Elliott Wave

 

 

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Elliott Wave Theory

Elliott Wave Theory interprets market actions in terms of recurrent price structures obedient to the Fibonacci sequence. Basically, Market cycles are composed of two major types of Wave : Impulse Wave and Corrective Wave. For every impulse wave, it can be sub-divided into 5 - wave structure (1-2-3-4-5), while for corrective wave, it can be sub-divided into 3 - wave structures (a-b-c). 


 

Surfer's Waves within Wave

An important feature of Elliott Wave is that they are fractal in nature. 'Fractal' means market structure are built from similar patterns on a larger or smaller scales. Therefore, we can count the wave on a long-term yearly market chart as well as short-term hourly market chart. 

 See waves within wave:

Rules for Wave Count

Based on the market pattern, we can identify ' where we are' in term of wave count. Nevertheless, as the market pattern is relatively simplistic, there are several rules for valid counts: 
  1. Wave 2 should not break below the beginning of Wave 1; 
  2. Wave 3 should not be the shortest wave among Wave 1, 3 and 5; 
  3. Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree. 
  4. Rule of Alternation : Wave 2 and 4 should unfold in two different wave forms. 

Wave forms in Impulse Wave

There are three major types of wave form in Impulse Wave: 

(a) Extended Wave

Among Wave 1, 3 and 5, only one should unfolded into extended wave. 'Extension' means the wave is elongated in nature and sub-waves are conspicuous in relation to waves of higher degree. 

See extension pattern:

(b) Diagonal Triangle at Wave 5

Sometimes, the momentum at Wave 5 is so weak that the 2nd and 4th sub-waves overlap with each other and evolved into diagonal triangle. 

(c) 5th Wave Failure

In some other circumstances, the Wave 5 is so weak than it even cannot surpass the top of the wave 3, causing a double top at the end of the trend. 

See diagonal triangle and failure fifth pattern:

Wave Forms in Corrective Wave

Corrective Wave forms are rather complicated, but basically we can categorize them into six major wave forms: 
 
  1. Zig-Zag : abc pattern composed of 5-3-5 sub-wave structure. 
  2. Flat : abc pattern composed of 3-3-5 sub-wave structure, with b equals a. 
  3. Irregular : abc pattern composed of 3-3-5 sub-wave structure, with b longer than a. 
  4. Horizontal Triangle : 5-wave triangular pattern composed of 3-3-3-3-3 sub-wave structure. 
  5. Double Three : abcxabc pattern composed of any two from above, linked by x wave. 
  6. Triple Three : abcxabcxabc pattern composed of any three from above, linked by two x waves. 
See Six Corrective patterns:

Conclusion

The attractiveness of Elliott Wave Analysis is : Three impulse wave forms and six corrective wave forms are conclusive. All we have to do is to identify which wave form is going to unfold in order to predict future market actions. This is a bold statement, needless to say, knowledge of market historical wave patterns and experiences in wave count are of paramount importance. 

Please read disclaimer
 


 

3 FREE Videos: Financial Market Myths Exposed!

Elliott Wave International’s Market Myths Exposed 3-part video series turns conventional wisdom about the financial markets on its head, allowing you to think independently of the mainstream and call your own shots regarding portfolio management.

In these three videos – originally presented to a full workshop at the 2007 San Francisco Money Show– Elliott Wave International Chief Market Analyst Steven Hochberg, editor for EWI’s Financial Forecast Service and close associate of distinguished market forecaster Robert Prechter, debunks some of the most widely held market myths and answers some of today's toughest questions for traders and investors, including …

  • Why company earnings alone can't drive share prices up or down.
  • Why Economics 101 does not apply to the financial markets.
  • What's the deal with real estate?
  • Does a strong economy lead to strong financial markets?
  • Is the Federal Reserve manipulating market valuation?
  • Why do charts of the world’s markets look so correlated?
  • And, most importantly, where should you put your money?
  • Plus a whole lot more …

Many people pay hundreds of dollars to attend the conferences at which Steve speaks. But now you can get a front-row seat to Steve’s intimate workshop setting without expensive plane tickets and hotel reservations. All you need is a free Club EWI membership to watch!

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October Curse vs. Objective Analysis: The Choice Is Yours

October 12, 2010

By Elliott Wave International

Over the weekend, I went shopping for Halloween decorations. In the store, one of the clerks was wearing a white T-shirt with a puff-paint rendering of the Dow Jones Industrial Average. The line representing prices was the color of blood red, dripping and splashed across the front. When I asked him what it was, he said "the October Curse."

'Tis the season of stock market adages; those age-old Wall Street platitudes that claim stock prices perform a certain way during certain months of the year. The problem is, such correlations are hardly a guarantee.

Take October, for example. Yes, this month has marked some of the darkest periods in stock market history: 1929, 1987 and on. Historically, however, it's not the worst performing month. For example, the supposed "Halloween Jinx" failed to bring a deathly pallor to stocks in 2008, as the final days of that year's October saw the biggest weekly gain since 1974.

Remove Dangerous Mainstream Assumptions from Your Investment Process. Elliott Wave International's FREE 118-page Independent Investor eBook shows you exactly what moves markets and what doesn't. It will change the way you invest forever. Click here to learn more and download your free, 118-page ebook.

Then there are these familiar saws of seasonal wisdom:

"As Goes The First Week of January, So Goes The Month"-- In the first week of January 2010, the stock market enjoyed a powerful winning streak. Yet, by the end of the month, prices were back in the red, circling the drain of a two-month low.

"Sell In May And Go Away" -- And don't come back 'till St. Leger's Day (September). If investors heeded this wisdom this year, they would have missed one of the strongest uptrends in stocks of the entire year from July to September.

"September Curse" -- If you think October is supposed to be bad, September is widely assumed to take the financial killing cake. Yet this year, U.S. stocks enjoyed their strongest September in 71 years!

Bottom line: Don't "buy" your trading strategy before the trend actually arrives. The choice comes down to old adages, or objective analysis. Pick the latter.

Remove Dangerous Mainstream Assumptions from Your Investment Process. Elliott Wave International's FREE 118-page Independent Investor eBook shows you exactly what moves markets and what doesn't. It will change the way you invest forever. Click here to learn more and download your free, 118-page ebook.

This article was syndicated by Elliott Wave International and was originally published under the headline October Curse Vs Objective Analysis: The Choice Is Yours. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

 

Your Free Chance to Learn How to Forecast Markets Using Technical Analysis
EWI's Senior Tutorial Instructor Jeffrey Kennedy gives you practical lessons -- free
September 17, 2010

By Elliott Wave International

There are two camps of market analysts out there: the fundamental camp and the technical one. Fundamental analysts look at things like the GDP, unemployment, interest rates, etc. to make logical assumptions about where the stock market is going.

Technical analysts use none of that. They look at the market's internals to gauge the trend: things like momentum, trend channels -- and yes, Elliott wave patterns.

And this is your free chance to learn how they do it.

We've put together a free 54-page Club EWI resource for you, "The Ultimate Technical Analysis Handbook." Below is a short excerpt from chapter 3. Enjoy! (For details on how to read this free report in full, look below.)


The Ultimate Technical Analysis Handbook
Chapter 3: How To Integrate Technical Indicators Into an Elliott Wave Forecast
By EWI's Senior Tutorial Instructor Jeffrey Kennedy

I love a good love-hate relationship, and that’s what I’ve got with technical indicators. Technical indicators are those fancy computerized studies that you frequently see at the bottom of price charts that are supposed to tell you what the market is going to do next (as if they really could). The most common studies include MACD, Stochastics, RSI and ADX, just to name a few.

I often hate technical studies because they divert my attention from what’s most important -- PRICE. ... Nevertheless, I have found a way to live with them, and I do use them. Here’s how: Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.

Out of the hundreds of technical indicators I have worked with over the years, my favorite study is MACD (an acronym for Moving Average Convergence-Divergence). ... Even though the standard settings for MACD are 12/26/9, I like to use 12/25/9 (it’s just me being different). An example of MACD is shown in Figure 6 (Coffee).

Coffee - December Contract Daily Data

The simplest trading rule for MACD is to buy when the Signal line (the thin line) crosses above the MACD line (the thick line), and sell when the Signal line crosses below the MACD line. Although many people use MACD this way, I choose not to... I like to focus on different information that I’ve observed and named: Hooks, Slingshots and Zero-Line Reversals. Once I explain these, you’ll understand why I’ve learned to love technical indicators. ...

