On September 16, 1970, Richard Russell had the following to say about Elliot Wave Theory:
"Last week I received a letter from a gentleman at a large New York Bank, and the letter raises on important question which deserves answering here. He writes:
'I have been particularly interested in your comments to the effect that we now have seen two of the three major declines that mark a primary bear market. Referring to the chart on Page 4 of your Letter No. 469, two major slides are quite noticeable (one in 1966 and the other in 1969-70). However, there is a third slide (in late 1967 and early 1968) that is very clear in the Transportation Average but not so noticeable in the other two averages. From your letters, it is clear that you do not regard this as one of the three major phases of the primary bear market; however, I would like to hear some more of your reasoning as to why it does not qualify.'
"Now I believe this gentlemen is expressing a common misconception, a misconception which stems from a confusion between Dow Theory and the Elliot Wave Theory. Let me attempt to clarify. Elliot (writing in the 1930’s) believed that bull movements occurred in a five-step series of upward zig-zags, three rising waves and two declining wave-corrections. He believed that bear movements occurred in a three-step downward zig-zag, two declining waves separated by a single corrective rising wave.
"The fact is that Elliot’s observations regarding the wave theory have been born out so many times in actual practice that they must be taken seriously. The problem is that most amateurs do not know how to break the waves down correctly. Each Elliot wave may break down into many sub-waves, and a mere glance at a chart and a cursory dividing of a structure into three-wave and five-wave patterns is usually so far from a true Elliot analysis as to be more deceptive than useful.
"Hamilton Bolton (founder of the Bank Credit Analyst) did some remarkable work on Elliot, and Bolton’s research and interpretations have been carried on by the present editor, Donald Storey. Storey believes that the first wave of the current bear market started for the Dow Industrials in February, 1966. The first wave ended at the October, 1966 lows The second wave (and this was the major corrective wave) carried to either the December, 1968 peak or possibly the May, 1969 peak. From there the third leg (which was again a downward leg) began, and Storey believes we are continuing in that leg now. He feels that this leg will ultimately approach or break the 1970 lows, going perhaps as low as the 1962 Dow low (535) or the 1956 and 1957 peaks (520)[Russell, Richard. Dow Theory Letters. September 16, 1970. Letter 473 page 3.]."
The price action of the Dow Jones Industrial Average from September 1970 and the following years is potentially instructive and presented below.