Last month we introduced the Arc Principle — a discovery of a hidden order in the markets — that involves the circular mapping of market swings via Fibonacci Arcs. The first article of this series presented this discovery as the missing link between the forecasting methods of W.D. Gann and R. N. Elliott. Here, we delve into aspects of the Arc Principle that specifically relate to Elliott Wave Theory and that will show that Elliott didn’t know everything there was to know about the Elliott Wave Principle.
Few trading methods have held the interest of the investing public more than the Elliott Wave Theory, which was developed by R.N. Elliott in the 1930s. This is due in large part to Robert Prechter, who in 1978 resurrected the theory in his book “Elliott Wave Principle,” which he co-authored with A.J. Frost. Prechter called the bull market commencing in 1981, and for some time thereafter his market calls were so influential that they alone could move the markets. Hedge fund billionaire Paul Tudor Jones at one time attributed much of his success to the Elliott Wave approach.
The Wave Principle is all about counting waves. But early in the development of the wave theory, Elliott picked up on observations of the Dow theorist, Robert Rhea, and began noting the relationship of his theory to the Fibonacci ratio: 1.618 to 1. Since then, some of the greatest calls in market history have been made using a combination of Wave counts and the Fibonacci ratio. But Elliott Wave purists caution that one should not place too much stock in Fibonacci ratio analysis at the expense of the Wave count.
While Elliott is a towering figure in the field of market forecasting, he did not know everything there is to know about the markets, nor even about his own wave theory. As it turns out, the Fibonacci ratio plays a larger role in the underlying order of the markets than Elliott imagined. He was unaware that Fibonacci Arcs govern virtually every swing in the market. No move takes place without them; from the smallest scale to the largest.
what elliott didn't know about his theory
Obviously, one can’t be certain what Elliott knew and didn’t know, but considering his writings in light of the Arc Principle, it is reasonable to postulate that he didn’t know the following four things:
1. An Elliott Wave count that is not confirmed by an Arc “Circle-Back” will likely prove incorrect.
Elliott Wave Theory: For decades the prevailing view among Elliott Wave experts has been that wave form analysis must take precedence over proportionate relationships of waves in a sequence. Proportionate relationships refers to Fibonacci price and time ratios as two distinct measurements within a given wave sequence.
The Arc Principle: Fibonacci price and time ratios occurring between waves are nearly always part of a circular Arc formation. Elliott was unaware of the circular dimension of market swings hypothesized by the Arc Principle. The idea that a Fibonacci Arc could confirm a wave count would likely never have occurred to him.
“Arcing markets,” (below) shows the weekly chart of Caterpillar Inc. (CAT) with a Fibonacci Arc drawn on the swing from 2012 to 2016. In their simplest form, Fibonacci Arcs are comprised of a circle set to a some radius (usually a market swing) together with additional circles or “vibrations” radiating from the same center, derived from the initial radius, then multiplied or divided by the Fibonacci ratio. Arcs obviously circle both forward and backward from their center, but the focus here is back in time, as an expression of the Circle-Back Principle.
Circling back simply means that the circumference of one or more of the circles that make up a Fibonacci Arc corresponds to the time of a past turning point. In this case, a Fibonacci multiple of the swing circled back using the 100% circle to the time of the 2000 low.
It strains credulity to imagine this occurrs by chance.
2. Fibonacci relationships form across unrelated wave sequences.
Elliott Wave Theory: Elliott limited his use of the Fibonacci ratio to price and time calculations within the waves and sub-waves of a given wave sequence.
The Arc Principle: Fibonacci price and time relationships freely occur across swings, unrelated to a given wave sequence. The Arc Principle proves this by confirming support or resistance at a Fibonacci price or time mark, regardless of wave sequence.
