Fibonacci in the equity market

In the late 1920s the American mathematician Ralph Nelson Elliot developed an analysis of the share market, which was later called the Elliot Wave Principle. Elliot examined in particular the psychological aspects of the sellers’ behaviour and tried to explain movements in the market by means of patterns in crowd-psychology. His wave theory claims that share prices are guided by pre-determined cycles based on the Fibonacci sequence. According to that, during a bull market the market prices move in five upward waves and in three waves somewhat downwards again; in a bear market the pattern is reversed.

At the end of the 1970s the discovery of fractal geometry led to a revival of Elliot’s waves. Although the theory is controversial in academic economic literature, its various protagonists have made accurate prognoses and thus also raised the standing of the theory.

If the Elliot waves are examined from the perspective of the chaos theory different intervals can be interpreted as self-similar. The waves – five up, three down – occur according to them not just after quite a considerable interval of time, but every day, every hour, every minute. Such models, so-called market fractals, may, recent research has shown, be interpreted as instruments for measuring the social and historical development of a country. Historical developments and events consequently represent fluctuations in mood swings resulting from the crowd psychology of companies which cannot be influenced from outside. If the evaluation of the Elliot waves is correct, it is even supposed to be possible to make predictions about a country’s future historical, social and societal development.