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Technical analysis or charting can be broken down into formations, line charts and wave and cycle theories. Over the decades since investors started charting the progress of share prices, indexes and other financial data, various wave and cycle theories have been proposed. These theories are usually based on recurring price patterns which are said to happen in every financial market. The Dow Theory itself is probably the oldest and best-known wave theory. It postulates that the Dow Jones Industrial Index has three visible movements: long-term trends, secondary trends and daily fluctuations. R. N. Elliott proposed what came to be known as the Elliott Wave Theory - which suggests that shares and markets move in an 8-part recurring cycle, made up of a five-part upward trend and a three-part downward trend. Nicolai Kondratiev put forward the Kondratiev Wave which is a very long cycle (54 years) of commodity prices which he traced back 300 years - but which economists at the London School of Economics have traced back 3000 years. The problem with wave and cycle theories is that they do not establish any clear and believable link to human behaviour. Why should shares or indexes move in an 8-part Elliott Wave or in any cycle? Is there some sort of cosmic biorhythm which we are unaware of? It is interesting and fun to study wave and cycle theories and to try to apply them, but our experience is that they do not have much predictive value.

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