Read the rest of the 50-page "Ultimate Technical Analysis Handbook" online now, free! All you need is to create a free Club EWI profile. Here's what else you'll learn:

Chapter 1: How the Wave Principle Can Improve Your Trading
Chapter 2: How To Confirm You Have the Right Wave Count
Chapter 3: How To Integrate Technical Indicators Into an Elliott Wave Forecast
Chapter 4: Origins and Applications of the Fibonacci Sequence
Chapter 5: How To Apply Fibonacci Math to Real-World Trading
Chapter 6: How To Draw and Use Trendlines
Chapter 7: Time Divergence: An Old Method Revisited
Chapter 8: Head and Shoulders: An Old-School Approach
Chapter 9: Pick Your Poison... And Your Protective Stops: Four Kinds of Protective Stops

Get more lessons like the one above in the free 50-page Ultimate Technical Analysis Handbook. Learn more and download your free copy here

This article was syndicated by Elliott Wave International and was originally published under the headline Your Free Chance to Learn How to Forecast Markets Using Technical Analysis. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

3 Reasons Now is Not the Time to Speculate in Stocks
Sometimes the investment weather forces you to 'buy a coat,' says Robert Prechter
August 31, 2010

By Elliott Wave International

When it's sunny, you head outside without a thought, but when it's rainy, you look for your umbrella.

When the markets are trending up, you don't worry about your investments much, but when the markets turn bearish ... what do you do?

In an interview with Jeff Sommer of The New York Times in July 2010, Robert Prechter said that he is convinced that a "market decline of staggering proportions" is on its way, and that individual investors should get out of the market and into cash and cash equivalents, such as Treasury bills.

"I'm saying: 'Winter is coming. Buy a coat,'" Prechter said. "Other people are advising people to stay naked. If I'm wrong, you're not hurt. If they're wrong, you're dead. It's pretty benign advice to opt for safety for a while."

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

For more specific advice as to why now is not the right time to speculate in stocks, here's an excerpt from chapter 20 of Prechter's business best-selling book, Conquer the Crash -- You Can Survive and Prosper in a Deflationary Depression, 2nd edition 2009.

* * * * *

Should You Speculate in Stocks?

Perhaps the number one precaution to take at the start of a deflationary crash is to make sure that your investment capital is not invested “long” in stocks, stock mutual funds, stock index futures, stock options or any other equity-based investment or speculation. That advice alone should be worth the time you spent to read this book.

1. Stocks May Go to Near Zero

In 2000 and 2001, countless Internet stocks fell from $50 or $100 a share to near zero in a matter of months. In 2001, Enron went from $85 to pennies a share in less than a year. These are the early casualties of debt, leverage and incautious speculation. Countless investors, including the managers of insurance companies, pension funds and mutual funds, express great confidence that their “diverse holdings” will keep major portfolio risk at bay. Aside from piles of questionable debt, what are those diverse holdings? Stocks, stocks and more stocks. Despite current optimism that the bull market is back, there will be many more casualties to come when stock prices turn back down again.

2. Stock Mutual Funds Will Fall, Too

Not only will many stocks fall 90 to 100 percent, but so will a substantial number of stock mutual funds, which cannot exit large equity positions without depressing prices and which have the added burden to you of one percent (or more) annual management fees. The good news is that we will finally find out who the few truly good fund managers are and which ones were heroes by virtue of being around for a bull market.

3. The Fed Won't Be Able To Save the Stock Market

Don’t presume that the Fed will rescue the stock market, either. In theory, the Fed could declare a support price for certain stocks, but which ones? And how much money would it commit to buying them? If the Fed were actually to buy equities or stock-index futures, the temporary result might be a brief rally, but the ultimate result would be a collapse in the value of the Fed’s own assets when the market turned back down, making the Fed look foolish and compromising its primary goals, as cited in Chapter 13. It wouldn’t want to keep repeating that experience. The bankers’ pools of 1929 gave up on this strategy, and so will the Fed if it tries it.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline 3 Reasons Now is Not the Time to Speculate in Stocks. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

The Hindenburg Omen -- Omen-ous or Not?
Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator
August 24, 2010

By Elliott Wave International

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI's chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we've discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That's a good question, and it speaks to a broader issue, viz., the "re-emergence" of technical analysis into the mainstream consciousness of market participants. In Prechter's Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

"In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn't sleep like babies with a buy-and-hold blanket like they do today."

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the "broadly diversified, buy and hold" stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter's desk -- FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline The Hindenburg Omen -- Omen-ous or Not?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Efficient Market Hypothesis: R.I.P.

August 19, 2010

By Elliott Wave International

Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical "Parthenon" of economics, this notion has consistently endured the test of time ----- until now. Academics and advisors across the globe are currently exposing crack after crack in the "Efficient" model so deep as to bring the entire theory crashing to the ground.

"The EMH is not only dead," writes a July 29, 2010 news source. "It's really, most sincerely dead." (Minyanville)

As to what caused the theory's collapse -- one recent business journal offers this insight:

"Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises." (The Economist)

Here's the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist(Read that full-length publication today, absolutely free by clicking on the hyperlink) In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:

The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter's 2004 Theorist takes the rein:

"The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority -- financial market trends are based on little more than the shared mood of investors -- how they feel -- which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)... Buyers, in a rising market appear unconsciously to think, 'The herd must know where the food is. Run with the herd and you will prosper.' Sellers in a falling market appear to unconsciously think, 'The herd must know that there's a lion racing toward us. Run with the herd or you will die.'"

Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)

In the end, it's not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.

As the mainstream media continues to jump on board Prechter's Financial/Economic Dichotomy Theory, you can read both of Prechter's original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the 2007 Journal of Behavioral Finance.

Read some of the latest nuggets directly from Robert Prechter's desk -- FREE. Click here to download a free report packed with recent quotes from Prechter's Elliott Wave Theorist.

This article was syndicated by Elliott Wave International and was originally published under the headline Efficient Market Hypothesis: R.I.P.. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Deflation: First Step, Understand It
There is still time to prepare if deflation is indeed in our future.
August 16, 2010

By Elliott Wave International

"Fed's Bullard Raises Specter of Japanese-Style Deflation," read a July 29 Washington Post headline.

When the St. Louis Fed Chief speaks, people listen. Now that deflation -- something that EWI's president Robert Prechter has been warning about for several years -- is making mainstream news headlines, is it too late to prepare?

It's not too late.

There are still steps you can take if deflation is indeed in our future. The first step is to understand what it is. So we've put together a special, free, 60-page Club EWI resource, "The Guide to Understanding Deflation: Robert Prechter’s most important warnings about deflation." Enjoy this quick excerpt. (For details on how to read this important report free, look below.)

When Does Deflation Occur?
By Robert Prechter

To understand inflation and deflation, we have to understand the terms money and credit.

Money is a socially accepted medium of exchange, value storage and final payment; credit may be summarized as a right to access money. In today’s economy, most credit is lent, so people often use the terms "credit" and "debt" interchangeably, as money lent by one entity is simultaneously money borrowed by another.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. The psychological aspect of deflation and depression cannot be overstated. ...

Read the rest of this important 60-page Robert Prechter's report online now, free! Here's what else you'll learn:
  • What Makes Deflation Likely Today?
  • How Big a Deflation?
  • Why Falling Interest Rates in This Environment Will Be Bearish
  • Myth: "Deflation Will Cause a Run on the Dollar, Which Will Make Prices Rise"
  • Myth: "Debt Is Not as High as It Seems"
  • Myth: "War Will Bail Out the Economy"
  • Myth: "The Fed Will Stop Deflation"

This article was syndicated by Elliott Wave International and was originally published under the headline Deflation: First Step, Understand It. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

7 Ways to Become an Unsuccessful Trader
Q&A with an experienced Elliott wave trader reveals seven common trading mistakes.
August 12, 2010

By Elliott Wave International

To be a successful trader demands knowledge.

If you'd prefer to become an unsuccessful trader, you can start by making the following common trading mistakes, detailed by a professional who spent 25 years in portfolio management, trading and forecasting in the financial capital of the world, New York City.

In 2002, Wayne Gorman, long-time Elliott wave trader and current head of trader education at Elliott Wave International, left his 35th floor Manhattan apartment and moved to the quiet of North Georgia. He's been sharing his knowledge and skills with aspiring traders ever since -- in both online seminars and before live audiences around the world.

Wayne graciously agreed to a Q&A about trading mistakes. In his interview, Wayne reveals seven common mistakes traders make.

--------

EWI: Could you name two mistakes frequently made by stock traders?

Wayne Gorman: (mistake 1) The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an "event" comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.

(mistake 2) The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.

EWI: What are two common mistakes among options traders?