“Retracement steps” (below) shows two Fibonacci price grids on the daily chart of Wells Fargo (WFC). A retracement high turning point occurred on the blue grid’s 23.6% grid line and a impulsive low turning point on the 61.8% red grid line. The blue arc centered at the high of the blue grid circles to the exact time of the turning point at the high on the 23.6% line. The red Arc centered at the high of the red grid circles to the exact time of the turning point at the 61.8% grid line. Both arcs use the swings underlying the Fibonacci grid as their radius. If all you had was the Fibonacci price grids, sans the two arcs, you might have considered the matches to the price grids to be chance occurrences. Yet, when the blue and red arcs are added, it is difficult to conclude anything other than that the arcs confirmed the turning points triggered on the price grids. From an Elliott Wave perspective, the swings that formed the arc radii had nothing to do with the turning points that were later pinpointed. Once confirmed by the Arc Principle, it is hard to deny that Fibonacci price relationships occur across waves, unrelated to any particular wave count sequence.
3. Mass psychology is not the primary cause of market movements.
Elliott Wave Theory: Elliotticians express conviction about this, but shouldn’t. They say the cause of Elliott Wave patterns is “mass human psychology.” Hence, Elliott Wave practitioners focus on trading instruments that express mass human behavior, the market averages as a whole, or large volume stocks. Low volume trading instruments may sometimes express the Wave Principle, but should not be relied upon to do so.
The Arc Principle: Something else appears to be behind the movements of the markets. It is difficult to say exactly what this is, but this force is expressed geometrically. “Mass human psychology” is an inadequate theory for the reason that, if that theory were true, Fibonacci Arcs would not express with equal precision in both low volume instruments and high.
Tessco Technologies Inc. (TESS) was chosen for our next example to make this very point. Tessco’s average trading volume is the merest fraction (about .02%) of Apple’s. There is no expression of mass psychology here.
“Swinging for the fences,” (below) shows three arcs, each comprised of two circles. The arcs are centered at three consecutive turning points starting with the 1996 high. These three arcs all circle to the time of the all-time low in 2009. There can be little doubt that the Arc Principle is in evidence in “Swinging for the fences.” Each arc is precise. This is an expression of perfect order.
Both the Arc Principle and Wave Principle make use of the Fibonacci ratio vertically (price) and horizontally (time), but only the Arc Principle unifies these dimensions in one circular whole. If the Arc Principle uses the Fibonacci ratio with equal precision in low volume instruments as high volume ones, then Elliott is wrong. Mass psychology is an inadequate explanation.
A profound mystery is involved here. Precise expressions of the Arc Principle are evident in virtually every freely traded instrument, but how or why this happens defies our current understanding of the way the world works.
4. The Arc Principle is the missing “basic tenet.”
Elliott Wave Theory: In “Elliott Wave Principle,” Frost and Prechter state that “if a complete method of ratio analysis could be successfully resolved into a basic tenet, which does not appear possible, the Elliott Wave Principle would become an exact science.”
The Arc Principle: The Arc Principle is arguably that complete method of ratio analysis. For Elliott Wave purposes, it can resolve ratio analysis into a basic tenet. The problem faced by Frost and Prechter (and Elliott before them) is that ratio analysis cannot be resolved by taking the price dimension alone, or the time dimension alone. Price circles to time and time circles to price, and prominent turning points regularly occur “in between” price and time on an arc perimeter.
As illustrated in “Arcing markets” (page 61) it is a basic tenet that any completed impulse wave under Elliott Wave must circle back to a prior significant turning point under the Arc Principle. But that is just one of the principles of the Arc Principle that help clarify a Wave Count. As to whether this could lead to an exact science, that is another matter that is best left for a future article!
Arcing to trade
The Arc Principle confirms Elliott Wave Theory, but is also a standalone trading approach. While this article has been about what Elliott didn’t know, one of the most exciting things about the Arc Principle is that, by confirming wave counts, it shows that there is much that Elliott got right. But you do not need to master Elliott Wave Theory to apply the Arc Principle; it is a standalone discovery, offering a wealth of new observations and insights into what is really going on in the markets.
In the third and last article of this series, we will turn our focus to the other master forecaster of the 20th Century, W.D. Gann, and present “What Gann didn’t know about the Squaring of Price and Time.”
The complete Circle-Back Principle is presented through TheArcPrinciple.com.
A simplified version is described here.