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Elliott wave theory is a type of technical analysis that tries to predict trends in the financial markets. The technique is named after Ralph Nelson Elliott who was an accountant that developed the principle in the 1930s. What he proposed is that market prices behave in specific patterns, which technical analysts today would call Elliott waves. Elliott wrote two books about his views of market behavior called The Wave Principle (1938), and Nature’s Laws – The Secret of the Universe (1946). Elliott theorized that since humans are themselves pattern based creatures, their decisions could be predicted in patterns or rhythms as well. There have been critics that would argue the Elliot wave theory as a pseudoscience which goes against the principles of the efficient market theory.
Wave theory suggests that collective crowd psychology moves from optimism to pessimism and back to optimism. These swings create patterns, as shown by the price movements of a market at every degree of trend. Most developments which result from human based socio-economic processes follow laws that cause them to repeat themselves in similar, recurring waves of number and pattern. Elliott's model, in Nature’s Law: The Secret of the Universe says that market prices alternate between five waves and three waves at all degrees within a trend. As these waves develop, the larger price patterns unfold in a self-similar fractal geometry. Within the dominant trend, waves 1, 3, and 5 are motive waves, and each motive wave itself subdivides in five waves. Waves 2 and 4 are corrective waves, and subdivide in three waves. In a bear market the dominant trend is downward, so the pattern is reversed—five waves down and three up. Motive waves always move with the trend, while corrective waves move opposite it. Whether the trend is up or down, the pattern is 1, 2, 3, 4, 5, A, B, C.