ocean ] -_---+
ee
ae ma: i s +
, + + —> + *—§ - #4
t
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r ort mt Crt tt 6 H
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— + t — + 4 4

10 — 3 4
r +H
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z =e Trt tT - fake 4

4 T r T T r T =
ye asaeome 7 TyrT 2+
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a. re T t o&
282 R. N. E.Luiott’s MASTERWORKS

For individual stocks and commodities, the same general

recommendations apply except that the chart paper should be
subdivided by fourths instead of fifths.!
The weekly range should be charted on forms of the largest
size charts available in order to cover a long period, one for an
entire cycle. The monthly range, especially of the averages and
groups, is important for observing complete cycles.
Figures 53 and 54 in Chapter 6 demonstrate the value of
the daily range in order to establish beforehand the extent and
pattern of the weekly range. In like manner, the weekly range
assists in establishing the extent and pattern of the monthly
range. The monthly range assists in establishing the extent of
cycles. Likewise, the monthly range facilitates observances of
monthly time periods and ratio of waves.
In Figure 87, the vertical allowance for the Industrials is
one point per quarter inch. The Rails and Utilities are allowed
one point per half inch. The weekly range may be reduced to two
points per quarter inch for the Industrials and one point per
quarter inch for the Rails and Utilities. The monthly range may
be reduced still further.
On the actual chart paper the cross ruled lines are pale green
in color, and it will be noted that the chart patterns, which are
drawn in black ink, are accentuated against the pale green back-
ground, which is highly advantageous in reading waves.

FOOTNOTES
1 For prices expressed in eighths and quarters rather than deci-
mals.
 CHAPTER XIX

INVESTMENT TIMING

Timing is one of the chief elements in the universe. We sepa-

rate the times of the year into seasons: spring, summer, fall and
winter. We recognize the daylight as the time of activity and the
night time for relaxation and rest.
In the matter of investment, timing is the most essential
element. What to buy is important, but when to buy is more
important. Investment markets themselves progressively fore-
tell their own future. Waves indicate the next movement of the
market by their patterns, whose beginnings and endings are
susceptible to definite and conclusive analysis.
Nature’s Law embraces the most important of all elements,
timing. Nature’s Law is not a system or method of playing the
market but a phenomenon which appears to mark the progress
of all human activities. Its application to forecasting is revolu-
tionary.
If one had invested $1,000 in long-term Government bonds
in January 1932 and sold in June 1939, a total profit of $5000
(including interest and appreciation) would have resulted in the
89-month period. In January 1932, the yield on market value of
Governments was 4%. In June 1939, it was only 2%. As for the
stock market, an investment of $1,000 in July 1932 would have
been increased by March 1987 to approximately $5,000 without
taking dividends into account. This statement is based on the
per cent change in the popular averages.
The importance of accurate forecasting has resulted in an
immense increase in the use of statistics. A comparison of files
of newspapers of fifty years ago with those of today will be a
revelation in this respect. Millions are being spent to find a sat-
isfactory forecasting device, but the search will be fruitless with-
out recognition of the fact that the habit of the market is to
anticipate, not to follow.
 CHAPTER XX

SELECTION OF TRADING MEDIA

Chapter 19 demonstrated that the factor of first importance
in stock trading is timing, that is, when to buy and sell. The
factor of next importance is what stocks to trade. To guide you
in selecting securities (either stocks or bonds) in which trading
is contemplated, you should keep uppermost in mind all of the
following fundamentals.

Fluctuations and Income

Fluctuations in market value of any security are much
greater than its income yield, therefore the paramount factor is
the preservation and appreciation of principal as a result of price
fluctuations.

Bull Market Tops

In bull markets, each group of the 55 Standard Statistics
list shows tops made at different times, like a fan. Bull markets
are those which develop five Primary waves during a period of
about two years.! During such a period, the several groups tend
to move rather uniformly, being propelled by the powerful force
of the cycle.

