Empirical Verification of Elliott Wave Theory in Indian Stock Market

Abstract

Many scholars believe that the objective of a firm is to maximize the market value of the firm. When the firm keeps doing well, the market price of the firm’s stocks also go up increasing the potential returns to the investors. The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the both internal and external causes and characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it does not consider the "value" of a company or a commodity. Technicians are only interested in the price movements in the market. Technical analysis evaluates securities by analyzing the statistics generated by market activity, such as past prices and volume based on three assumptions such as the market discounts everything, price moves in trends, and history tends to repeat itself. Technical analysis uses many tools and one such a tool is Elliot wave theory. Elliott Wave Theory, developed in the 1930s, attracted much attention among scholars and practitioners as an effective tool for predicting the stock price movements and deciding the ‘market timing’ after the horrific crash of 1987. But the high degree of subjectivity involved in the use of Elliott Wave Theory makes it problematic and the use of this as a tool among the practitioners is varied and lacks general agreement on its utility and the Elliott Wave Principle has been the subject of constant controversy. This paper attempts to empirically verify the Elliott Wave Theory by looking for the existence of Elliott Waves in the Indian Industry / stock market.

Keywords: Elliott Wave Theory, Elliott Waves, Pattern, securities analysis, empirical verification, Technical analysis, stock price, forecasting, equity investment, Indian Industry, Indian Stock Market