WG: (mistake 3) One common mistake is to buy puts or calls that are way "out of the money," with no other transactions to compliment them. Unless your timing is absolutely perfect -- and who has perfect timing? -- your chance of success is low. It’s like buying a lottery ticket.

(mistake 4) Another common mistake is to buy options with too little time left to expiration. With less than one month to expiration, the time decay begins to accelerate and the chances of success diminish.

EWI: Please name a frequent mistake among traders who aim to catch the beginning of a particular Elliott wave.

WG: (mistake 5) In the middle of a corrective pattern, it's common to run out of patience while waiting for confirmation of a trend change. You have to give corrective patterns time to unfold before you jump in. This requires discipline, and a solid understanding of the many ways corrective patterns can unfold.

EWI: What's the biggest misconception among traders about using Elliott waves?

WG: (mistake 6) Too many traders think Elliott wave is a trading system that tells you exactly where to enter and exit a particular market. That's the biggest misconception. The reality is that it's an analytical and forecasting tool, which helps you develop and use your own trading system, based on your own personal risk tolerance.

EWI: What technical indicators do you believe traders over-rely on, and why?

WG: (mistake 7) Traders tend to over-rely on momentum indicators such as RSI, Stochastics and MACD to precisely spot turning points. But to paraphrase Mark Twain, markets can stay overbought or oversold a lot longer than either you or I can remain solvent.

EWI: How would you characterize today's market action, and do you teach courses that address this environment?

WG: This is a difficult stock market in the near term. Prices haven't strayed far from where they began in January. The action has yet to break out significantly to the downside or upside. This situation may not last much longer. I can suggest these online courses to deal with the current situation, and to prepare for the next big move:

This article was syndicated by Elliott Wave International and was originally published under the headline Do You Recognize These Six Common Trading Mistakes?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Technicals vs. Fundamentals: Which are Best When Trading Crude Oil and Natural Gas?

July 26, 2010

By Elliott Wave International

If "fundamentals" drive trend changes in financial markets, then shouldn't the same factors have consistent effects on prices?

For example: Positive economic data should ignite a rally, while negative news should initiate decline. In the real world, though, this is hardly the case.

On a regular basis, markets go up on bad news, down on good news, and both directions on the same news -- almost as if to say, "Talk to the hand cuz the chart ain't listening."

Unable to deny this fly in the fundamental ointment, the mainstream experts often attempt to reconcile the inconsistencies with phrases like "shrugged off," "defied" or "in spite of."

That begs the next question: How do you know when a market is going to cooperate with fundamental logic and when it won't? ANSWER: You don't.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.

Take, for instance, the first three news items below regarding the July 22 performance in crude oil, versus the fourth headline, which occurred on July 23:

  1. Crude prices surge nearly 4% in their sharpest one-day percentage gain since May. The rally was "aided by fears that Tropical Storm Bonnie will enter the Gulf of Mexico over the weekend and disrupt oil production." (Wall Street Journal)
  2. "Oil Prices Soar As Gulf Storm Threat Looms" (Associated Press)
  3. "The storm should keep oil prices bubbling if it continues to strengthen and remain on track." (Bloomberg)

vs.

  1. "Oil Slips From Surge Despite Storm Threats" (Commodity Online)

Unlike fundamental analysis, technical analysis methods don't rely on the news to explain or predict market moves. They look at the markets' internals instead.

Get FREE access to Elliott Wave International's most intensive forecasting service for the global Energy markets. Now through noon Eastern time July 28, you can get timely intraday charts, forecasts and analysis for Crude Oil and Natural Gas. You'll also get daily, weekly and monthly analysis and forecasts for all major Energy markets and Energy ETFs. Access FreeWeek now.

This article, Free Insight Into Crude Oil's Next Big Move,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

The Bear Market and Depression: How Close to the Bottom?

July 12, 2010

By Elliott Wave International

While many people spend time yearning for the financial markets to turn back up, a rare few have looked back in time to compare historical markets with the current situation -- and then delivered a clear-eyed view of the future informed by knowledge of the past. One who has is Robert Prechter. When he thinks about markets and wave patterns, he goes back to the 1700s, the 1800s, and -- most tellingly for our time now -- the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.

Here is an excerpt from the EWI Independent Investor eBook, which answers the question: How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009

Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.

During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.

With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to justify being bullish. Thus, as part of the crowd, they are still seeking rationalizations for their continued optimism, and one of their best excuses is that everyone else is bearish. This would be reasoning, not rationalization, if it were true.

But is the net reduction in optimism since 2000/2007 in fact enough to indicate a market bottom? For the rest of this issue, we will update the key indicators from Conquer the Crash that so powerfully signaled a historic top in the making. When we are finished, you will know whether or not the market is at bottom.

Economic Results of Major Mood Trends

Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods of prosperity and depression. The top formed in the past decade is the biggest since 1720, yet, as you can see, the decline so far is small compared to the three that preceded it. There is a lot more room to go on the downside.

Stock Market vs. Divident Yield

Figure 2 updates the Dow’s dividend yield. Over the past nine years, it has improved nicely, from 1.3 percent to 3.7 percent, near its level at previous market tops. If companies’ dividends were to stay the same, a 50 percent drop in stock prices from here would bring the Dow’s yield back into the area where it was at the stock market bottoms of 1942, 1949, 1974 and 1982. But of course, dividends will not stay the same.

Companies are cutting dividends and will cut more as the depression deepens. So, the falling stock market is chasing an elusive quarry in the form of an attractive dividend yield. This is a downward spiral that will not end until prices get ahead of dividend cuts and the Dow’s dividend yield goes above that of 1932, which was 17 percent (or until dividends fall so close to zero that the yield is meaningless).

Get the whole story about how much farther we have to go to a bear-market bottom by reading the rest of this article from EWI's Independent Investor eBook. The fastest way to read it AND the six new chapters in EWI's Independent Investor eBook is to become a member of Club EWI.

This article, The Bear Market and Depression: How Close to the Bottom?,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

20 Questions with Robert Prechter: Signs Point to Deflation

June 30, 2010

By Elliott Wave International

The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour. To read the entire conversation, access the 20-page report here.

Jim Puplava: Bob, I want to pick up from last September. Since then we've had several quarters of positive economic growth. Asset classes rose substantially, CPI turned positive, gold has hit a new record, oil is close to $80 a barrel. I guess a lot of our listeners would like to know, have these events altered your views on deflation?

Robert Prechter: No, because we forecasted these events, and we forecasted them at the bottom in March and April of 2009. On February 23 in the Elliott Wave Theorist, I said that we were almost at the bottom; that ideally the S&P should get down in the 600s before turning up; and that the Dow was going to rally from that low up to about 10,000. We put that target out a few days after the low. The main thing we said at the time was that it was going to be only a partial retracement, in other words a bear market rally. By the end of it, we said people would be bullish on the economy, there would be positive economic numbers, investors would think we have made the turn, the Fed would take credit for having saved the financial system, and there would be optimism across the board. All of this has happened. And going into April 2010, few people in the fundamentalist or technical camp were looking for a downturn.

The final thing I said was that Obama's popularity would rise into that peak, and on that one I was wrong. His ratings couldn't even bounce during that period, which I found very surprising. But both Obama and George Bush’s popularity trends followed the real value of stocks, not the inflated dollar price of the stock market, which I find interesting.

As far as inflation and deflation go, we had deflation during the down cycle in 2008. Commodities fell hard, the stock market fell hard and real estate fell hard. But the recovery that we were looking for in the first quarter of 2009 was expected to be a reflationary, and it was. You saw a decline in credit spreads. You saw a rise from the lows in commodity prices and stock prices. All of that is perfectly normal. These are just waves ebbing and flowing. But the long-term trend is still down, and as this cycle matures we are going to see more and more evidence of deflation.

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

This article, 20 Questions with Robert Prechter: Signs Point to Deflation,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

Big Bear Markets: More Than Falling Stock Prices
Many infamous authoritarian regimes emerged during or after big bear markets
June 15, 2010

By Elliott Wave International

Fear and uncertainty that drive a severe bear market are the same emotions which can set the stage for authoritarianism, in most any nation. 

"Bear markets of sufficient size appear to bring about a desire to slaughter groups of successful people. In 1793-1794, radical Frenchmen guillotined countless members of high society. In the 1930s, Stalin slaughtered Ukrainians. In the 1940s, Nazis slaughtered Jews. In the 1970s, Communists in Cambodia and China slaughtered the affluent. In 1998, after their country's financial collapse, Indonesians went on a rampage and slaughtered Chinese merchants." - Bob Prechter, Wave Principle of Human Social Behavior, p. 270

Why do authoritarian tendencies emerge only during bear markets in stocks?