Bear Markets
Usually the duration of a bear market is longer than the
previous bull market.? During the severe and relatively short
duration of the decline from 1929 to 1932, the very best stocks
and bonds, as well as the lower grades of both, had to be liqui-
dated regardless of their real value. Many traders gained the
erroneous impression that the bottoms of all bear markets should
repeat that performance.’ Research indicates many years will
elapse before such a drastic decline may be expected.
The final bottoms of bear markets are conspicuous by bot-
toms of nearly all groups being made simultaneously. This
is just the reverse of tops in bull markets. During bear markets,
powerful leadership is less pronounced, and this is especially
true during rallies. During bear swings, the market as a whole
and the several groups become more sensitive to current events
and extraneous factors.
 Nature’s Law 285

Previous Experience in Trading

Many traders acquire prejudices against certain stocks be-
cause of previous unfortunate experiences. To pursue such a
course, the trader would eventually find no group free from ob-
jection.

Inactive Stocks
A stock that is frequently or occasionally inactive should be
avoided for trading, the reason being that waves are not regis-
tered. Inactivity clearly indicates that the stock does not enjoy
thorough distribution, or else it has reached the fully-developed
stage.

Inside Tips
Usually inside tips from well-intentioned friends refer to
inactive and low priced stocks. It is preferable to confine one’s
trading to stocks that are always active.

The Age of Stocks

The life of a stock usually has three stages. The first is the
youthful or experimental stage, during which such stocks should
be avoided as they have not been properly seasoned. The second
is the creative stage. Stocks that fall within this category have
reached healthy development, thus making them a desirable
medium for trading, provided they are thoroughly seasoned. The
third or grown-up stage represents the period of fullest develop-
ment. Dividends may be uniformly reliable and fluctuations
narrow. For these reasons, the certificates become lodged in
portfolios and therefore the stock is less attractive for trading
purposes.
In summary, when the pattern of a reliable average is fa-
vorable, follow these recommendations:
1) Select the groups which perform in harmony with the
average.
2) Then select the stocks that move in sympathy with these
groups.
3) Always choose stocks that are constantly active, medium
priced and seasoned leaders.
4) Diversify funds, i.e., employ more or less an equal num-
ber of dollars in from five to ten stocks, not more than one
286 R. N. ELLiott’s MASTERWORKS

stock of a group (for example: General Motors, United Air-

craft, U.S. Rubber, U.S. Steel, New York Central, and Con-
solidated Edison).

FOOTNOTES
1 A bull market is any advance that contains the necessary five
waves. Defining the term “bull market” or “bear market” by duration
or percentage price change is arbitrary.
2 I think this is an unintentional misstatement. Bear markets
are almost always shorter than bull markets, and over the long run
tend to run about 61.8% of the time required for bull markets (see
chapter 4 of Elliott Wave Principle).
3 The same expectation is prevalent today. With the crashes of
1969-1970 and 1973-1974 behind us, most are currently looking for
an “instant replay” at the next four-year cycle low. Few can envision
the possibility of a less “oversold” bottom, despite the fact that the
wave position suggests that, as Elliott puts it, “many years will
elapse before such a drastic decline may be expected.”
 CHAPTER XXI

PYRAMIDIC SYMBOLS
AND HOW THEY ARE DISCOVERED

By permission of the Landone Foundation, I quote three

paragraphs from pages 134 and 135 of Mr. Landone’s book,
Prophecies of Melchi-Zedik:

The total distance around the base of the Pyramid is

36,524.22 Pyramid inches. This is exactly 100 times 365.2422,
the number of days in our solar year.
The height of the designed Pyramid is 5,813.02 inches.
These mystic wise men formulated systems of measures of
quantity, time, weight and length, and squares and cubes of
the lengths. Since all of these are based on the length of the
side of the square, and since that length was derived from the
circle whose circumference was equal to the days of the solar
year, and since the time of revolution of earth around the sun
is eternal, these mystics created the only system of measure-
ment forever exact and eternally the same.!

Having ascertained the circumference of the Great Pyra-

mid Gizeh at its base, the investigators cast about for some known
fact that would correspond. In this instance, it was the number
of days in a year, down to the last fraction. In other words, two
facts are associated, and thus establish the purpose of the sym-
bol from which forecasts may be made.
I discovered rhythm in human activities and later learned
that it is symbolized in the Great Pyramid. Egyptologists failed
to recognize this symbol because they were not aware of rhythm
in nature and human activities. This symbolism is described in
Chapters 1 and 2, and demonstrated in Chapters 8 through 14.
My contribution to pyramidic symbolism follows, in the
order named:
1) Discovery of patterns, degrees and numbers of waves.
2) Association of the Fibonacci number series, Hambidge’s
discoveries in its application to art and botany, and Pythago-
ras and his cryptic diagram.
288 R. N. ELuiotr’s MASTERWORKS

3) Diagrams of the Great Pyramid from all angles.

