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Elliott Waves In C

02/18/03 04:00:29 PM PST
by David Penn

Declining C waves are the most destructive patterns in Elliott wave analysis. Here's looking back on some of the worst.

Writing about declining C waves in The Elliott Wave Principle, authors A.J. Frost and Robert Prechter Jr. note:

Declining C waves are usually devastating in their destruction. They are third waves, and have most of the properties of third waves. It is during this decline that there is virtually no place to hide except cash. The illusions held throughout waves A and B tend to evaporate and fear takes over. C waves are persistent and broad.

Frost and Prechter are referring to what is generally the third and final stage in a correction process that purges the excesses from a previous advance or bull market. The A wave the authors refer to is the first break of the bull market and, as such, is often believed to be a temporary pause or "healthy correction" to the immediately preceding bull market. As Frost and Prechter suggest of A waves:

. . . [T]he investment world is generally convinced that this reaction is just a minor pullback pursuant to the next leg of advance. The odd-lot public surges to the buy side, despite the first really technically damaging cracks in individual stock patterns.

Thus, while both A and C waves both tend to represent declines, they are declines of truly different orders. To use a metaphor, if an A wave is equivalent to tripping over your own feet, then a C wave is a fall down a flight of stairs.

The notion of C waves may be relevant to today's market because I suspect that the current downleg of the secular bear market that began in early 2000 is a classic correction composed essentially of three parts: an A wave, a B wave, and a C wave — each being of Elliott wave theory's primary degrees. Defining "primary degree" specifically is difficult insofar as the various degrees of Elliott wave — from minute to minor to intermediate to primary to cycle to supercycle — are more accurately expressed in relation to each other than as absolutes (such as "a cycle wave lasts X number of years"). That said, the primary A and B waves in the current secular bear market (using the Standard & Poor's 500 as our template) appear to be 18 months (March 2000 to October 2001) and six months (October 2001 to March 2002) in duration, respectively. The primary C wave that I believe began in March 2002 is — as of this writing — approximately 11 months long.

In a later work, The Wave Principle Of Human Social Behavior And The New Science Of Socionomics, Prechter extended the differences between A and C waves, drawing upon his theory on the relationship between what he calls social mood and the market. His point, in sum, is that whereas A waves generally are characterized by expressions of shock and disbelief, anger and denial, C waves are where all of these negative emotions come to dark fruition:

The most intense conflicts, such as wars, are not associated with all large bear markets but typically occur during or immediately after the largest C waves in corrective processes of Primary degree and higher. A waves, regardless of extent, rarely result in war.

And later,

It might be postulated that major C wave declines are times when destructive social goals are achieved with wide cooperation, just as third waves on the upside are times when constructive social goals are achieved with wide cooperation.

Prechter provides an interesting set of examples to support this hypothesis. He notes, for example, that the American Revolutionary War did not occur during the bear market of 1720 in the wake of the bursting of the South Sea and John Law/Mississippi bubbles, but in the late 1700s during what Prechter considers the wave c phase of the corrective process. Similarly, the American Civil War did not break out in the 1830s and 1840s — a time of severe financial panics — but took place in the 1860s, "two years after the end of wave c." Additional examples provided by Prechter include the War of 1812, the Spanish-American War, both World Wars and, through a certain reading of events, the Vietnam War.

Truly, there are many who find Elliott wave theory and its companion hypotheses on "social mood" unconvincing. Thus, this discussion is less an attempt to convert and more an effort to encourage thinking about the interplay between social events — from corporate enterprise to organized political conflict — and the stock market, which has been frequently acknowledged as not only a heavily sociopsychological barometer but also as a major leading indicator of economic and financial trends. In many ways, the secular bear market we have been experiencing affords us with a unique opportunity to examine not only how moods of entire societies can shift from hopeful to fearful, but also how this transition might be monitored, tracked, and, perhaps in some way, even anticipated.


The mother of all C waves in modern (that is, 20th-century) market history is probably the bear market leg down from 1930 to 1932 (Figure 1). This C decline was the most severe part of the secular bear market that began in 1929. Recall that the Dow industrials fell initially from 386 in September 1929 to 225 in November. While short in duration (two months), the first leg of this bear market (the A wave) was certainly destructive in and of itself, taking the Dow industrials down by some 49%. By comparison, the Dow industrials began 2003 down "only" 32% from its all-time high — and that is after more than three years! This 32% figure is also about the same percentage move that the Dow experienced in its wave "a" decline from its peak in January 2000 to the low in September 2001.