"As society becomes more fearful, many individuals yearn for the safety and order promised by strong, controlling leaders." - The Socionomist, May 2010

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

Bob Prechter's new science of socionomics explains that stock market fluctuations mirror trends in people's collective mood. In simple terms, when the market is buoyant, it indicates positive social mood; the opposite when a bear market takes over.

The fascinating part is that because the stock market and social mood trend closely together, a forecaster can apply Elliott wave analysis to both -- and predict both.

Generally, widespread brutalities and wars do not follow the first phase of a bear market. Extreme violence, when it does occur, often follows the worst part of the market's downturn -- like the end of the Great Depression, a negative social mood period that ultimately ushered in World War II.

But even during the first phase, a negative social mood grows. So, if a forecaster determines correctly where in the wave structure social mood resides, he can make educated forecasts about what will follow in society -- given what has happened before under similar social mood trends.

Authoritarianism is a subject of heated discussions these days, which makes it a timely topic for a socionomic study. The latest, two-part issue of the monthly Socionomist gives you just that: A look at historic trends and specific forecasts for the years ahead.

Learn How to Anticipate and Prepare for Political Conflict and War, Bull Markets and Bear Markets. The 118-page Independent Investor eBook covers a vast array of investment topics and exposes myths that mainstream investors accept as fact. Once you learn the real cause of conflict and war, you might be surprised how the stock market plays a key role in forecasting major social events. Click here to download the 118-page Independent Investor eBook for FREE

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

Deflation: How To Survive It
Important warnings about deflation from Robert Prechter.
June 11, 2010

By Elliott Wave International

Telegraph.go.uk, May 26: "US money supply plunges at 1930s pace... The M3 money supply in the U.S. is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history."

Deflation is suddenly in the news again. It's a good moment to catch up on a few definitions, as well as strategies on how to beat this rare economic condition.

And who better to ask than EWI's president Robert Prechter? He predicted the first wave of deflation in the 2007-2009 "credit crunch" and has written on this topic extensively.

We've put together a great free resource for our Club EWI members: a 63-page "Deflation Survival Guide eBook," Prechter’s most important deflation essays. Enjoy this excerpt -- and for details on how to read the eBook in full free, look below.


What Makes Deflation Likely Today?
Bob Prechter, Deflation Survival Guide, free Club EWI eBook

Following the Great Depression, the Fed and the U.S. government embarked on a program...both of increasing the creation of new money and credit and of fostering the confidence of lenders and borrowers so as to facilitate the expansion of credit. These policies both accommodated and encouraged the expansionary trend of the ’Teens and 1920s, which ended in bust, and the far larger expansionary trend that began in 1932 and which has accelerated over the past half-century. Other governments and central banks have followed similar policies. The International Monetary Fund, the World Bank and similar institutions, funded mostly by the U.S. taxpayer, have extended immense credit around the globe.

Their policies have supported nearly continuous worldwide inflation, particularly over the past thirty years. As a result, the global financial system is gorged with non-self-liquidating credit. Conventional economists excuse and praise this system under the erroneous belief that expanding money and credit promotes economic growth, which is terribly false. It appears to do so for a while, but in the long run, the swollen mass of debt collapses of its own weight, which is deflation, and destroys the economy. A devastated economy, moreover, encourages radical politics, which is even worse.

The value of credit that has been extended worldwide is unprecedented. Worse, most of this debt is the non-self-liquidating type. Much of it comprises loans to governments, investment loans for buying stock and real estate, and loans for everyday consumer items and services, none of which has any production tied to it. Even a lot of corporate debt is non-self-liquidating, since so much of corporate activity these days is related to finance rather than production.

Total credit market debt as a percent of U.S. annual GDP 1915-2002

Figure 11-5 is a stunning picture of the credit expansion of wave V of the 1920s (beginning the year that Congress authorized the Fed), which ended in a bust, and of wave V in the 1980s-1990s, which is even bigger.

...it has been the biggest credit expansion in history by a huge margin. Coextensively, not only is there a threat of deflation, but there is also the threat of the biggest deflation in history by a huge margin. ...

Read the rest of this important 63-page deflation study now, free! Here's what you'll learn:
  • What Triggers the Change to Deflation
  • Why Deflationary Crashes and Depressions Go Together
  • Financial Values Can Disappear
  • Deflation is a Global Story
  • What Makes Deflation Likely Today?
  • How Big a Deflation?
  • Much, Much More

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

Bigger Than A '10% Correction'?
Every Big Bear Grew From a Cub
May 26, 2010

By Elliott Wave International

The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.

If only it were so.

"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes." - The Elliott Wave Theorist, December 2001

There is no way to know in advance whether a particular market downturn will fall 11%, 35% or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.

Read Part One of Robert Prechter's Latest Two-Part, April-May Theorists FREE
The April-May Theorist series entitled "Deadly Bearish Big Picture" reveals a lucid picture for 2010-2016. It's the flipside of Robert Prechter's February
2009 Forecast for a 'Sharp and Scary' Rally. Click here to download the 10-page part one for FREE now.

One thing that is certain -- every bear market reached a 10% drop before prices fell even further.

And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.

On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."

You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."

Two key features of the Elliott Wave Principle is its ability to establish a price target for the current trend, and a time range.

In his latest Elliott Wave Theorist (a two-part April-May issue), Robert Prechter tells why market participants should look far beyond a mere 10%-15% move in the now-unfolding trend.

Read Part One of Robert Prechter's Latest Two-Part, April-May Theorists FREE
The April-May Theorist series entitled "Deadly Bearish Big Picture" reveals a lucid picture for 2010-2016. It's the flipside of Robert Prechter's February
2009 Forecast for a 'Sharp and Scary' Rally. Click here to download the 10-page part one for FREE now.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

The Federal Reserve Does NOT Control the Market
FREE eBook reveals why the Fed is powerless to change the economic course
May 21, 2010

By Elliott Wave International

As the world's leading stock markets continue to play stomach-hockey with investors via one triple-digit turn after another, the mainstream community takes solace in this core belief: No matter how uncertain things become, the Federal Reserve can at any moment swoop in to set the economy right.

In reality -- the Fed has no such power. This is the revelation of Elliott Wave International's newest complimentary resource from Club EWI: the 35-page eBook titled "Understanding the Fed." Including excerpts from the selected works of EWI President Robert Prechter -- including his 2002 book "Conquer the Crash" and several past "Elliott Wave Theorist" publications -- this riveting report exposes once and for all the most dangerous myths about the Federal Reserve.

Chapter 3 (of the 8-chapter anthology) attends to the "Potent Directors Fallacy" -- i.e., the false notion that the central bank is in control of the U.S.'s money, market, and economy -- and offers this "Conquer the Crash" insight:

"For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan's boom ended, its regulators have been using every presumed macroeconomic 'tool' to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks, and government officials were 'wisely managing' South East Asia's boom until it collapsed spectacularly in 1997. In America, the Federal Reserve has lowered its discount rate from 6% to 1.25%, an unprecedented amount in such a short time... What will it do if the economy resumes its contraction; lower rates to zero?"

Note: The underlined sentence above was written in 2002. Today, that forecast has come to fruition after the Fed's rate-slashing campaign since September 2008 has brought rates to the zero level.

Chapter 3 then goes on to explain WHY the Fed's monetary policy failed to lift the hot-air balloon of the economy out of the violent credit and housing downdraft. Here, the eBook writes:

"The Fed's ultimate goal is to influence public borrowing from banks. During economic contractions, banks become fearful. At such times, low Fed-influenced rates cannot overcome creditors' disinclination to lend and/or customers' unwillingness or inability to borrow. Thus, regardless of assertions to the contrary, the Fed's purported 'control' of borrowing, lending, and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree."

Once again, flash ahead to today and the disintegration of optimism and shift toward conservation can be seen in the following data from February 2010:

  • Year-over-year bank credit was (negative) - 6.8% vs. 10% in 2007
  • Loan availability to small businesses plunged to the lowest level since interest rate crisis of 1980, thus drying up a major means of debt repayment.
  • The number of banks tightening their lending standards has soared, while consumer credit and tax revenue is plunging.
  • And, residential and commercial mortgages are plunging, as more and more home/business owners are walking away from their leases.

In Bob Prechter's own words: Once you can assimilate the truths contained in this eBook, "you will have knowledge of the banking system that one person in 10,000 has."