4) Correlation of the Fibonacci ratio and the elevation of
the pyramid — 5,813 inches (which is composed by the three
basic numbers of the Fibonacci Summation Series: 5, 8 and
13) — to the base of the pyramid.
5) Application of the Summation Series to human activi-
ties in many fields.

Ratio Ruler
Draughtsmen use an instrument called a “proportional di-
vider.” The fulcrum is movable in order that any ratio may be
obtained. These instruments are expensive and now practically
unobtainable. I have therefore devised a handy substitute for
ascertaining, without mathematical calculations, when the ra-
tio between any two movements, in either amplitude or time, is
61.8%. I will send one on receipt of 25 cents in check, money
order, coin or postage stamps.

R.N. Elliott
No. 63 Wall Street
New York (5), N. Y.

FOOTNOTES
1 For more on this subject, read Peter Thompkins’ Secrets of the
Great Pyramid (Harper & Row, 1971).
 CHAPTER XXII

THE LAW OF MOTION

Dictionary definitions of the word “cycle” are several: “a
period of time,” “an entire turn or circle,” “a spiral leaf struc-
ture,” “a series that repeats itself.” Attention has been mainly
directed to cyclical rhythms in the stock market where they are
very pronounced. Every movement, from wheels to planets, is
cyclical. All cycles have subdivisions or degrees which facilitate
the measurement of their progress.
400

150

100

(IO countries pebdg US} 40 Commodities in Currency

Real Estate

Figure 88
290 R. N. E.uiotr’s MASTERWORKS

Planets travel in orbits and at speeds peculiar to each. The

Earth revolves on its own axis and once in every twenty-four
hours divides night from day. It encircles the sun once a year
and thus provides the four seasons. The mechanism of plan-
etariums may be turned backward or forward to show the rela-
tive positions and movements of planets and their satellites at
any time, past, present or future.
Some elements never change their patterns. For example,
water constantly observes complete cycles. The sun’s rays on
the ocean’s surface cause water to evaporate. Air currents move
the vapor until it encounters cooler atmosphere over hills and
mountains, which in turn condenses the vapor. Gravity draws
the water back to earth, where it again joins the sea.
Nations experience political, cultural and economic cycles,
both great and small. Patterns of human life are observed in
mass movements such as migration to and from cities, average
age, birth rate, etc.
Figure 88 demonstrates that one human activity cannot be
depended upon to forecast another. Therefore, the pattern of
each factor must be analyzed by its own waves and not by extra-
neous factors. During the period from 1939 to April 1942, the
lag in the stock market compared to that of business produced
much discussion but no explanation. The answer is that eight
years of inflation during the "Twenties created a thirteen-year
triangle to 1942.
The graph of temperature shown _Jemperoture, mean average NYC
in Figure 89 is important. Tempera-
ture is not associated with human
activities; nevertheless cyclical waves,
over a period of one hundred ten
years, formed a perfect pattern of five
waves upward.
Periodicities between peaks and 450
valleys of many items, such as epi-
demics, production of lynx pelts, tent 545
caterpillars, salmon runs, etc. are
fairly common. In human activities, Figure 89
cycles are not all uniformly spaced. They follow wave patterns
in accordance with the Fibonacci Summation Series.
 Nature’s Law 291

