Jun 20

How to Set Protective Stops for Trades

How to Set Protective Stops Using the Wave Principle

The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals

The 3 simple rules of Elliott wave analysis can help traders manage risk, ride market trends and spot price reversals.

EWI’s Chief Commodities Analyst Jeffrey Kennedy values the Wave Principle not only as an analytical tool, but also as a real-time trading tool. In this excerpt from Jeffrey’s free Best of Trader’s Classroom eBook, he shows you how the Wave Principle’s built-in rules can help you set your protective stops when trading.


Over the years that I’ve worked with Elliott wave analysis, I’ve learned that you can glean much of the information you require as a trader – such as where to place protective or trailing stops – from the three cardinal rules of the Wave Principle:

1. Wave two can never retrace more than 100% of wave one.
2. Wave four may never end in the price territory of wave one.
3. Wave three may never be the shortest impulse wave of waves one, three and five.

Let’s begin with rule No. 1: Wave two will never retrace more than 100% of wave one. In Figure 4-1, we have a five wave advance followed by a three-wave decline, which we will call waves (1) and (2). An important thing to remember about second waves is that they usually retrace more than half of wave one, most often making a .618 Fibonacci retracement of wave one. So in anticipation of a third-wave rally – which is where prices normally travel the farthest in the shortest amount of time – you should look to buy at or near the .618 retracement of wave one.

Where to place the stop: Once a long position is initiated, a protective stop can be placed one tick below the origin of wave (1). If wave two retraces more than 100% of wave one, the move can no longer be labeled wave two.

Now let’s examine rule No. 2: Wave four will never end in the price territory of wave one. This rule is useful because it can help you set protective stops in anticipation of catching a fifth-wave move to new highs. The most common Fibonacci retracement for fourth waves is .382 retracement of wave three.

Where to place the stop: As shown in Figure 4-2, the protective stop should go one tick below the extreme of wave (1). Something is wrong with the wave count if what you have labeled as wave four heads into the price territory of wave one. 

And, finally, rule No. 3: Wave three will never be the shortest impulse wave of waves one, three and five. Typically, wave three is the wave that travels the farthest in an impulse wave or five-wave move, but not always. In certain situations (such as within a Diagonal Triangle), wave one travels farther than wave three.

Where to place the stop: When this happens, you consider a short position with a protective stop one tick above the point where wave (5) becomes longer than wave (3) (see Figure 4-3). Why? If you have labeled price action correctly, wave five will not surpass wave three in length; when wave three is already shorter than wave one, it cannot also be shorter than wave five. So if wave five does cover more distance in terms of price than wave three – thus breaking Elliott’s third cardinal rule – then it’s time to re-think your wave count.

The Best of Trader’s Classroom presents the 14 most critical lessons that every trader should know. You can download the entire 45-page eBook with a free Club EWI Membership. Download the free Best of Trader’s Classroom now.

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Jun 15

DOW Below 12000 After 6 Weeks of Decline

Posted in Stock Market

Housing double was officially announced last month. Now stocks, commodities, currencies are declining as well. The economic environment and unparalled optimism in various markets are in line with a major top. Is the deflationary crash starting it’s next leg down? What is causing the stock market decline?

Before blaming falling stocks on the most recent weak economic reports, let’s check some dates

As of June 10, the Dow has suffered the “longest losing streak since the fall of 2002. The market’s last seven-week stretch of losses began in May 2001, as the dot-com bubble deflated,” reports The Associated Press.
As for why stocks are falling, most observers agree: Blame “weaker hiring, industrial output, and a moribund housing market.” The economic reports from the past two weeks made that clear.

But wait a minute. The DJIA didn’t top in the past two weeks — it topped on April 29. At the time:

  • U.S. unemployment benefit applications had been trending down/flattening. In fact, “The unemployment rate fell last month in more than 80% of the nation’s largest metro areas,” said an April 27 AP report.
  • U.S. industrial output was up. In fact, “both the Philly and N.Y. Fed reports show[ed] improving manufacturing and business conditions.” (Reuters, April 15)
  • As for the U.S. housing market, it officially entered the “double-dip recession” zone only on May 31, a month after the Dow’s April 29 peak. 