Do you want to really understand the Fed? Then keep reading this free eBook, "Understanding the Fed", as soon as you become a free member of Club EWI.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Signs of Deflation You Might Not be Able to See Clearly

May 14, 2010

By Editorial Staff, Elliott Wave International

The following market analysis is courtesy of Bob Prechter's Elliott Wave International. Elliott Wave International is currently offering Bob's recent Elliott Wave Theorist, free.

Continuing—and Looming—Deflationary Forces
The Fed and the government quite effectively advertise their efforts to inflate the supply of money and credit. But deflationary forces, to most eyes, are invisible. I thought I would point some of them out.

1. Banks Are about 95 Percent Invested in Mortgages

Treasury Holdings As a Percentage of U.S. Chartered Bank Assets

Figure 4, courtesy of Bianco Research, shows that U.S. banks used to be fairly conservative, holding 40 percent of their assets in Treasury securities. This large investment in federal government debt, the basis of our “monetary” “system”, served as a stop-gap against deflation. In 1950, even if mortgages had been wiped out by a factor of 80 percent, banks still would have been 50% solvent and 40% liquid. Today, banks hold federal agency securities (backed mostly by mortgages), mortgage-backed securities (meaning complicated packages of mortgages), plain old mortgages that they financed themselves, and a few business loan contracts. If these mortgages become wiped out by a factor of 80 percent, which in turn would cause many of the business loans to go into default, the banks will be only about 22% solvent and 1% liquid. I believe the coming wipeout will be bigger than that, but let’s be conservative for now. The point is that, unlike Treasuries, IOUs with homes as collateral can fall in dollar value, and such IOUs are pretty much the only paper backing U.S. bank deposits. The potential for deflation here is tremendous.

2. More Mortgages Are Going Under

It has been well publicized recently that commercial real estate has been plunging in value as business tenants walk away from their leases, leaving properties empty. Zisler Capital Partners reports, “Returns were negative for the past five quarters, the longest streak since 1992. Property prices have fallen by 30 percent to 50 percent from their peaks. Much of the debt is likely worth about 50 percent of par, or less.” (Bloomberg, 11/11) Needless to say, the fact that commercial mortgages are plunging in value is stressing banks even further, which in turn restricts their lending. This trend is deflationary.

3. People Are Walking away from Their Homes and Mortgages

Great numbers of people are ceasing to pay their mortgages, even if they have the money to pay them. When people walk away from their mortgages, they are reneging on a promise to pay the interest on the loan. … Refusal to pay interest is deflationary. When banks can’t collect fully on their loan principal, as is the case by law in the above-named states, it is deflationary. Even in states where banks can go after other assets held by borrowers, default is still deflationary if the borrowers are broke. The reason is that, in all these cases, the value of the loan contract falls to the marketable value of the collateral, and a contraction in the value of debt is deflation.

Some people who walk away from their mortgages purposely damage the homes when they leave. New businesses have sprung up to take on the job of cleaning up the houses that former occupants trashed as they left. Angry defaulters are stripping coils out of stoves, pulling electrical wiring out of walls, ripping fixtures out of bathrooms, yanking seats off of toilets, punching holes in walls and leaving rotting food in the fridge. (AP, 8/9) Such actions, and the threat of more such actions, lower the value of the collateral behind mortgage debts, thereby lowering the value of mortgages, which is deflationary.

4. Bank Lending Standards Have Stayed Restrictive

Federal Reserve Survey of Credit Standards

As people default on mortgages, banks are tightening lending standards. Figure 7 shows that banks loosened credit standards from late 2003 through the summer of 2007. By the end of that time, you could borrow money if you were breathing and could operate a ball-point pen. Banks have been tightening credit standards ever since. The rate of tightening peaked in October 2008, but the graph shows that over the past year various banks have either left their new, tighter standards in place or continued to tighten their standards further. Across the board, it is harder to get a loan, and it’s staying that way. Lending restrictions reduce the credit supply. This condition is deflationary.

5. Banks Are Cashing Out of the Credit-Card Business

Total Consumer Credit (Annual Rate Change)

Articles have revealed that banks are doing everything they can to get credit-card debtors to pay off their cards. They are raising penalties and rates, lowering ceilings and otherwise bugging their clients to pay up, one way or another: Transfer your debt to another bank’s card; default; pay us off; we don’t care which. And it’s working. Through September, consumers have paid down credit card balances for 12 months in a row. Figure 8 shows the new trend. The credit-card business was another formerly humming engine of credit that is sputtering. You might call the new program “cash from clunkers,” and it is deflationary.

For more information from Robert Prechter, download a FREE 10-page issue of The Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You'll find out why the worst is NOT over and what you can do to safeguard your financial future.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Why Economic Forecasts Often Fail
Linear thinking often utterly misses the mark in financial forecasting.
April 13, 2010

By Elliott Wave International

Let's begin with a paradox: The one constant in our society is dramatic change. This is the main reason why projecting present conditions into the future often fails.

"If someone had asked you in 1972 to project the future of China, would anyone have said, in a single generation, they will be more productive than the United States and be a highly capitalist country?

"Project the U.S. space program in 1969, in fact many people did -- there are plenty of papers you can read from 1969 to 1970 saying, well, it's obvious at this pace we'll both have colonies on the Moon very soon and we'll have men on Mars...

"One could just as well ask someone to project, say, the Roman stock market in 100 A.D. I doubt if you'd have found anyone who said, well, it's essentially going to go to zero."

-- Robert Prechter at the London School of Economics, lecture "Toward a New Science of Social Prediction."

Examples of linear thinking may be well-known like the ones above, or they may happen in our individual spheres. Mom sees Johnny eating animal crackers Monday, Tuesday and Wednesday. The box is now empty. She buys more -- but the box remains unopened for days. Johnny wants a break from animal crackers. It's an elementary example, but a demonstration of linear thinking nonetheless.

Remove dangerous linear thinking from your investment process -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

The socially awkward classmate you knew in high school is now the boss of the former class president who was dubbed "most likely to succeed." Projections for both of their futures would have widely missed the mark.

SUVs are selling like snow cones on an August afternoon in Luckenbach, Texas... "let's make more," says Detroit. "Dramatic change" takes over in the form of sky-high gas prices followed by a recession and a social distaste for excess -- and SUV sales sink.

Point is: When it comes to your money, pay attention to the pitfalls of linear thinking.

The markets of today may not resemble the markets of tomorrow.

Keep in mind the concept of dramatic change. This cannot be over-emphasized and bears repeating: Major change is not an occasional occurrence throughout history; paradoxically, it's the only constant.

Even with the benefit of reviewing the above examples, it can be difficult to imagine, ahead of time, a future which is strikingly different from the present. But you must leave your mind open to such a possibility -- nay, probability.

Elliott Wave International believes the stock market in the immediate years ahead will probably show big price changes. The foundation for that forecast is the Elliott Wave Principle, which is based on decades of market observation and proven mathematical patterns -- not linear projections.

"...Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress."
-- Frost and Prechter, The Elliott Wave Principle

What is the magnitude of the next market period likely to be?

You may be astonished to find out if you've been thinking "linearly" up until now.

Remove dangerous linear thinking from your investment process -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

This article was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

 

 

 

Bob Prechter Reveals the Most Dangerous Gold & Silver Myths
A FREE report keeps you on the right side of precious metals
March 23, 2010

By Nico Isaac

Right now, the gold BULL-ion bandwagon is more crowded than a New York subway train during rush hour. But before you squeeze your way into the crowd of passengers, you should know one thing: Those steering the course are using outdated maps based on ill-conceived notions and illusory hopes.

Where can you get better information about gold and silver? Take a look at the latest FREE resource from Club EWI, the Gold and Silver eBook. This riveting, 40-page eBook pools the recent and archived writings on the precious metals by EWI president Bob Prechter himself. The result is a comprehensive collection that spans the last four decades of gold and silver history to expose the most dangerous market myths. Off the top is this familiar bit of "wisdom" from the school of Alan Greenspan:

It is impossible to foresee the end of major trends in precious metals

BEFORE they occur. Hindsight is foresight.

NOT SO, says Prechter. Since gold and silver established their all-time record peaks in 1979-80, he has stayed one step ahead of the metals' history-making turns. Here, Chapters 2 and 3 of the Gold & Silver eBook offer up the following excerpts from Bob's earliest writings:

Silver

  • November 18, 1979, Elliott Wave Theorist (EWT): With silver prices hovering near $20/ounce, Bob wrote: “If my wave count is valid, silver can be expected to drop back down to between $4 and $6, $3.20-$3.49 some time in the next decade.”

What actually happened: From there, silver prices embarked on a 13-year bear market that saw prices plunge into the $3.50-per-ounce area.

