The Elliot wave theory or the 5-3 curve is an extremely convenient tool for judging the trends in stock and commodity prices. The Elliot wave is marked by 5 impulse waves marked by 1,2,3,4 and 5 and 3 correction waves a,b and c. In the Elliot wave theory, the pattern keeps on repeating itself and each point on the curve is composed of several 5-3 waves. The topic to explore therefore is can the 5-3 curve pattern be replicated in other scenarios as well? Do other waves also reflect a 5-3 pattern? Perhaps one does.
The product life cycle curve reflects the four stages in the life cycle of a product: Introduction, growth, maturity and decline. The nature of the curve appears smooth unlike the 5-3 curve and stock market pattern. So how does these two curves become similar ?
While making the product life cycle curve we often tend to assume the existence of a single product in isolation. This is never the case in real market scenario as there are always substitutes available. One can easily argue that for a totally path breaking product like say iPhone there were no substitutes and hence this consideration is not valid. However, the point to consider here is iPhone still remains a mobile communication device and there existed other devices in this segment. So even in case of path breaking products there are always other substitutes available.
Now consider that there is a product A in the market and does relatively well in terms of sales. After a certain period, product B (a slightly improved product) is launched. What happens to sales of product A? It falls while those of product B tends to rise. Product A starts investment in R&D and re-launches a better product. Sale of B drops which forces it to investment in development and regain the market share.
Are we not seeing a repeat of the 5-3 curve? If we examine closely, we will find two parallel 5-3 curves of A and B in different stages. When B enters the market, it reflects curve 1, while A enters curve 2. Similarly when product A gets re-launched, it enters curve 3 while product B enters curve 2. On a similar note, when the market will decline, both product A and B will enter the a-b-c correction wave pattern. Hence if we focus on two parallel product life cycle curves we can find the formation of a 5-3 curve.
This is important especially in case of hyper competitive markets as all the products will try to outperform each other leading to formation of a 5-3 pattern. For example, in discount stores the price of one product is reduced and matched with better quality. If Big Bazaar introduces a certain discount, it more than likely that similar offers will also be available to match or even better that in competitors like Vishal Megamart- thus implying the existence of Elliot wave.
However, it remains to be explored whether 5-3 curve can work in a highly differentiated product market not affected by price.
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