Dynamic symmetry is a law of nature and therefore the basis

of all forms of activity.
Since the discovery that the earth is round, the cycle has
been the subject of much research. There are three classes of
cycles. First are uniform periodicities between peaks and be-
tween nadirs, such as day and night, seasons of the year, tides,
epidemics, weather, swarms of insects, etc. (I recommend an
article by Donald G. Cooley entitled “Cycles Predict the Future”
in Mechanix Illustrated, February, 1944). Second are periodical
fluctuations caused, in some instances, by astronomical aspects.
Third are patterns, time and ratio, in accordance with a sum-
mation series disclosed by the mathematician Fibonacci.
A pamphlet entitled “The Relation of Phyllotaxis to Mechani-
cal Laws” by Professor A.H. Church of Oxford is very interest-
ing. Phyllotaxis is the leaf arrangement of plants. Mr. Jay
Hambidge spent many years researching records, and is the
author of a book entitled Practical Applications of Dynamic Sym-
metry. One chapter is entitled “The Law of Phyllotaxis.” A copy
of pages 27 and 28 thereof is repeated in Chapter 2 of this trea-
tise.
Dr. William F.. Petersen, Professor of Pathology at the Uni-
versity of Illinois, is the author of a very important and inter-
esting book entitled The Patient and the Weather. Therein are
graphed the progress of disease. The patterns are precisely the
same as any other activity, including the stock market.

Capper, world production Coton, world production

5

1900 1937-1900 1937

Figure 90 Figure 91
 CHAPTER XXIII

THE GREAT DEPRESSION

This common expression is a misnomer insofar as the stock
market is concerned. The decline of stocks from 1929 to 1932
was a correction of the previous advance, as shown in Figures
68 and 82. The dictionary defines “depression” as “below the
general surface.” The Grand Canyon of Colorado is a “depres-
sion” because it is far “below the general surface” for many miles
on either side. From the top of the Rockies to the Pacific Ocean
is a “correction,” so to speak, not a “depression,” notwithstand-
ing the fact that the Pacific Coast is much lower than the bot-
tom of the Colorado Canyon. There is no such thing as a
“depression” in the stock market. If there were, it would be cor-
rect to say that from the Rockies to the Pacific is a “depression.”
There are numerous reasons for this erroneous expression.
The general public, which has no interest in stocks, may
have enjoyed and become accustomed to continuous employment
in the period from 1921 to 1929. Naturally, they assumed it to
be a normal condition. When the 1929-1932 decline occurred,
many people found it difficult to make both ends meet. Natu-
rally, it seemed to them to be a “depression.”
During the advance in the stock market from 1921 to 1929,
traders in stocks were told that we were in a “New Era,” “never
would decline,” “just keep on going,” etc. Many common prac-
tices were “awful but lawful.”
Many politicians are responsible for the erroneous use of
the word “depression.” During the early part of the 1929-1932
decline in stocks, when Mr. Hoover was President, some said
that prosperity was “just around the corner.” During the presi-
dential campaign in 1932, the Democrats blamed the Republi-
cans and Mr. Hoover for the “depression.” The results of elections
in 1932, 1936 and 1940 demonstrated that most voters believed
the New Dealers. The Republicans blamed the New Dealers for
the decline from 1937 to 1942. The falsity of this political clap-
trap, whether sponsored by Democrats or Republicans, is dem-
onstrated graphically in Chapters 10 and 11.
 Nature’s Law 293

The stock market never has a “depression;” it only corrects

a previous advance. A cycle is action and reaction.
Many services and financial commentators in newspapers
persist in discussing current events as causes of advances and
declines. They have available the daily news and market behav-
ior. It is therefore a simple matter to fit one to the other. When
news is absent and the market fluctuates, they say its behavior
is “technical.”! This feature is discussed in Chapter 17.
Every now and then, some important event occurs. If Lon-
don declines and New York advances, or vice versa, the com-
mentators are befuddled. Mr. Bernard Baruch recently said that
prosperity will be with us for several years “regardless of what
is done or not done.” Think that over.
In the “dark ages,” the world was supposed to be flat. We
persist in perpetuating similar delusions.

FOOTNOTES
1 Sound familiar? Decades later, this practice is as prevalent as
ever.
 CHAPTER XXIV

EMOTIONAL CYCLES OF INDIVIDUALS

Cycles of mass psychology in human activities are demon-
strated by graphs on other pages. A scientist now discloses his
studies in the emotional cycles of individuals. In the November
1945 issue of the Red Book appears an article written by Mr.
Myron Stearns in which he reports the results of studies, over a
period of seventeen years, made by Dr. Rexford B. Hersey, sci-
entist. The McCall Publishing Corporation has given me per-
mission to quote from the article. I have underlined certain
numbers and refer to them in the last paragraph.