  • March 26, 1993, EWT: “Silver is approaching a major bottom" of its decades-plus long downtrend.

What actually happened: Silver found its low in 1993.

Gold

  • December 9, 1979, EWT: "After 13 years of rise, Elliott counts now suggest an important top is near in gold. The downside target is at least $282.50."

What actually happened: While the price projection for gold's peak was far off the mark (the Theorist cited the upper $480/ounce range), the time target of early 1980 was met with accuracy. From its 1980 peak, gold prices plummeted nearly 70% before hitting bottom in 2001.

  • At the Crest of the Tidal Wave, 1995: “One attractive termination date for the gold bottom is New Year’s Day of 2001 (plus/minus a month). That way, it will have lasted a ... a lean 21 years from the 1980 peak."

What actually happened: Gold registered its low at $255 on February 20, 2001.

Now that we can see that it is possible to benefit from foresight about the end of major trends in precious metals, what about these other popular notions --

  • Gold always goes up in recession and depressions.
  • Gold always performs better than stocks in economic downturns.
  • Gold and Silver are just beginning (as in the year 2010) their biggest bull market runs ever.

Download Robert Prechter's FREE 40-Page Gold and Silver eBook. Is gold a simple buy-and-hold at today's prices? The independent insights in this valuable ebook deliver Prechter's complete analysis and help you decide how to – and how not to – incorporate gold and silver successfully into your own investment strategy. Learn more, and download your Gold and Silver eBook here.


Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

 

 

 

 

Learn Elliott Wave Analysis -- Free
Often, basics is all you need to know.
March 5, 2010

By Editorial Staff

Understand the basics of the subject matter, break it down to its smallest parts -- and you've laid a good foundation for proper application of... well, anything, really. That's what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter's classic "Elliott Wave Principle -- Key to Market Behavior." Here's an excerpt:

Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. ...the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.

These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.

As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.

The following discussions relate to an underlying bull market... These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

Idealized Elliott Wave Pattern 

1) First waves -- ...about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced. ...

Read the rest of this 10-lesson Basic Elliott Wave Tutorial online now, free! Here's what you'll learn:
  • What the basic Elliott wave progression looks like
  • Difference between impulsive and corrective waves
  • How to estimate the length of waves
  • How Fibonacci numbers fit into wave analysis
  • Practical application tips for the method
  • More

Keep reading this free tutorial today.


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

 

 

 

What Does NOT Move Markets? Examining 8 Claims of Market Efficiency
March 2, 2010

By Susan Walker

If everyone says that shocks from outside the financial system -- so-called exogenous shocks -- can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what's missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter's February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

* * * * *

Excerpted from Prechter's February 2010 Elliott Wave Theorist, published Feb. 19, 2010                            

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

* * *

In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it's important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.

 

 

 

Surviving Deflation: First, Understand It
Deflation is more than just "falling prices." Robert Prechter explains why.
February 26, 2010

By Editorial Staff

The following article is an excerpt from Elliott Wave International's free Club EWI resource, "The Guide to Understanding Deflation. Robert Prechter's Most Important Writings on Deflation."

The Primary Precondition of Deflation
Deflation requires a precondition: a major societal buildup in the extension of credit. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way: "In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following: (a) All were set off by a deflation of excess credit. This was the one factor in common."

"The Fed Will Stop Deflation"
I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars -- at best -- returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit-production plants all over the country, called Federal Reserve Banks. To everyone’s delight, these banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so they lower the price to one percent. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory -- ironically now made fact -- the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the banks begin giving credit away, at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if it’s free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts, so many bonds deteriorate to worthlessness. The value of credit -- at best -- returns to the level it was before the program began.

Jaguars, anyone?

Read the rest of this important 63-page deflation study now, free! Here's what you'll learn:

What Triggers the Change to Deflation
Why Deflationary Crashes and Depressions Go Together
Financial Values Can Disappear
Deflation is a Global Story
What Makes Deflation Likely Today?
How Big a Deflation?
More


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

 

 

 

Use Bar Chart Patterns To Spot Trade Setups
How a 3-in-1 chart formation in cotton foresaw the January selloff
February 26, 2010

By Nico Isaac

For Elliott Wave International's chief commodity analyst Jeffrey Kennedy, the single most important thing for a trader to have is STYLE-- and no, we're not talking business casual versus sporty chic. Trading "style," as in any of the following: top/bottom picker, strictly technical, cyclical, or pattern watcher.

Jeffrey himself is, and always has been, a "trend" trader; meaning: he uses the Wave Principle as his primary tool, along with a few secondary means of select technical studies. Such as: Bar Patterns. And, of all of those, Jeffrey counts one bar pattern in particular as his absolute, all-time favorite: the 3-in-1.

Here's the gist: The 3-in-1 bar pattern occurs when the price range of the fourth bar (named, the "set-up" bar) engulfs the highs and lows of the preceding three bars. When prices move above the high or below the low of the set-up bar, it often signals the resumption of the larger trend. The point where this breach occurs is called the "trigger bar." On this, the following diagram offers a clear illustration:

For a real-world example of the 3-1 formation in the recent history of a major commodity market, take a look at this close-up of Cotton from Jeffrey Kennedy's February 5, 2010, Daily Futures Junctures.

As you can see, a classic 3-in-1 bar pattern emerged in Cotton at the very start of the new year. Then, within days of January, the trigger bar closed below the low of the set-up bar, signaling the market's return to the downside. Immediately after, cotton prices plunged in a powerful selloff to four-month lows.

Then February arrived and with it, the end of cotton's decline. In the same chart, you can see how Jeffrey used the Wave Principle to calculate a potential downside target for the market at 66.33. This area marked the point where Wave (5) equaled wave (1), a common relationship. Since then, a winning streak in cotton has carried prices to new contract highs.

What this example tells you is that by tag-teaming the Wave Principle with Bar Patterns, you can have a higher objective chance of pinning the volatile markets to the ground.

To learn more, read Jeffrey Kennedy's exclusive, free 15-page report titled "How To Use Bar Patterns To Spot Trade Set-ups," where he shows you 6 bar patterns, his personal favorites.

 


Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

 

 

 

More Credit Default Swaps Means Trouble for European Debt
February 25, 2010

By Editorial Staff

Government debt is no longer just a problem for emerging countries. Portugal, Spain, France and Greece (as we have seen in recent weeks) are living in fear of credit default. Consequently, the value of their credit default swaps is skyrocketing.

The following is an excerpt from the February issue of Global Market Perspective. For a limited time, you can visit Elliott Wave International to download the rest of the 100+ page issue free.

High levels of global debt are both financially debilitating and deflationary because they commit scarce cash to servicing interest payments. Up until now, most sovereign credit defaults occurred in emerging-market countries, such as Argentina and Russia. The deflationary tide, however, is starting to lap up against more developed Eurozone economies.

The chart shows the value of credit default swaps -- an instrument similar to an insurance contract that pays holders (if they are lucky) in the event of default -- for Greece, Portugal, Spain and France. In recent weeks these contracts have soared, with credit-default swaps on Greece’s and Portugal’s debt already surpassing the January-March 2009 extremes established in the latter part of Primary degree 1 down.

Government Debt Troubles

Obviously, the market is growing more skeptical that Greece can pay its debts, so the cost of protecting against default is rising fast. Greece’s budget deficit is 12.7% of gross domestic product, and Portugal faces a budget shortfall that’s more than twice the European Union’s limit. Traders are now buying default protection on sovereign debt at a rate of more than five times that of specific company bonds. “Greece’s neighbors would ‘step in’ to prevent a debt default to avoid ‘a problem for the whole of Europe,’” a Tokyo-based bondsalesman says. Maybe so, but who will step in to bail out Portugal, Spain, the next sovereign default or the one thereafter?

The world is running out of money to service its mounting debts, and this chart simply depicts the front edge of the next great wave of credit contraction, which will sweep into more established countries throughout Europe and eventually to the United States.

Read the rest of this issue now free! You'll get 100+ pages of insights about:

 

  • World Stock Markets
  • Global Interest Rates
  • International Currency Relationships
  • Metals and Energy
  • Social Trends and Observations
  • More

Visit Elliott Wave International to download your free 100+ page issue.


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

 

 

 

Same Day. Same Event. Same Market. Different Story!
"There is no group more subjective than conventional analysts." -- Robert Prechter.
February 23, 2010

By Vadim Pokhlebkin

Elliott wavers sometimes hear the criticism that patterns in market charts can be "open to interpretation." For example, what looks like a finished 1-2-3 correction to one analyst, another analyst may interpret as 1-2-3 of a developing impulse, with waves 4 and 5 on the way.

