Technical Analysis

of Stocks
by Richard D. Marcus

 Repeated patterns, fractal

geometry, and tessellations
appear in biology, art, stock
prices and foreign exchange
rates.
 These have been useful to some
who do technical analysis.
Liberation by M.C. Escher
February 24, 2004
 Fractal Geometry
and security prices
 A fractal is a shape which can be divided into parts
that are smaller or larger versions of the whole
 Irregularly shaped objects & fine-particle aggregates.
 Used in repetition for fast computer screens

 Stock market movements can be sub-divided into

sections and returns calculated for each section
 When each section relates to other sections in
patterns, we find the fractal nature of security prices
• Fractals imply ‘memory’ in prices, not random walks.
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 Basics of Elliott Waves
 Market cycles are
composed of two major
types of waves
– Impulse Waves
– and Corrective Waves
 Every impulse wave can
be sub-divided into a five Total waves = 8
wave structure
 Corrective waves can be
sub-divided into three.
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 Waves Within Waves

 Elliott Waves are

fractal in nature.
 'Fractal' means that
they are built from
similar patterns on
both larger or
smaller scales.
 The waves appears
in long-term yearly
market charts as well
Total number of waves = 34 as short-term hourly
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 Types of Impulse Waves
 Extended first impulse, #1
 Extended second impulse , #2 (never the shortest)
 Extended third impulse , #3
– Extension means
the wave is elongated
in nature
– Only one wave is
an extension
– Sometimes impulse
waves collapse
– But they follow rules
#1 #2 #3
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 Rules for Reading
Impulse Elliott Waves
1. Wave 2 should not break below the
beginning of Wave 1;
2. Wave 3 should not be the shortest wave
among Wave 1, 3 and 5;
3. Wave 4 should not overlap with Wave 1,
except for wave 1, 5, a or c of a higher
degree.
4. Rule of Alternation: Wave 2 and 4 should
unfold in two different wave forms.
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 Corrective
Wave Forms
 Zig-Zag: abc pattern composed of 5-3-5 sub-wave structure.
 Flat: abc pattern composed of 3-3-5 sub-wave structure, with b
equals a.
 Irregular: abc pattern composed of 3-3-5 sub-wave structure, with b
longer than a.
 Horizontal Triangle: 5-wave triangular pattern composed of 3-3-3-
3-3 sub-wave structure.
 Double Three: abcxabc pattern composed of any two from above,
linked by x wave.
 Triple Three: abcxabcxabc pattern composed of any three from
above, linked by two x waves.
Top 100 FTSE Firms:
Eurotop 100

How far
will it
fall?
 Where is the
the top of
Wave 1 Wave 3?
3?

Horizontal
Triangle
Wave 2

• The Elliott waves above are applied to short term

pound-denominated debt.
• As the impulse wave 3 tends to be long, wave 3 has
five sub-waves. We are in the fifth sub-wave. Are we
near the top of the 3rd wave?
 Fibonacci Series
 The Fibonacci numbers are: 0, 1, 1, 2, 3, 5, 8, 13,
21, 34, 55, 89, 144 …
 Add the last two to get the next.
 In 1202 Fibonacci investigated how fast rabbits could breed in
ideal circumstances in one year:
At the end of the first month, they mate, but there is still one only 1 pair.
At the end of the second month the female produces a new pair, so now there are 2 pairs
of rabbits in the field.
At the end of the third month, the original female produces a second pair, making 3 pairs
in all in the field.
At the end of the fourth month, the original female has produced yet another new pair, the
female born two months ago produces her first pair also, making 5 pairs. Etc.
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 Fibonacci Rectangles and
Shell Spirals
 We add squares around the picture.
Each new square having a side which is
as long as the sum of the latest two
square's sides. These are Fibonacci
Rectangles.
 We draw a spiral by putting together
quarter circles, one in each new square.
This is a spiral (the Fibonacci Spiral).
 The shape of a snail shell or some sea
shells.
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 The Golden Mean
 Ratio of any two adjacent Fibonacci numbers is:
5/3, 8/5, 13/8, … tends to 1.618 (Golden Mean)
 The Golden Ratio is the inverse Golden Mean
 That is 1 / 1.618 = .618
 Or 1 / 2.618 = .382

 When trying to figure how far a wave might go,

the Golden Mean and Golden Ratio are guides.
 Wave lengths tend to relate to each other by
2.618, 1.618, 1, .618, .382, and .236.
 Golden Ratios and Elliott Waves
 Target for wave 1
A
– Often 38.2% or 61.8% of the previous B
correction
 Target for wave 2 C
– Retraces at least 38.2% but mostly
61.8% of wave 1.
 Target for wave 3  Target for wave 5
– Longest, tends to be 161% of wave 1 - Travels the same
or even 262% length as wave 1, or
 Target for wave 4 61.8% of wave 1, or
– Retraces 23%, often 38.2% of wave 3 161.8% of wave 1.
 A Slice through a Nautilus Shell

 Distances in the Nautilus

shell expand by the
Square Root of the
Fibonacci series
 Sometimes known as the
‘silver ratio’, the square
root of the Golden Ratio
or .786
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 Evaluation of Elliott Waves
 Reading chart  Experts post test on
patterns is more an in-sample work
art than science – “If you had
 Two analysts make followed my advice,
different predictions you’d have made
millions!”
 To test it, we tend to
 Compare several
follow an expert or
experts’ newsletters
guru on waves.
– Elliott wave
 Test results vary theorists fair poorly
widely. to modestly in such
contests.
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 Notice that the numbers on the dice are 3, 8, and 5

Commodity Traders
Consumer Report
 Damaging to Elliott wave theorists, Futures, (March,
1984) magazine compared returns following the advice
of ten newsletters (including the Elliott Wave
Theorist).
 Listed in order of profits per trade and consistency:
Elliott Wave was not in the top half.
 Third best in terms of return on initial margin,
however.

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 Readings
on Technical Analysis
 The Encyclopedia of Technical Market Indicators,
Colby and Meyers.
 Cornelius Luca, Trading in the Global Currency
Markets, 2nd Edition, Prentice-Hall, 2000, especially
Chapter 28.
 Robert R. Prechter and A.J. Frost, Elliott Wave
Principle: Key to Market Behavior, New Classics
Library, June 1998.
 Great Internet site on Elliott Wave
Principle: www.prognosis.nl/principle/index.html
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