Dr. Hersey is a Rhodes scholar, a graduate of the Univer-

sity of West Virginia and the University of Berlin.... Dr. Her-
sey wrote a book on his findings called “Workers’ Emotionalism
in Shop and Home,” which was published by the University of
Pennsylvania in 1932. Far-sighted officials of the Pennsylva-
nia Railroad have supported Hersey’s work.... Dr. Hersey was
invited to go to Germany. He found that workers there react
the same as Americans.
The periodic rise and fall of human emotions are vouched
for by Dr. Hersey, who has been observing and studying them
for more than seventeen years. His researches indicate that
with all of us, high spirits and low spirits follow each other
with a regularity almost as dependable as the tides. He found
that all the checks he made on each man, over a period of
weeks, fell into a fairly regular pattern. Dr. Hersey’s chart
showed that about every 5th week he became more critical.
You take it for granted that a run of bad luck, in time, gets
you down unless you exert strong will power. That good news,
on the other hand, raises you to the top of the world. Now
science says you are wrong. If you are full of energy and en-
thusiasm, good news will lift you higher still. Or if you are
plugging dolefully through “Blue Monday,” good news may help
temporarily, but that is about all.
Human emotions ordinarily rise and fall at regular inter-
vals of from 33 to 36 days. The ups and downs of these factors
resemble stock market charts.
 Nature’s Law 295

The blood cholesterol seems to have a cycle of about 56

days.... The thyroid output, which determines the total emo-
tional cycle, usually makes a round trip from low to high and
back in from 4 to 5 weeks.... In hyperthyroid cases, cycles may
be as short as 3 weeks.
There seems to be no difference in cycle length between
men and women.

The Fibonacci Summation Series includes the numbers 3,

5, 34 and 55. Time cycles are not always exact. Therefore when
a period is given as “33 to 36,” the basic period is 34, more or
less. The basic period of 55 includes “56.”
When members of your family, friends, employees, employ-
ers, customers, etc. annoy you, I recommend a review of this
chapter. Other people have their cycles the same as you do. Do
not allow your cycle to tangle with another.
296 R. N. ELviott’s MASTERWORKS

©The Philosophical Research Society, Inc.

faa

a ae
i
Al |
Sn, teeters — sears \
— a JAG an
errtw
| — ’
PYTHAGORAS
 CHAPTER XXV

PYTHAGORAS
Pythagoras, a great man, lived in the fifth century B.C. and
made an impression on history that is seldom approached. The
reader is urged to review a report on his activities in the Ency-
clopedia Britannica. He was a persistent investigator of the dis-
coveries of others and visited Egypt, which is often mentioned
as “The Cradle of Civilization.”
Pythagoras is prominently known for his studies in math-
ematics. Insofar as I have seen, the most important of his dis-
coveries has been overlooked. He drew a triangle and placed
thereunder the cryptic title “The Secret of the Universe.” This
feature is described extensively in Chapter 2.
In 1945, Mr. John H. Manas, Ph.D., President of the
Pythagorean Society, wrote a book entitled Life’s Riddle Solved,
in which he disclosed a picture of Pythagoras, and I have per-
mission from Mr. Manly P. Hall, head of The Philosophical Soci-
ety of Los Angeles, California, to reproduce it (see opposite page).
There are many symbols in this picture, but we will focus
our attention on two items, the pyramid which Pythagoras holds
in his right hand and the three squares in the lower right hand
corner of the picture.
The pyramid represents the Great Pyramid of Gizeh, pre-
sumably built about 1000 B.C., although some students argue
that it is much older. This Pyramid is classed as one of the “Seven
Wonders of the World.” The precision of measurement and plac-
ing in position of the immense marble stones employed are re-
markable. However, this feature is insignificant when compared
to the knowledge symbolized. It may be that a paragraph in the
Bible (Isaiah 19:19) refers to it. It reads, “In that day shall there
be an altar to the Lord in the midst of the land of Egypt, and a
pillar at the border thereof to the Lord.”
In Chapter 2 are graphed different views of this pyramid.
For convenient reference, the view of one side is repeated in
Figure 92.
The base of one side is 9,131 inches. The base of the four
sides measures 36,524.22 inches. This symbolizes the number of
298 R. N. Evuiotr’s MASTERWORKS

days in our solar year, 365% days.