Does this happen? Absolutely. (Although, there are always tools an Elliottician can employ to firm up the wave count.) But here's the real question: What's the alternative?
Typical alternatives amount to analysis of the "fundamentals": Jobs, interest rates, CPI, PPI, what Ben Bernanke said on Tuesday -- it all goes into the pot. Result? Well, if you think it's clear and unambiguous, guess again. Here's a fresh example.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

On the evening of February 18, in a surprise move, the Federal Reserve raised its discount rate -- the interest rate at which it lends money to banks. The next morning the S&P futures were pointing lower; everyone was bracing for a weak day -- because, as conventional thinking goes, higher interest rates are bad for business, the economy, and ultimately for the stock market. Friday morning, stocks indeed opened lower and major news headlines confirmed: 

  • Wall St opens weaker after Fed move
  • ... Investors Wary After Fed Move
  • Stocks Open Lower After Surprise Fed Move

But around 11am that same morning, the DJIA turned around and moved higher. Now look at what the headlines from major sources were saying after lunch on February 19:

  • US stocks bounce back; Fed move viewed in positive light
  • US Stocks Up A Bit On Fed Discount Rate Increase
  • Stocks Higher After Fed Move

What was a "bearish move" by the Fed in the morning morphed into a "bullish" one by the afternoon! Same event. Same market. Same day. Completely opposite interpretation!

This brings to mind the answer EWI's President Robert Prechter once gave when asked about the objectivity of Elliott wave analysis. Bob said:

"I always ask, 'compared to what?' There is no group more subjective than conventional analysts who look at the same 'fundamental' news event -- a war, the level of interest rates, the P/E ratio, GDP reports, you name it -- and come up with countless opposing conclusions. They generally don’t even bother to study the data. Show me a forecasting method that is totally objective or contains no human interpretation. There is no such thing, even in a black box. To answer your question more specifically, though, properly there should be no subjectivity in interpreting Elliott waves patterns. There is a set of rules and guidelines for that interpretation. Interpretation gives you only the most probable scenario(s), not a sure one. But people mislabel probabilistic forecasting as subjectivity. And subjectivity or bias can ruin that value, just as in any other approach. Sometimes we screw up. But in contrast to the outrageously improbable (if not downright false) wave interpretations or other types of forecasts we often see from others, we are as close to an objective service as you’re going to find. We hire analysts who know the rules of Elliott cold."

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.


Vadim Pokhlebkin joined Robert Prechter's Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor's in Business from Bryan College, where he got his first introduction to the ideas of free market and investors' irrational collective behavior. Vadim's articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people's collective investment decisions.

 

 

 

What Chinese Malls Tell Us about the Economic Reality
February 22, 2010

By Editorial Staff

Investor expectations are decidely bullish right now, and many people expect an economic turnaround this year. What do the underlying economic conditions suggest? The Chinese mall "The Place" demonstrates the contrast between investor hope and economic reality.

The following is an excerpt from the February issue of Global Market Perspective. For a limited time, you can visit Elliott Wave International to download the rest of the 100+ page issue free.

Bullish expectations (shown by the top three panels) may not be quite as extreme as they were in 2007, but adjusted for underlying economic conditions (bottom panels), the current psychology probably ranks right up there with the most complacent outlook in history. The charts of housing, consumer credit and unemployment show the systemically sluggish state of the economy. We know that fundamentals always lag psychological trends, but the lag is generally only a matter of months. It’s been nearly 11 months since the outset of the Primary wave 2 rally; by these critical economic measures the rebound is barely registering.The wide disparity between the hope of investor expectations and the reality of economic strength shows that the great bear market -- already ten years old -- remains in its early stages. As the next legdown matures, hope will turn to despair, and it will become impossible to ignore the persistence of the economic contraction.

Hope Versus Reality

The same chasm between fundamental performance and stock market expectations is visible in other parts of the world. In China, for instance, ground reports reveal how out-of-whack financial
expectations are with street-level demand. A blog called The Peking Duck described Beijing’s “stunningly dysfunctional, catastrophic mall, The Place. Fifty percent of the eateries in the basement were boarded up. The cheap food court, too, was gone, covered up with ugly blue boarding, making the basement especially grim and dreary. There is simply too much stuff, too many stores and no buyers.” The world’s largest mall in southern China is completely empty. Most investors do not see past the performance of the Shenzhen or Shanghai stock indexes, just as most of the buying and selling of U.S. stock indexes remains detached from the real economy. We see lots of hope but no change in the reality.

Read the rest of this issue now free! You'll get 100+ pages of insights about:
  • World Stock Markets
  • Global Interest Rates
  • International Currency Relationships
  • Metals and Energy
  • Social Trends and Observations
  • More

Visit Elliott Wave International to download your free 100+ page issue.


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

 

 

 

How Elliott Wave Principle Can Improve Your Trading
The Wave Principle identifies trend, countertrend, maturity of a trend -- and more.
February 19, 2010

By Editorial Staff

The following article is an excerpt from Elliott Wave International's Trader's Classroom Collection.

Every trader, every analyst and every technician has favorite techniques to use when trading. But where traditional technical studies fall short, the Wave Principle kicks in to show high probability price targets and, just as importantly, how to distinguish high probability trade setups from the ones that traders should ignore.

Where Technical Studies Fall Short
There are three categories of technical studies: trend-following indicators, oscillators and sentiment indicators. Trend-following indicators include moving averages, Moving Average Convergence-Divergence (MACD) and Directional Movement Index (ADX). A few of the more popular oscillators many traders use today are Stochastics, Rate-of-Change and the Commodity Channel Index (CCI). Sentiment indicators include Put-Call ratios and Commitment of Traders report data.

Technical studies like these do a good job of illuminating the way for traders, yet they each fall short for one major reason: they limit the scope of a trader’s understanding of current price action and how it relates to the overall picture of a market. For example, let’s say the MACD reading in XYZ stock is positive, indicating the trend is up. That’s useful information, but wouldn’t it be more useful if it could also help to answer these questions: Is this a new trend or an old trend? If the trend is up, how far will it go? Most technical studies simply don’t reveal pertinent information such as the maturity of a trend and a definable price target -- but the Wave Principle does.

How Does the Wave Principle Improve Trading?
Here are five ways the Wave Principle improves trading:

1. Identifies Trend – The Wave Principle identifies the direction of the dominant trend. A five-wave advance identifies the overall trend as up. Conversely, a five-wave decline determines that the larger trend is down. Why is this information important? Because it is easier to trade in the direction of the overriding trend, since it is the path of least resistance and undoubtedly explains the saying, “the trend is your friend.” Simply put, the probability of a successful commodity trade is much greater if a trader is long Soybeans when the other grains are rallying.

2. Identifies Countertrend – The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective response to the preceding impulse wave. Knowing that a recent move in price is merely a correction within a larger trending market is especially important for traders, because corrections are opportunities for traders to position themselves in the direction of the larger trend of a market.

3. Determines Maturity of a Trend – As Elliott observed, wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal, as illustrated in Figure 1. Wave (1) subdivides into five small waves, yet is part of a larger five-wave pattern. How is this information useful? It helps traders recognize the maturity of a trend. If prices are advancing in wave 5 of a five-wave advance for example, and wave 5 has already completed three or four smaller waves, a trader knows this is not the time to add long positions. Instead, it may be time to take profits or at least to raise protective stops.

Since the Wave Principle identifies trend, countertrend, and the maturity of a trend, it’s no surprise that the Wave Principle also signals the return of the dominant trend. Once a countertrend move unfolds in three waves (A-B-C), this structure can signal the point where the dominant trend has resumed, namely, once price action exceeds the extreme of wave B. Knowing precisely when a trend has resumed brings an added benefit: It increases the probability of a successful trade, which is further enhanced when accompanied by traditional technical studies.

Read the rest of this 5-page Trader's Classroom Collection lesson now, free! Learn more here.

Here's what you'll learn:

  • How the Wave Principle provides you with price targets
  • How it gives you specific "points of ruin": At what point does a trade fail?
  • What specific trading opportunities the Wave Principle offers you
  • How to use the Wave Principle to set protective stops 
  • Keep reading this free lesson now.

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

 

 

 

Europe's Return to Risky Investment
February 19, 2010

By Editorial Staff

Over 100 banks are opening soon, buying junk bonds is gaining popularity and emerging markets are the trendy investment. Sound familiar? Europe appears to be returning to some bad investment habits. 

