Ralph Nelson Elliott developed the Elliott Wave Theory in the late 1920s by discovering that stock markets,thought to behave in a somewhat chaotic manner,in fact,did not. They traded in repetitive cycles,which he discovered were the emotions of investors as a cause of outside influences,or predominant psychology of the masses at the time. Elliott stated that the upward and downward swings of the mass psychology always showed up in the same repetitive patterns,which were then divided into patterns he termed 'waves'
In the financial markets we know that 'every action creates an equal and opposite reaction' as a price movement up or down must be followed by a contrary movement. Price action is divided into trends and corrections or sideways movements. Trends show the main direction of prices while corrections move against the trend. Elliott labeled these 'impulsive waves' and 'corrective waves'.
The interpretation of the Elliott Wave Theory is as follows:
Every action is followed by a reaction.
There are five waves in the direction of the main trend followed by three corrective waves (a '5-3' move).
A 5-3 move completes a cycle.
This 5-3 move then becomes two subdivisions of the next higher 5-3 wave.
The underlying 5-3 pattern remains constant,though the time span of each may vary.
We are now in the 1st corrective wave. Expect a slight rise as supply evens out and bargain hunters pick up bids,followed by the 2nd corrective wave.