Our calendar year is 365 days, but
every fourth year an extra day
must be added (February 29th). +
This is “leap year.” The total days 2
in four years is 1,461. al
The elevation from base to y
top is 5,813 inches. The baseofone “—— ~—#!3! inches, =
side is 9,131 inches. The ratio of Figure 92
the elevation to the base is 63.6%.
The pyramid has five surfaces and eight lines. 5 plus 8 equals
13. Note the elevation, 5,813 inches — 5, 8 and 13. 5 is 62.5% of
8. 8 is 61.5% of 18. Note the application of this ratio in Figure
71.
In human activities, an advancing movement is composed
of five waves, three up and two intervening corrections. A cycle
is composed of five waves up and three waves down, total eight.
This is true of all degrees, Minor, Intermediate and Major. See
Chapter 4.
The diagram shown in the lower
right hand of the Pythagoras picture is
VX
reproduced as Figure 93. I have num-
bered the squares which are shaded in
6 A the picture. The upper right square has
five shaded squares. The upper left
square has eight shaded squares. The
5
7 lower square has thirteen shaded
10 squares. These numbers correspond to
V 12 3 the number of inches elevation of the
Figure 93 Pyramid.

The same three squares are shown

in Figure 94. The smaller squares are
now numbered in a different manner, At
that is: ay Ve
— 1,2 and 8, where the square of Tal alate
3 equals 9,
— 1, 2, 3 and 4, where the square
of 4 equals 16, and
— 1,2,3,4and 5, where the square
of 5 equals 25. Figure 94
 Nature’s Law 299

The theorem is that the square of the hypotenuse of a right

triangle is equal to the sum of the squares of the other two sides.
The discovery of this solution is the best known of Pythagoras’
works.
Now return to the Fibonacci Series, 1 to 144. These num-
bers form the “Secret of the Universe” to which Pythagoras re-
ferred. The best example in botany is the sunflower, described
by Mr. Jay Hambidge in Chapter 2. In bodies of humans and
animals, the numbers 3 and 5 apply. There are many other sym-
bols in the picture of Pythagoras,’ which is an idealistic concep-
tion.

FOOTNOTES
1 Elliott trimmed the picture to a 5" x 8" Golden Rectangle in his
reproduction.
 CHAPTER XXVI

MISCELLANEOUS’

Volume of Waves
In an advance, the volume of wave 5 does not exceed the
volume of wave 3; occasionally it is less. So long as volume in-
creases, another advance is due, until a new high registers with-
out an increase in volume. See Figure 95. Note also that the
volume of wave 2 is less than the volume of wave 1. It is a favor-
able indication.”
)
3

i Volume
Figure 95

Circles
The word “cycle” means circle. Occasionally this feature
appears in graphs of stocks. The circle in Figure 96 is divided
into four segments, A, B, C and D. When a graph is rounding
downward, as in segment C, and the downward pattern has been
completed insofar as the number of waves is concerned, it may
be expected that at the bottom, one or more series of “three-
wave movements” may develop and then be followed by an ac-
celerated advance as per segment D. The entire picture down
and up will then resemble segments C and D combined, or in
other words, the lower half of the circle.
 Nature’s Law 301

The flood of strikes around the

end of 1945 is simply the swing of the
pendulum from left to right, 1 to 2 A B
then to 8, as in Figure 96. Before la-
bor was organized (previous to 1906), 1 3
many, if not most employers, were C D
autocratic, ruthless and heartless to
employees, competitors and the pub-
lic. The behavior of some strikers to- ?
day is not worse than the behavior of
management in early days. Every Figure 96
nation, human activity and individual has its own cycle — some
long, others short, depending on the class and extent of each.

The “A-B Base”

The A-B base’, shown in Figure 53, Chapter 6, is occasion-
ally composed of double threes or even triple threes, as described
in Chapter 5. This is especially true when a rounding bottom is
made, as discussed in the first paragraph under “Circles,” above.

