As we will show in subsequent lessons, the spiral-like form of market action is repeatedly shown to be governed by the Golden Ratio, and even Fibonacci numbers appear in market statistics more often than mere chance would allow. However, it is crucial to understand that while the numbers themselves do have theoretic weight in the grand concept of the Wave Principle, it is the ratio that is the fundamental key to growth patterns of this type. Although it is rarely pointed out in the
literature, the Fibonacci ratio results from this type of additive sequence no matter what two numbers start the sequence. The Fibonacci sequence is the basic additive sequence of its type since it begins with the number “1” (see Figure 3-17), which is the starting point of mathematical growth. However, we may also take any two randomly selected numbers, such as 17 and 352, and add them to produce a third, continuing in that manner to produce additional numbers. As this sequence progresses, the ratio between adjacent terms in the sequence always approaches the limit phi very quickly. This relationship becomes obvious by the time the eighth term is produced (see Figure 3-18). Thus, while the specific numbers making up the Fibonacci sequence reflect the ideal progression of waves in markets, the Fibonacci ratio is a fundamental law of geometric progression in which two preceding units are summed to create the next. That is why this ratio governs so many relationships in data series relating to natural phenomena of growth and decay, expansion and contraction, and advancement and retreat.
In its broadest sense, the Elliott Wave Principle proposes that the same law that shapes living creatures and galaxies is inherent in the spirit and activities of men en masse. The Elliott Wave Principle shows up clearly in the market because the stock market is the finest reflector of mass psychology in the world. It is a nearly perfect recording of man’s social psychological states and trends, which produce the fluctuating valuation of his own productive enterprise, making manifest its very real patterns of progress and regress. What the Wave Principle says is that mankind’s progress (of which the stock market is a popularly determined valuation) does not occur in a straight line, does not occur randomly, and does not occur cyclically. Rather, progress takes shape in a “three steps forward, two steps back” fashion, a form that nature prefers. In our opinion, the parallels between and Wave Principle and other natural phenomena are too great to be dismissed as just so much nonsense. On the balance of probabilities, we have come to the conclusion that there is a principle, everywhere present, giving shape to social affairs, and that Einstein knew what he was talking about when he said, “God does not play dice with the universe.” The stock market is no exception, as mass behavior is undeniably linked to a law that can be studied and defined. The briefest way to express this principle is a simple mathematical statement: the 1.618 ratio.
The Desiderata, by poet Max Ehrmann, reads, “You are a child of the Universe, no less than the trees and the stars; you have a right to be here. And whether or not it is clear to you, no doubt the Universe is unfolding as it should.” Order in life? Yes. Order in the stock market? Apparently.