Essential Design

The market's compound construction is such that two waves of a particular degree subdivide into eight waves of the next lower degree, and those eight waves subdivide in exactly the same manner into thirty-four waves of the next lower degree. The Wave Principle, then, reflects the fact that waves of any degree in any series always subdivide and re-subdivide into waves of lesser degree and simultaneously are components of waves of higher degree. Thus, we can use Figure 1-3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring.
Now observe that within the corrective pattern illustrated as wave [2] in Figure 1-3, waves (A) and (C), which point downward, are each composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (B), which points upward, is composed of three waves: A, Band C. This construction discloses a crucial point: Motive waves do not always point upward, and corrective waves do not always point downward. The mode of a wave is determined not by its absolute direction but primarily by its relative direction. Aside from five specific exceptions, which will be discussed later in this course, waves divide in motive mode (five waves) when trending in the same direction as the wave of one larger degree of which it is a part, and in corrective mode (three waves or a variation) when trending in the opposite direction. Waves (A) and (C) are motive, trending in the same direction as wave [2]. Wave (B) is corrective because it corrects wave (A) and is countertrend to wave [2]. In summary, the essential underlying tendency of the Wave Principle is that action in the same direction as the one larger trend develops in five waves, while reaction against the one larger trend develops in three waves, at all degrees of trend.
*Note: For this course, all Primary degree numbers and letters normally denoted by circles are shown with brackets.

Essential Concepts

Figure 1-4

The phenomena of form, degree and relative direction are carried one step further in Figure 1-4. This illustration reflects the general principle that in any market cycle, waves will subdivide as shown in the following table (see section 1.6).

Wave Mode

There are two modes of wave development: motive and corrective. Motive waves have a five-wave structure, while corrective waves have a three-wave structure or a variation thereof. Motive mode is employed by both the five-wave pattern of Figure 1-1 and its same-directional components, i.e., waves 1, 3 and 5. Their structures are called "motive" because they powerfully impel the market. Corrective mode is employed by all counter-trend interruptions, which include waves 2 and 4 in Figure 1-1. Their structures are called "corrective" because each one appears as a response to the preceding motive wave yet accomplishes only a partial retracement, or "correction," of the progress it achieved. Thus, the two modes are fundamentally different, both in their roles and in their construction, as will be detailed throughout this course.
In his 1938 book, The Wave Principle, and again in a series of articles published in 1939 by Financial World magazine, R.N. Elliott pointed out that the stock market unfolds according to a basic rhythm or pattern of five waves up and three waves down to form a complete cycle of eight waves. The pattern of five waves up followed by three waves down is depicted in Figure 1-2.

Figure 1-2

One complete cycle consisting of eight waves, then, is made up of two distinct phases, the five-wave motive phase (also called a "five"), whose subwaves are denoted by numbers, and the three-wave corrective phase (also called a "three"), whose subwaves are denoted by letters. Just as wave 2 corrects wave 1 in Figure 1-1, the sequence A, B, C corrects the sequence 1, 2, 3, 4, 5 in Figure 1-2.
When an initial eight-wave cycle such as shown in Figure 1-2 ends, a similar cycle ensues, which is then followed by another five-wave movement. This entire development produces a five-wave pattern of one degree (i.e., relative size) larger than the waves of which it is composed. The result is shown in Figure 1-3 up to the peak labeled (5).

Figure 1-3

This five-wave pattern of larger degree is then corrected by a three-wave pattern of the same degree, completing a larger full cycle, depicted as Figure 1-3.
As Figure 1-3 illustrates, each same-direction component of a motive wave (i.e., wave 1, 3 and 5), and each full-cycle component (i.e., waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself.
It is neccessary to understand a crucial point: Figure 1-3 not only illustrates a larger version of Figure 1-2, it also illustrates Figure 1-2 itself, in greater detail. In Figure 1-2, each subwave 1, 3 and 5 is a motive wave that must subdivide into a "five," and each subwave 2 and 4 is a corrective wave that must subdivide into a "three." Waves (1) and (2) in Figure 1-3, if examined under a "microscope," would take the same form as waves [1]* and [2]. Regardless of degree, the form is constant. We can use Figure 1-3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring.
*Note: For this course, all Primary degree numbers and letters normally denoted by circles are shown with brackets.

Basic Tenets

Under the Wave Principle, every market decision is both produced by meaningful information and produces meaningful information. Each transaction, while at once an effect, enters the fabric of the market and, by communicating transactional data to investors, joins the chain of causes of others' behavior. This feedback loop is governed by man's social nature, and since he has such a nature, the process generates forms. As the forms are repetitive, they have predictive value.
Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the linear causality to which one becomes accustomed in the everyday experiences of life. Nor is the market the cyclically rhythmic machine that some declare it to be. Nevertheless, its movement reflects a structured formal progression.
That progression unfolds in waves. Waves are patterns of directional movement. More specifically, a wave is any one of the patterns that naturally occur under the Wave Principle, as described in Lessons 1-9 of this course.

The Five Wave Pattern

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4, as shown in Figure 1-1. The two interruptions are apparently a requisite for overall directional movement to occur.

Figure 1-1

R.N. Elliott did not specifically state that there is only one overriding form, the "five wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five wave pattern at the largest degree of trend. Because the five wave pattern is the overriding form of market progress, all other patterns are subsumed by it.