FOOTNOTES
1 This chapter originally contained several paragraphs that fit
directly into earlier sections of the book. Apparently Elliott thought
of some additional points after the bulk of the manuscript was
completed and typed. I have moved these paragraphs to the appropri-
ate areas in the previous text.
2 That is, indicative that wave 2 is indeed in progress and that
wave 8 will follow.
3 The “A-B base” seems fine as a description for the first two
waves of an A-B-C irregular correction. Elliott’s reference to Figure
53 seems at first to indicate that that is what he meant. However, in
the discussion of the 1942-1946 bull market that follows, he uses the
A-B base concept as an additional wave phenomenon which can occur
between the end of a corrective wave and the beginning of a cardinal,
or impulse wave. The addition of this idea is unnecessary, since a
construction with that look has been, in our experience, merely part
of the previous corrective wave or the next impulse wave. Apparent
occurrences of an “A-B base” always have another explanation, one
more consistent with the Wave Principle.
 CHAPTER XXVII

THE 1942-1945 BULL MARKET

The thirteen-year triangle in the Dow-Jones Industrial
Average from 1928 to April 1942 is graphed in Figure 71. As
described in Figures 31, 32, 37 and 38 in Chapter 5, thrust
follows a triangle.
In Figure 97, the Dow-Jones Industrial Average is graphed.
Each vertical line represents the range of one month. Major wave
@ is short. Major wave © is longer, and its Intermediate waves
are indicated by small letters a, b, c, d and e. Note the inner base
line at waves b and d. Major wave @) is composed of three Inter-
mediate waves indicated by the small letters a, b and c from
July to November, 1943. Major wave G) runs from November
1943 to December 10, 1945. Waves A and B consumed five
months.! In the daily and weekly range for this period, all waves
were composed of three waves each (see Figure 53).
From letter B to the number 1 is Intermediate wave 1, as it
is composed of five waves of the daily range. Intermediate wave
3 is composed of five waves indicated by small letters a, b, c, d
and e (extended). Extensions never appear in more than one of
three impulse waves 1, 3 and 5 (see Figures 39 through 44).
Intermediate wave 4 is the same as Intermediate wave 2. Inter-
mediate wave 5 is composed of five waves of the weekly range
and reached 196.59 on December 10, 1945. The parallel line was
slightly exceeded. Subsequent to December 10, 1945, an irregu-
lar top” reached 207.49 on February 4, 1946.
The pattern of Major wave 6) from November 1943 to De-
cember 1945 is unusual in one respect. It hugged the base line
from November 1943 to August 1945, instead of heading straight
for the parallel line. The cause of this abnormality was a new
crop of reckless speculators with more money than experience
who favored low-priced stocks instead of seasoned issues of the
type represented by the popular averages. In order to overcome
this abnormality, I devised a Special Index that behaved nor-
mally, as will be seen in the lower chart of Figure 97. Note that
Major wave (5) does not hug the base line, but instead follows a
straight line from beginning to end.
 Nature’s Law 303

DOW JONES INDUSTRIALS 196.59 wy?

April 1942. fo Now, 1945
3
5SS

Figure 97

Note: In the upper graph in Figure 97, the Industrial Aver-

age registered its “OT” (orthodox top) at 196.59 on December 10,
1945. On going to press, an irregular top, wave B, is in process
of formation. This should be followed by wave C (see Chapter
7).3
I expect a sub-normal bear market as illustrated in Figure
76, Chapter 12.4
304 R. N. EL.iott’s MASTERWORKS

FOOTNOTES
1 Counting A and B as waves 1 and 2 of an extended wave
would have allowed Elliott to anticipate the May 1946 peak as the
orthodox top.
2 The December peak marked the end of wave 3. The “irregular
top” of February preceded a clear five-wave decline, as would have
been expected. However, this top was wave B of an A-B-C irregular
correction that constituted wave 4. Wave 5 then carried to the final
orthodox peak at 212.50 in May 1946.
3 Elliott would have been correctly bearish for the 1946 crash,
since he was expecting the wave C decline. Since the bottom of the
decline was just above 160, he probably would have “called” the
bottom as well, since that bottom was at the level of the previous
wave 4.
4 The only forecasting problem that Elliott would have encoun-
tered later would have been in expecting the advance to begin again
immediately, since he was expecting a sub-normal bear market as a
result of the thrust idea, which stemmed from his thirteen-year
triangle interpretation. While the lows at 160 were never seriously
penetrated, the market did not take off until 1949.
 REVIEW AND CONCLUSION
Figure 71 depicted a thirteen-year triangle from 1928 to
1942. By reference to Chapter 5, it will be noted that triangles
have always appeared as wave 4 and that wave 5 exceeds the
top of wave 3.

