Elliott's theory posits that every complete market cycle consists of several waves, whether in a bull or bear market. In a bull market cycle, the first five waves are upward (impulse), followed by three downward (corrective) waves. Among the first five waves, the odd-numbered waves (1, 3, 5) are advancing, while the even-numbered waves (2, 4) are corrective. The seventh wave (odd-numbered) typically represents a rebound consolidation. Thus, odd-numbered waves generally indicate upward movements or rebounds, whereas even-numbered waves signify declines or pullbacks. The complete cycle follows an alternating pattern of rises and falls. Over longer timeframes, the first five waves form Wave 1 of a higher-degree cycle, and the subsequent three waves constitute Wave 2 of that larger cycle, which also comprises eight waves.

In bear markets, the pattern reverses: the first five waves are downward, followed by three upward waves. Within the first five bearish waves, the odd-numbered waves (1, 3, 5) are declining, while the even-numbered waves (2, 4) are corrective rebounds. Among the three bullish waves, the sixth and eighth waves advance, with the seventh wave pulling back. The full cycle still consists of eight alternating waves. In bear markets, one cycle forms Waves 1 and 2 of a higher-degree cycle, which also contains eight waves.

In both bull and bear markets, the fifth wave is typically the longest—either the strongest rally or the sharpest decline.

Key Tenets of Elliott Wave Theory:

① A complete cycle comprises eight waves: five upward and three downward.

② Waves can be combined into higher-degree waves or subdivided into smaller waves.

③ Impulse waves (following the trend) subdivide into five smaller waves.

④ Among Waves 1, 3, and 5, Wave 3 cannot be the shortest.

⑤ If any impulse wave extends, the other two will exhibit similar duration and magnitude.

⑥ Corrective waves usually unfold in three-wave patterns.

⑦ Fibonacci ratios form the mathematical basis of wave theory.

⑧ Common retracement ratios are 0.382, 0.5, and 0.618.

⑨ The trough of Wave 4 must not overlap the peak of Wave 1.

⑩ Elliott Wave Theory has three components: pattern, ratio, and time—in descending order of importance.

⑪ The theory reflects mass psychology; its accuracy increases with market participation.