The Elliott Wave Theory, or EWT, is named after Ralph Nelson Elliott. It is a technical analysis method rooted in crowd psychology. Drawing inspiration from the Dow Theory and natural observations, Elliott concluded that stock market movements could be forecasted by recognizing and identifying a recurring pattern of waves.

Elliott Wave is a type of technical analysis developed by Ralph Nelson Elliott. He believed that markets often follow a repeating pattern influenced by crowd psychology. Despite fluctuations in market conditions, Elliott's research indicated that investors consistently engage in the same cycle of booms and busts. By analyzing data from the Dow Jones Industrial Average (DJIA), he found that stock market price movements exhibit a structural design that mirrors a fundamental harmony present in nature. Elliott posited that all human activities, not just those in the stock market, are shaped by these identifiable wave series. He identified patterns, or "waves," of directional movements that recur in markets, though they may not be consistent in time or amplitude. He explained how these "waves" connect to form larger patterns, which serve as the foundational elements for even larger patterns, and so forth.

With assistance from C. J. Collins, Elliott's concepts gained traction on Wall Street through a series of articles published in Financial World magazine in 1939. In the 1950s and 1960s, after Elliott's death, Hamilton Bolton further developed his work. In 1960, Bolton published "Elliott Wave Principle–A Critical Appraisal," marking the first significant contribution since Elliott's passing. In 1978, Robert Prechter and A. J. Frost collaborated to write "Elliott Wave Principle." Today, Robert Prechter continues Elliott's legacy, leading a new generation of "Ellioticians" who apply his theory to contemporary financial markets. Notable practitioners include Prechter, Jack Schwager, and billionaire Paul Tudor Jones.

Elliott Wave Theory consists of two primary phases: an impulse or motive phase and a reactionary or corrective phase. The impulse phase always moves in the direction of the trend, while the corrective phase moves against it. In a bullish market, the impulse phase rises, and the corrective phase declines. Conversely, in a bearish market, the impulse phase falls, and the corrective phase rises.

The fundamental principles of Elliott Wave Theory revolve around the concepts of building up and tearing down. Key ideas include: action is followed by a reaction; there are five waves in the direction of the main trend followed by three corrective waves (a "5-3" move); a 5-3 move completes a cycle; this 5-3 move then becomes two subdivisions of the next higher 5-3 wave; and the underlying 5-3 pattern remains constant, although the duration of each may vary. The basic pattern consists of eight waves (five upward and three downward) labeled 1, 2, 3, 4, 5, a, b, and c. Waves 1, 3, and 5 are termed impulse waves, while waves 2 and 4 are corrective waves. Waves a, b, and c correct the main trend established by waves 1 through 5. The main trend, determined by waves 1 through 5, can be either upward or downward, with waves a, b, and c always moving in the opposite direction of waves 1 through 5.

Elliott Wave Theory recognizes that public sentiment and mass psychology move in five waves within a primary trend and three waves in a countertrend. Once a five-wave movement in public sentiment concludes, it signals a shift in the public's subconscious sentiment in the opposite direction, a natural occurrence in human psychology rather than a reaction to specific news.

A Wave Within a Wave: Elliott Wave Theory asserts that each wave within a wave count contains a complete 5-3 wave count of a smaller cycle. The longest wave count is referred to as the Grand Supercycle, which consists of Supercycles, and Supercycles are made up of Cycles. This hierarchy continues into Primary, Intermediate, Minute, Minuette, and Sub-Minuette waves. The accompanying chart illustrates how 5-3 waves are composed of smaller cycles, showing that the impulse wave labeled 1 in the previous chart consists of five smaller waves.

Fibonacci numbers form the mathematical basis of Elliott Wave Theory. The Fibonacci sequence is generated by starting at 1 and adding the previous number to create the next (e.g., 0+1=1, 1+1=2, 2+1=3, 3+2=5, 5+3=8, 8+5=13, etc.). Each cycle defined by Elliott corresponds to a total wave count that aligns with the Fibonacci sequence. For instance, the previous chart indicates that Waves 1, 3, and 5 comprise a smaller 5-wave impulse pattern, while Waves 2 and 4 consist of a smaller 3-wave corrective pattern. Practitioners of Elliott Wave utilize their wave count assessments alongside Fibonacci numbers to forecast the timing and magnitude of future market movements, ranging from minutes and hours to years and decades.

There is a general consensus among Elliott Wave practitioners that the most recent Grand Supercycle commenced in 1932, with the final fifth wave of this cycle beginning at the market bottom in 1982. However, since 1982, there has been considerable disagreement. Many viewed the October 1987 crash as the cycle's conclusion, but the subsequent strong recovery prompted a reevaluation of their wave counts. This highlights a limitation of the Elliott Wave Theory: its predictive accuracy relies on a precise wave count. Determining the start and end points of waves can be highly subjective. While some of the most successful traders on Wall Street have employed Elliott Wave, others have completely dismissed it.