The Basic Pattern
In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which
are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two counter trend interruptions, which are labeled 2 and 4, as shown in Figure 1. The two interruptions are apparently a requisite for overall directional movement to occur. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.
There are two modes of wave development: motive and corrective. Motive waves have a five-wave structure, while corrective waves have a three-wave structure or a variation thereof. Motive mode is employed by both the five-wave pattern of Figure 1 and its same-directional components, i.e., waves 1, 3 and 5. Their structures are called “motive” because they powerfully impel the market. Corrective mode is employed by all countertrend interruptions, which include waves 2 and 4 in Figure 1. Their structures are called “corrective” because they can accomplish only a partial retracement, or “correction,” of the progress achieved by any preceding motive wave. Thus, the two modes are fundamentally different, both in their roles and in their construction, as will be detailed in an upcoming section. The five-wave motive phase has subwaves denoted by numbers, and the three-wave corrective phase has subwaves are denoted by letters. Every motive wave is followed by a corrective wave. Just as wave 2 corrects wave 1 in Figure 1, the sequence A, B, C corrects the sequence 1, 2, 3, 4, 5 in Figure 2
The Essential Design
it also illustrates Figure 2 itself, in greater detail. Waves (1) and (2) in Figure 3, if examined under a “microscope,” would take the same form as waves 1 and 2. Regardless of degree, the form is constant. We can use Figure 3 to illustrate two waves, eight waves or thirty-four waves, depending upon the degree to which we are referring. Now observe that within the corrective pattern illustrated as wave 2 in Figure 3, waves (A) and (C), which point downward, are each composed of five waves: 1, 2, 3, 4 and 5. Similarly, wave (B), which points upward, is composed of three waves: A, B and C. This construction discloses a crucial point: Motive waves do not always point upward, and corrective waves do not always point downward. The mode of a wave is determined not by its absolute direction but primarily by its relative direction. Aside from four specific exceptions, which will be discussed later in this chapter, waves divide in motive mode (five waves) when trending in the same direction as the wave of one larger degree of which it is a part, and in corrective mode (three waves or a variation) when trending in the opposite direction. Waves (A) and (C) are motive, trending in the same direction as wave 2. Wave (B) is corrective because it corrects wave (A) and is countertrend to wave 2. In summary, the essential underlying tendency of the Wave Principle is that action in the same direction as the one larger trend develops in five waves, while reaction against the one larger trend develops in three waves, at all degrees of trend. Nor does Figure 3 imply finality. As before, this larger cycle automatically becomes two subdivisions of the wave of next higher degree. As long as progress continues, the process of building to greater degrees continues. The reverse process of subdividing into lesser degrees apparently continues indefinitely as well. As far as we can determine, then, all waves both have and are component waves.