This is not to say that unemployment, manufacturing and real estate were peachy in April. But the worst of the reports from those areas of the economy only came after the stock market had already entered the decline. The most recent weak economic reports hardly explain why stocks topped when they did.

If you’re looking for a better explanation, consider an Elliott wave perspective: The economy doesn’t lead the stock market — it’s the stock market that leads the economy.

Skeptical? Then think back to 2007. “Goldilocks economy,” strong corporate earnings, unemployment at 4.4% — nothing but blue skies ahead. The Dow rallies to an all-time high above 14,000 in October 2007 — and over the next 18 months goes on its biggest losing streak in 70+ years, falling 54% and ushering in “the Great Recession.”

Now fast forward to March 2009. The Dow has crashed below 6,500; unemployment has more than doubled; the desperate Fed has dropped interest rates to 0%; foreclosures; bailouts; consumer confidence at an all-time low; general state of near-panic. The Dow bottoms on March 6, 2009, and stages a powerful two-year rally above 12,000.

By conventional logic, you’d have to agree that, paradoxically, “the good economy” of 2007 prompted the deflationary crash, while “the bad economy” of 2009 sent stocks flying.

But here’s an explanation that actually makes sense: Broad market trends are not created by the economic conditions — social mood is what creates them. Social mood doesn’t depend on what Ben Bernanke had for breakfast — it changes for endogenous reasons, and those changes follow the Elliott wave model. Stocks lead the economy because they are quicker to register changes in social mood. 

Before you make investment decisions based on the latest economic report, be sure to read the 2011 edition of The Independent Investor eBook by Elliott Wave International. You will see example after example of the fallacy to the belief that economic conditions direct the moves in the stock market.  Download your free 50-page Independent Investor eBook now.

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Jun 12

How To Trade Successfully

Posted in Market Timing

Five Tips for How To Trade Successfully

Take it from the person who won the United States Trading Championship with profits of more than 440% in 1984 – there are five things that every successful trader needs to know how to do:

  1. Have a method to trade.
  2. Have the discipline to follow your method.
  3. Get real trading experience, instead of only trading on paper.
  4. Have the mental fortitude to accept the fact that losses are part of the game.
  5. Have the mental fortitude to accept huge gains.

Bonus tip: Find a mentor.

That trader who won the championship in a record-breaking fashion is Robert Prechter, the founder and president of Elliott Wave International. Once you think you’ve mastered his 5 tips for how to trade successfully, then the best thing to do is to find a mentor. In this excerpt from the book, Prechter’s Perspective, Bob Prechter discusses how sitting at the elbow of a professional trader can make all the difference in learning the trade of trading.


Free 47-page eBook: How to Spot Trading Opportunities

Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.


(The following Q&A is excerpted from Prechter’s Perspective, revised 2004.)

Question: Has any specific trading experience decreased your trading success?

Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you’re better off speculating with small amounts of real money. Using larger amounts of money will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

Q.: It sounds painful. Is there any way at least to reduce the hard knocks?

Bob Prechter: There is one shortcut to obtaining experience, and that is to find a mentor.
 
Q.: Did you have a mentor?

Bob Prechter: In 1979, I sat with a professional trader for about a year. The most important thing he taught me was to keep trades small relative to your capital. It reduces the emotional factor.

Q.: How would one select a mentor?

Bob Prechter: The best way to select one is to find a person who is doing exactly what you would like to do for a living, then get to know him well enough to ask if he will tutor you or at least let you watch while he works. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. Listen to him. Sit down with him, if possible, for six months. Watch what he does. More important, watch what he doesn’t do. Finding a guy who knows what he is doing is the best lesson you could ever have. You will undoubtedly find that he is very friendly as well, since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled, matured by the experience of trading. He will usually welcome the opportunity to tell you what he knows.

Free 47-page eBook: How to Spot Trading Opportunities
Elliott Wave International has released part one of their hugely popular How to Spot Trading Opportunities eBook for free. The eBook sells as a two-part set for $129. You can now download part 1 for free. Learn more here.

Five Fatal Flaws of Trading

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That’s an age-old question. While there is no magic formula, one of Elliott Wave International’s senior instructors Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don’t claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person’s life. Maybe you’ll find one in Jeffrey’s take on trading? We sincerely hope so.

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

Why Do Traders Lose?

