The Daily Feather — Significance of the Third Wave

Elliott Wave Theory: A theory in technical analysis that attributes wave-like price patterns, identified at various scales, to trader psychology and investor sentiment. In the 1930s, Ralph Nelson Elliott developed a model for the underlying principles of financial markets by studying their price movements. An accountant by trade – and naturally adept with numbers – Elliott’s background work included a study of 75 years’ worth of yearly, monthly, weekly, daily, and self-made hourly and 30-minute charts across various indexes. According to Elliott, markets move through two phases, motive (or impulse) – five waves in the direction of the trend – and corrective – three waves against the trend. The impulse waves are the most important, and a correct Elliott Wave count must comply with three rules: 1) wave 2 never retraces more than 100% of wave 1; 2) wave 3 is the largest and most powerful of the impulse waves (1, 3, and 5); and 3) wave 4 never enters the territory of wave 1.

Price movements of securities aren’t the only things that move in waves. Layoff cycles do too. In the post-pandemic era, initial jobless claims have cycled through three waves. The first began at the September 2022 absolute low of 189,000 and ended with a June 2023 high of 260,000 (blue line). The second started after the January 2024 trough of 193,000 and terminated with the October 2024 peak of 259,000.