That A wave from the Dow industrials was followed by a B wave advance from November 1929 until April 1930, and saw the Dow industrials move from 225 to 297, a 52% gain. This might very well have been a classic bear market rally, as investors no doubt believed that the short, sharp, two-month drop in wave A was little more than a buying opportunity en route to a Dow 500, or similarly longed-for level. Everything that Elliott wave theorists have written about B waves seems to apply to the bear market rally that began late in the fall of 1929 and ended in the spring of 1930:

Upward B waves are phonies. They are sucker plays, bull traps, speculator's paradise, orgies of odd-lotter mentality. They are often emotional, rarely technically strong, and virtually always doomed to complete retracement by wave C.

All of this and more applied to the B wave in the middle of the 1929­33 bear market decline. Imagine the anxiety of a stock investor in the summer of 1930, having watched his portfolio sail throughout the second half of the 1920s, only to be hit by a perfect storm in September 1929. A few months later, this investor must have believed he was back on the right track, having recouped more than half of his losses from the September crash. But then, in the summer of 1930, the Dow was heading down again; by the one-year anniversary of the crash of 1929, the Dow would actually be trading lower than it was when "The Crash" occurred. The C wave had begun.

Figure 1: This C wave from 1930 to 1932 took stock investors from anxious hope to utter despair.

The C wave was indeed the most severe part of this bear market. From the end of the B wave with the Dow industrials at 297, the C wave took a little less than two years to take the Dow industrials down to 41 before the decline was over. Losses during the C wave alone were some 86% — compared to the overall losses of the bear market from the peak in September 1929, losses of 89%. In other words, most of the destruction of the 1929­32 bear market occurred in wave C. Writing about market — and world — conditions in early 1932, Prechter noted:

As an extreme example, the collective mood in Germany in July 1932 was so negative that its expression produced Adolf Hitler's peak of popularity, exactly concurrent with the month of the low in stocks . . . The collective mood in the United States also reached a negative extreme in 1932­1933. One manifestation of that mood extremity was the increased enrollment in and disruptive activity by the Communist Party in the US.


A more recent C wave worth noting is the one that took place about midway through the second secular bear market of the 20th century from 1965 to 1982. Many Elliott wave theorists suggest that this bear market actually ended years before Ronald Reagan's Presidential administration, noting that the market bottomed in nominal terms in 1974. Others, however, wait until the Dow industrials held ground above the 1,000 mark (actually 1,070) in the fall of 1982.

This bear market was shaped quite differently from the one that occurred nearly 30 years before. Instead of a sharp, three-legged descent from unbridled enthusiasm to unimpeded helplessness, the bear market of the late 1960s and 1970s was a relentless back-and-forth in which the rallies seemed to top out at the same point while the declines, each time, plunged deeper down than the last. Elliott wave theorists tend to suggest this bear market had a more complex corrective mode than the standard three-wave decline. And while I won't attempt to explicate their reasoning (namely, that the bear market featured a "triangle" bounded by a wave B advance from 1966 to 1969 and a wave E decline of 1973­74), Elliott wave theorists have remained relatively consistent since that time in their evaluation of the "triangle" wave count with five — instead of three — waves.

Where then, in this "triangle" bear market with five waves, was the infamous C wave, traditional harbinger of stock market destruction? The most widely accepted wave count for the 1966­74 bear market consists of an A wave decline of 1966 and a B wave advance from 1966 to 1969. The C wave began shortly thereafter.

Figure 2: The C wave decline of 1969­70 seemed to mock the optimism of 1968 with its "summer of love."

The 1969­70 cyclical bear market took the Dow Jones industrials down from 1,000 to as low as 625 by the spring of 1970, a loss of more than 37%. The S&P 500's losses were comparable, nearly a 33% loss from November 1968 to May 1970 (Figure 2). Incidentally, May 1970, the month the stock markets bottomed, was also the month when students protesting the escalation of the war in Vietnam were shot and killed by National Guard troops at Kent State University in Ohio.

