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month of January to reach a peak of 417 in the Financial Times Ordinary Share Index on the 30th. There didn’t appear to be a cloud in the economic sky. Share prices then turned down and continued down through February and March. Wave 3 of the Elliott Primary was completed with the February-March move acting as Wave 4, the latter being given impetus by the resignation of Prime Minister Harold Wilson.

      There were many bearish rumblings generated as a result of the political fiasco. However, the influence exerted on the stock market was short-lived with rallying action punctuating the end of March 1976. While there were many “bear scares” throughout the January 1975-March 1976 bull move in the F.T.30, students of the Elliott Wave Principle would not have been deterred, for the end of the bull market was not likely to occur until a completion of the fifth and final wave.

      Cyclical Nature of the Market

      The behaviour of the London Stock Market during the aforementioned period offers a test case example of the manner in which the inexorable cyclical forces act totally independently of the environment. History is replete with similar examples relative to stock market movements. News items can often cause extremities in the amplitude of a cycle, and sometimes affect the time frame of the Elliott Wave cycle, but never actually alter the cycle. More simply put, if the general psychological atmosphere is pessimistic, a bearish news announcement will cause an acceleration in any existing downtrend while a bullish pronouncement may mitigate the momentum of a down trend temporarily. If the general atmosphere is optimistic, a bearish announcement may slow down the momentum of the uptrend while a bullish announcement might accelerate the degree of rise. In both cases, the overriding major cyclical forces that govern the intermediate trend of the market will remain unaffected by daily fluctuations in share prices triggered by news announcements.

      According to a study published by Draper Dobie, sources of price trends are foreseeable fundamental events, which account for 75 per cent of investors’ motivation. The balance of 25 per cent is attributable to human response to those unforeseeable fundamental events which add “specific randomness” to share price motion.

      Sources of share price trends which are attributable to the large bulk of investor motivation and thus affect the overriding cyclical forces can be summarised as follows:

      1 Events of an historic nature which may motivate the buying or selling of shares.

      2 Events which can be anticipated, influence the economy as a whole and have specific effects on industrial groupings.

      3 Events which can be anticipated and which affect the performance of a particular company.

      Short-term influences which cause “random noise” within the overriding trend, accounting for approximately 25 per cent of investor motivation, are those unforeseen events which fall in the following categories:

      1 “Acts of God” – earthquakes, volcanic action, droughts, typhoons, fires, assassinations, insurrections, some government action.

      2 Conflicting reports which attempt to forecast the unforecastable. With this category can be placed self-interest reports that are issued by government bodies and members of the securities industry relating to longer term economic forecasts.

      3 Reports which are simply ill-conceived. In this category must be placed most stock market predictions that appear in newspapers, and predictions widely dispersed by individuals who use a priori judgement catering to herd instincts.

      In this latter category, the rate of occurrence is frequent and the effect can be pronounced and sudden on the price amplitude but the effects are usually dispersed quite quickly and the time frame is not influenced to any major degree.

      It should be permanently imbedded into the psyche of every investor that major and international events which attract massive response do NOT dominate stock market activity on anything other than a short-term basis. To most investors, this is difficult to fathom. However, the study of cyclical movements in the stock market and the Elliott Wave theory over long periods should dispel the false belief that markets are actually dominated by these occurrences. Every day on picking up a newspaper one will find this or that national or international event being outlined as the cause of the day’s stock market behaviour. Obviously, it is a total impossibility to trace the precise motivation of every investor. The alternative adopted by the press is to regard today’s stock market action as reflecting the current news and local personalities instead of recognising that market action leads the business news events of the day and discounts in advance the business cycle.

      The impact on market action of wars, global financial crises and all other similar events, does not alter the relationship of the cyclical time frame. Time synchronisation in coincident markets throughout the world continues; only the amplitude of the trend is distorted for temporary periods. The following diagram illustrates the economic cycle of Juglar and Kondratieff through the U.S. Civil Wars and the period following which included World War I and World War II. The chart is reproduced from the work Cycles: The Science of Prediction, by E. R. Dewey and E. F. Dakin.

      Fig 3. War and its Dislocations

       Fig. 3 shows distortion in the Wholesale Price Index in time of War. The solid line shows the three year moving average of the Index of Wholesale Prices in the U.S., 1830-1945. The broken line shows the synthesis of the regular 9-year and 54-year cycles. The shaded areas show the difference between the Index and the regular pattern for the periods of the Civil War, World War I, and World War II.

       The 3-year moving average has been extrapolated to 1945. The shaded areas begin one year prior to the outbreak of the wars, since in a 3-year moving average the effect of the first year of war is extended one year backward.

       It is interesting to note that in spite of the magnitude of the distortion, the timing of the peaks happens to coincide with the normal timing of the 9-year cycle. It is also interesting to note how nearly equal are the distortions.

      The lesson to be learned from the illustration is the dominance of cyclicality in supply and demand markets, such as commodities, shares, etc., such cyclicality deriving from important basic rhythms in the world economy. Charles Dow stated that a bull market that takes place in one major country will usually take place in most countries having mature economies throughout the world. The concept of international economic cyclicality would explain this. With the growing influence of the multi-national corporations, the expansion of the Common Market, and modern communications of all kinds, the thesis set forth many decades ago appears even more credible.

      Cyclicality in share price movements, as reflected by the popular share price indices such as the Dow-Jones Industrial Averages in the U.S. or the Financial Times Industrial Ordinary Share Index in London, is the summation (or combination) of all the basic rhythms in the individual economies and the common cyclicality of the components of these indices. Common cyclicality is the product of cyclicality in the individual issues, similar cyclical relationships in all issues, similar relative cycle magnitudes and their synchronisation in time. These factors produce trend dominance by the international stock market cycle or general sentiment, which in turn controls the majority of all share price behaviour. As mentioned, there will be deviations from the dominant trend due to the introduction of “random noise”. As we develop the Elliott Wave Theory we will see how this “random noise” is compensated for.

      Time Frame Relative – not Fixed

      While Elliott’s work held certain common philosophies with those of the cyclical economists there was also a strict point of departure. Whereas Kitchin, Juglar and Kondratieff attempted to apply a fixed time frame to the behaviour of economic cycles, it was Elliott’s belief that the time frame was only relative. Elliott was far more concerned with the behaviour of the component parts of the cycle, since the evidence he collected did not justify the repetition of share price movements over any fixed period, either short term, intermediate term or long term. We have no idea what

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