So much for W. D. Gann. Now for Elliott wave analysis, probably the most complicated of all technical methods. Those who follow Elliott wave analysis tend to make very bold predictions. Based upon the principles Elliott set out at the end of the 1930s, Elliottitians, as they are known, use wave analysis to predict the point a market will reach.

As with many highly complex techniques, the Elliott wave theory has its roots in something that is simple and familiar to most people, the motion of the sea on the shore. Elliott was an accountant who contracted a serious illness in South America and underwent a protracted convalescence in a beach house. During this time, Elliott observed the crashing of the waves on the shore and noted how the waves increased in amplitude and then subsided. With lots of free time on his hands, Elliott started to look at the stock market and noticed that the prices there seemed to move in waves also.

From this realization, Elliott became a little overambitious and came to believe that his theory of wave motion guided not only stock prices but just about everything else that people do. Does he have a point? Are biorhythms, for example, a part of Elliott's master wave theory? I don't know and do not much care. The basic points of wave theory are reasonable, and they do actually relate to the way markets move. It's just when you start to use them to make far-off predictions that things come a little unstuck. Elliott wave analysis is all based around a count of highs and lows, and when an Elliottitian gets one of the grand predictions—which the theory constantly suggests—wrong, the defense is always that the analyst got the count wrong but the prediction was correct. In defense of Elliott, his analysis led him to predict the start of the long bull run that began after the crash of 1929. Many market gurus, it seems, get one major prediction right, then milk it for all it's worth.

Elliott's analysis led him to believe that markets and individual securities move in a five-leg formation up, followed by a three-leg formation down, which is illustrated in the below figure.