Figure 98

Figure 98 is a graph of the market from 1800 to December

1945.1 Wave (@) from 1800 to 1857 is based on business history,
as stock market records are not available previous to 1857. No-
vember 1928 is the orthodox top of wave @) from which the tri-
angle (wave ()) started. The triangle ended, and the “thrust”
(wave G)) started, in April 1942. A “thrust” has always exceeded
the top of wave @), which in this case is November 1928.
The movement from 1921 to November 1928 was composed
of three bull markets and two intervening sub-normal bear mar-
kets. Thus far, in December 1945, one bull market has regis-
tered. It would therefore appear logical that the pattern and
extent above 1942 would resemble the movement from 1921 to
1928, i.e., three bull markets and two intervening, sub-normal
bear markets.
The Dow-Jones Industrial Average started in 1921 at 64
and ended in November 1928 at, 299, for a 235-point advance.
The thrust started April 1942 at 93. 93 plus 235 equals 328, or
29 points above November 1928, the end of wave @).? The thrust
may consume eight years, ending in 1950, similar to 1921-1929.
The immense amount of currency in the hands of the public due
to financing of the second World War would seem to confirm
this indication.
306 R. N. ELLiott’s MASTERWORKS

There is a different sequence of procedure now as compared

to 1921-1928. During 1921-1928, the first wave was a normal
bull market without inflationary symptoms. The fifth wave end-
ing in November 1928 was decidedly inflationary. Now, the first
wave, from 1942 to 1945, disclosed inflationary characteristics.
Low-priced stocks of questionable value surged ahead at the
expense of the “blue chips.” The New York Sun selected ninety-
six stocks that advanced phenomenally. Every stock started at
some figure below $2 per share. The highest rate of advance was
13,300%. The lowest rate of advance was 433%. The average for
the group was 2,776%.
The patterns of graphs shown on previous pages furnish a
historic outline of the United States. Its development is marvel-
ous for many reasons:
— Geographic position, shape and boundaries: A square,
bounded on two sides by large oceans, and on two sides by
friendly neighbors.
— Latitude and climate: Semi-tropical, thus facilitating
agriculture.
— Natural resources: Gold, iron, coal, oil, timber and wa-
ter-ways.
— Genius and individual initiative: The number and value
of patents from 1850 to 1929 is marvelous. Attention is in-
vited to Chapter 14. Note that the graph of patent applica-
tions (Figure 81) coincides with waves of the stock market,
both in time and pattern, which in turn reflects business
activity and mass psychology.
— Democratic ideals: The form of government stimulates
individual initiative. This does not imply that perfection has
been achieved, but it does suggest that we may be on the
right road.

FOOTNOTES
1 Once again, with extremely limited data, Elliott outlines cor-
rectly the entire Grand Supercycle from the late 1700s, just as he did
in his essays of 1941 and 1942 (see Selected Essays section). His
prediction of a new high above 1929 was also correct. However, in this
depiction he shows a short time frame ending in 1950, which is all out
of proportion to the other four waves. It seems that even a cursory
 Nature’s Law 307

examination of the chart would suggest a top much further out than
1950, and much higher than 328 on the Dow. The problem again is
Elliott’s 13-year triangle, since thrusts following triangles are gener-
ally swift and short. The chart that Elliott produced in his Interpre-
tive Letter dated August 1941 and again in his Educational Bulletin
of October 1942 showed a more accurate beginning date of 1776 and
a more suitable projected ending date of 2012, as shown below.

ole
IT]

ae
-@
o-
oa

S
@ -
ae
oo 1952 a
1776 \

1657

2 This computation is based on the tenet that the thrust, or fifth

wave following a horizontal triangle, is generally about as long as the
widest part of the triangle.