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How Fibonacci Ratios Govern the Stock Market

Scientists speculate that Elliott waves are the stock market's "critical structure"

by Bob Stokes
Updated: December 29, 2016

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[Editor's Note: The text version of the story is below.]

In the 1930s, Ralph Nelson Elliott observed the Wave Principle in the stock market. Yet his work gained little notice from Wall Street.

In the decades that followed, a handful of analysts and forecasters kept Elliott's work from falling into obscurity.

But in recent decades, scientists re-discovered Elliott.

Consider this 1996 quotation from "Stock Market Crashes, Precursors and Replicas" in France's Journal of Physics:

We speculate that the 'Elliott waves' . . . could be a signature of an underlying critical structure of the stock market.

Robert Prechter put it this way:

Scientific discoveries have established that pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo “punctuated growth,” [or] building fractally into similar patterns of increasing size. This is precisely the type of pattern identified in market movements by R.N. Elliott.

Nature is full of fractals.

Consider branching fractals such as blood vessels or trees: A small tree branch looks like an approximate replica of a big branch, and the big branch looks similar in form to the entire tree.

Now consider that most of nature's fractals are governed by the Fibonacci sequence. It begins with 0 and 1, and each subsequent number is the sum of the previous two:  0,1,1,2,3,5,8,13,21,34,55 and so on. The Fibonacci sequence also governs the number of waves that form in the movement of aggregate stock prices.

Take a look at this figure from the Wall Street classic book, Elliott Wave Principle:

The book notes:

The essential structure of the market generates the complete Fibonacci sequence. The simplest expression of a correction is a straight-line decline. The simplest expression of an impulse is a straight-line advance. A complete cycle is two lines. In the next degree of complexity, the corresponding numbers are 3, 5 and 8. This sequence can be taken to infinity.

Right now, the math of the market reveals a big clue about the trend of stocks.

Learn How to Find Trading Opportunities Using Fibonacci

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