With regard to the notion of war and C waves introduced earlier, it is worth pointing out that while the Vietnam War had been prominent in the American psyche since at least 1966, with the B-52 bombing of North Vietnam and US troop levels exceeding 200,000, there were several events in 1969­70 that could be considered significant escalations of the conflict. There was the secret bombing of Cambodia, the announcement of the "Vietnamization" policy, and news of the My Lai massacre, in addition to the Kent State incident. I provide this as the "certain reading of events" mentioned with regard to the relationship between the 1969­70 C wave and the Vietnam War. It could be argued that the 1969­70 period reflected much of the worst of a conflict that would last a decade.


I suggested previously the current market environment is that of a C wave of primary degree. This C wave has developed in the wake of an initial primary A wave down from early 2000 to the fall of 2001. This break in the long-term uptrend of the equities market was followed by a primary B wave rally that began immediately in the wake of the September 11th terrorist attacks in the US and ended in the spring of the following year. By this measurement, the equities market — as measured by the Standard & Poor's 500 — has been in a C wave since the late spring of 2002.

Figure 3: This Elliott wave count of the bear market in the S&P from 2000 to the present suggests that the C wave is more than half over.

Looking at the five-wave pattern within the C wave that began in the first quarter of 2002, it seems apparent that this pattern is almost complete, but for a fifth and final decline that will complete both the downward C wave as well as the broader, primary A-B-C correction (Figure 3). Those who recall the decline of wave A will most likely note that sentiment, for one, was quite different from the mood of wave C. For example, until the final fifth wave down in wave A, most investors were largely convinced that the lows of the spring of 2001 marked the bottom of the bear market. These investors were completely taken by surprise by the fifth wave, which — though clearly exacerbated by the terrorist attacks in the US — was already in the making by August, when the decline in stock prices began to accelerate.

Prechter states that "A waves, regardless of extent, rarely result in war." Clearly, the primary A wave in 2001, which immediately preceded the brief war in Afghanistan, is an exception. However, it is increasingly likely that the US will enter into a war with measurably greater stakes as a resolution to the now 12-year-old conflict with Iraq. Insofar as the February­March time frame has been repeatedly posited as the launch date for any invasion of Iraq, it is hard to avoid seeing the current primary C wave concluding around the same time.


Speaking about Robert Prechter — or, more essentially, the Elliott wave theory he champions — legendary trader and Market Wizard Paul Tudor Jones said that his use of Prechter's methods allowed him to create "extraordinary risk/reward opportunities." This underscores, for me, the usefulness of Elliott wave analysis. Whether or not we subscribe to the entire truckload of supercycles, zigzags, and double threes, it cannot be denied that Elliott wave theory provides a process through which long-term trends and secular shifts in market behavior and psychology can be understood. Not only by strictly analyzing price action but also by paying close attention to what are often called the "temper of the times," traders can use Elliott wave approaches to determine — often with the accuracy of a veteran contrarian — lower-risk entry points from higher-risk ones.

The most obvious example of this is with the C wave. If a trader or investor comes to the conclusion that a C wave is under way, then she can position herself to take advantage of the pervasively negative mood and investment climate at the time by, for example, raising cash in preparation for the inevitable rally that will follow. And the more sizable the C wave — a primary C wave compared to an intermediate or minor one — the greater the potential reward when the subsequent rally arrives. For those looking to trade or actively invest in market moves of primary degree, making a bullish wager on a primary C wave bottom affords exceptional upside with a downside that tends to be quite limited. It is not that Elliott wave theory is perfect — or that it may be employed with no risk. It is a matter simply of having the wind at your back when it is strongest, and of being ready to change course when a different, even stronger wind begins to fill your sails.

David Penn may be reached at


Frost, A.J., and Prechter, Robert R. [1978]. Elliott Wave Principle, New Classics Library.

Prechter, Robert R. [1995]. At The Crest Of The Tidal Wave, John Wiley & Sons.

_____ [1999]. The Wave Principle Of Human Social Behavior And The New Science Of Socionomics, New Classics Library.

_____ [2002]. Conquer The Crash, John Wiley & Sons.

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