The following is an excerpt from the February issue of Global Market Perspective. For a limited time, you can visit Elliott Wave International to download the rest of the 100+ page issue free.

Just as in 2007, huge bullishness in concert with no fear is cropping up. Central and Eastern European (CEE) debt markets, for example, are clearly back on investors’ radar. UniCredit of Italy plans to open 100 banks across the region, while Erste Bank of Austria is preparing 70 more in Romania. Raiffeisen International, also of Austria, is getting ready to launch an internet-based banking system to serve the region as well.

Likewise, the European junk bond market, which effectively died after the financial crisis, has bounced back to life along with the rally. At 70%, total returns on western European junk bonds were more than double those on the FTSE All Share Index in 2009. Moreover, the trend is accelerating. The week of January 11 was the second largest week ever seen in European junk bonds, according to the Financial Times, as companies sold $11.7 billion worth of high-yield debt. Predictably, bankers are ramping up their expectations for 2010. Experts forecast about €50 billion in new issuance in the coming year, a number that nearly doubles what the market has produced in its best years. Says one portfolio manager discussing the market: A “virtuous-circle effect” will take place in 2010. “There was a time when German companies, for example, would think it was a social insult to be a junk bond, but now you are seeing [them] use the market as a mainstream tool for financing."

That’s on the corporate side. On the sovereign side, shaky debtors and giddy investors are also fully recommitted. For the first time ever, Moody’s upgraded JP Morgan’s Emerging Market Sovereign Bond Index from “junk” to “investment grade.” January’s upgrade occurred in spite of the sovereign default risk growing in countries like Greece, Spain, and Italy (see Secondary Markets), but that’s not stopping yield-starved investors from buying.

Barings Asset Management and HSBC are reportedly increasing their exposure to emerging markets. So is bond giant, Pimco, which calls emerging-market debt an “asset class on the upward path.” Its portrayal, however, merely describes the last 10 months of market action. The index shown on the previous page tracks emerging-market bond yields in their local currency. Just like trader sentiment numbers, yields are firmly back to pre-crisis levels. But extrapolating the last 10 months forward may be one of the most dangerous bets around. When the financial community recklessly returns to play with the loaded firearms from the prior mania, it’s a tell that a bear-market rally is ending. Most will again shoot themselves in the foot.

Read the rest of this issue now free! You'll get 100+ pages of insights about:

  • World Stock Markets
  • Global Interest Rates
  • International Currency Relationships
  • Metals and Energy
  • Social Trends and Observations
  • More

Visit Elliott Wave International to download your free 100+ page issue.


Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

 

 

 

Bob Prechter Points Out The Many Signs Of Deflation
Yes, You Heard Us Right
February 18, 2010

By Nico Isaac

Everywhere you look, the mainstream financial experts are pinning on their "WIN 2" buttons in a show of solidarity against what they see as the number one threat to the U.S. economy: Whip Inflation Now.

There's just one problem: They're primed to fight the wrong enemy. Fact is, despite ten rate cuts by the Federal Reserve Board to record low levels plus $13 trillion (and counting) in government bailout money over the past three years -- the Demand For and Availability Of credit is plunging. Without a borrower or lender, the massive supply of debt LOSES value, bringing down every exposed investment like one long, toppling row of dominoes.

This is the condition known as Deflation.

And, in a special, expanded November 19, 2009 Elliott Wave Theorist, Bob Prechter uncovered more than a dozen "value depreciating" developments underway in the U.S. economy as the two main engines of credit expansion sputter: Banks and Consumers. Off the top of the Theorist's watch list are these "Continuing and Looming Deflationary Forces":

  • A riveting chart of Treasury Holdings as a Percentage of US Chartered Bank Assets since 1952 shows how "safe" bank deposits really are. In short: today's banks are about 95% invested in mortgages via the purchase of federal agency securities. Unlike Treasuries, IOU's with homes as collateral have "tremendous potential" to fall in dollar value.
  • Loan Availability to Small Businesses has fallen to the lowest level since the interest rate crises of 1980. In Bob Prechter's own words: "The means of debt repayment [via business growth] are evaporating, which implies further deflationary pressure within the banking system."
  • An all-inclusive close-up of the Number Of Banks Tightening Their Lending Standards since 1997 has this message to impart: Since peaking in October 2008, lending restrictions have soared, thereby significantly reducing the overall credit supply.
  • Both residential and commercial mortgages are plummeting as home/business owners walk away from their leases at an increasing rate.
  • The major sources of bank revenue -- consumer credit and state taxes -- are plunging as more people opt to pay DOWN their debt. Also, a compelling chart of leveraged buyouts since 1995 shows a third catalyst for the credit binge -- private equity -- on the decline.

All that is just the beginning. The November 2009 Elliott Wave Theorist includes 13 pages of commentary, riveting charts, and unparalleled insight that make it impossible to ignore the deflationary shift underway in the financial landscape. For that reason, we have compiled the most timely insights from the entire, two-part Theorist in a special article for Club EWI members. In our opinion, this bundle of exclusive Theorist excerpts are "the most important investment report you'll read in 2010."

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.


Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

 

 

 

11 Commonplace Market Views: True or Myth?
February 17, 2010

By Susan C. Walker

"Cash on the sidelines is bullish for stocks." Have you ever heard some stock market pundit utter these words? Have you ever wondered if the statement were true? Read this item from the latest issue of The Elliott Wave Financial Forecast, and you'll wonder no more:

Myth -- Cash on the sidelines is bullish for stocks. This refrain rang like a gong all the way through the declines of 2000-2002 and 2007-2009. In February 2000, when mutual fund cash hit 4.2% (compared to 3.8% in November), The Elliott Wave Financial Forecast issued its “cash is king” advice. Once again, the word on the street is that there is way too much “cash on the sidelines” for stocks to fall precipitously. This chart shows net cash available to investors plotted beneath the DJIA. In December 2007, available net cash expanded to a new high, besting all extremes since at least 1992, a 15-year time span. Despite the presence of this mountain of cash, the DJIA lost more than half its entire value over the next 15 months. Indeed, as the chart shows, cash remained high right as the stock market entered the most intense part of the crash in 2008. Available cash does correlate with the market’s moves, but the market is in charge, not the cash.
--The Elliott Wave Financial Forecast, Jan. 29, 2010

Crashing Through The Cash 

Now take a look at these 10 statements and decide if they are true:

  1. Earnings drive stock prices.
  2. Small stocks are the place to be.
  3. Worry about inflation rather than deflation.
  4. It's enough to simply beat the market.
  5. To do well investing, you have to diversify.
  6. The FDIC can protect depositors.
  7. It's bullish when the market ignores bad news.
  8. Bubbles can unwind slowly.
  9. People can make money speculating.
  10. News and events drive the markets.

Bob Prechter and our other analysts have debunked each of these statements as a market myth. You can discover how we exposed these ideas as myths, and in turn make more informed decisions about your investing.

We've gathered the writings that expose these 10 statements as market myths in our 33-page eBook, called Market Myths Exposed. They come from two of our premier publications, The Elliott Wave Theorist and The Elliott Wave Financial Forecast, as well as two of our books, Prechter's Perspective and The Wave Principle of Human Social Behavior.

Get Market Myths Exposed for FREE
The 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. You will uncover important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, investment bubbles, inflation and deflation, small stocks, speculation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.


Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.

 

 

 

Robert Prechter on Herding and Markets' "Irony and Paradox"
To anyone new to socionomics, the stock market is saturated with paradox.
February 11, 2010

By Editorial Staff

The following is an excerpt from a classic issue of Robert Prechter's Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the rest of the 10-page issue free.

Market Herding
Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

Irony and Paradox
To anyone not versed in socionomics, everything the stock market does is saturated with paradox.

— When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.

— When long-term bonds yielded 15 percent in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99 percent bulls, just before prices started to fall.

— When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78 percent.

— In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. A new study... shows that as of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.

— Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.

And so on. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary and has consequences in social action, so we never have to wrestle with paradox. This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong.

To succeed in the market, you must learn initially to embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense...


Read the rest of this classic Elliott Wave Theorist issue now, free! You’ll get 10 pages of Bob Prechter's unique insights on:

  • Why Finance and Macroeconomics Are Not Subsets of Economics
  • How Correct Are Economists Who Forecast Macroeconomic Trends?
  • The “Beat the Market” Fallacy
  • Stock-Picking Geniuses or Just a Bull Market?
  • Index Funds and Diversification
  • Market Confidence vs. Certainty
  • Observations on Corporate Earnings
  • Why Being a Bear Doesn't Equal "Doom & Gloom"
  • More

Visit Elliott Wave International to download your free 10-page issue.