If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, ‘How do you stop the Hand?’ Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology

If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
  
Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations

Between you and me, nothing makes me angrier than those commercials that say something like, “…$5,000 properly positioned in Natural Gas can give you returns of over $40,000…” Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.


For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.


Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month … I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: ‘Aim small, miss small.’ I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.”

Fatal Flaw No. 5 – Lack of Money Management

The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% – 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the ‘aim small, miss small’ movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip

Trading successfully is not easy. It’s hard work … damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

Are These 4 Emotional Pitfalls Sabotaging Your Trading?

The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. For a limited time, Elliott Wave International is offering Jeffrey Kennedy’s report, How to Use Bar Patterns to Spot Trade Setups, free.

To be a consistently successful trader, the most important trait to learn is emotional discipline. I discovered this the hard way trading full-time a few years ago. I remember one day in particular. My analysis told me the NASDAQ was going to start a sizable third wave rally between 10:00-10:30 the next day… and it did. When I reviewed my trade log later, I saw that several of my positions were profitable, yet I exited each of them at a loss. My analysis was perfect. It was like having tomorrow’s newspaper today. Unfortunately, I wanted to hit a home run, so I ignored singles and doubles.

I now call this emotional pitfall the “Lottery Syndrome.” People buy lottery tickets to win a jackpot, not five or ten dollars. It is easy to pass up a small profit in hopes of scoring a larger one. Problem is, home runs are rare. My goal now is to hit a single or double, so I don’t let my profits slip away.

Since then, I’ve identified other emotional pitfalls that I would like to share. See if any of these sound familiar.

Have you ever held on to a losing position because you “felt” that the market was going to come back in your favor? This is the “Inability to Admit Failure.” No one likes being wrong and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I know now that being wrong is much less expensive than being hopeful.

Another emotional pitfall that was especially tough to overcome is what I call the “Fear of Missing the Party.” This one is responsible for more losing trades than any other. Besides overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend? The solution is to use a time filter, which is a fancy way of saying wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. Anyway, I would much rather miss an opportunity then suffer a loss, because their will always be another opportunity.

This emotional pitfall has yet another symptom that tons of people fall victim to chasing one seemingly hot market after another. For instance, metals have been moving the past few years so everyone wants to buy Gold and Silver. Of course, when everyone is talking about it is usually the worst time to get into a market. To avoid buying tops and selling bottoms, I have found that it’s best to look for a potential trade where (and when) no one else is paying attention.

My biggest, baddest emotional monster was being the “Systems Junkie.” Early in my career I believed that I could make my millions if I had just the right system. I bought every newsletter, book and tape series that I could find. None of them worked. I even went as far as becoming a professional analyst guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills; one is a skill of observation, while the other, of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.

I am not a psychologist or an expert in the psychology of trading. These are just a few lessons I’ve learned along the way… at quite a cost most times. But if you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one. What you discover may surprise you.

For more information on trading successfully, visit Elliott Wave International to download Jeffrey Kennedy’s free report, How to Use Bar Patterns to Spot Trade Setups.

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Jun 11

What is Deflation?

Posted in Economy

Deflation is more than just “falling prices.”

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?

There is still time to prepare if deflation is indeed in our future.

“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. …

  • 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” 

10 Things You Should and Should Not Do During Deflation
February 10, 2009

This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.

The following article was adapted from Robert Prechter’s NEW Deflation Survival eBook, a free 60-page compilation of Prechter’s most important teachings and warnings about deflation.

By Robert Prechter, CMT

1) Should you invest in real estate?

Short Answer: NO

Long Answer: The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60 percent and you realize you’ve made a horrendous mistake, you can call your broker and get out (unless you’re a mutual fund, insurance company or other institution with millions of shares, in which case, you’re stuck). With real estate, you can’t pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.

– Conquer the Crash, Chapter 16

2) Should you prepare for a change in politics?

Short Answer: YES

Long Answer: At some point during a financial crisis, money flows typically become a political issue. You should keep a sharp eye on political trends in your home country. In severe economic times, governments have been known to ban foreign investment, demand capital repatriation, outlaw money transfers abroad, close banks, freeze bank accounts, restrict or seize private pensions, raise taxes, fix prices and impose currency exchange values. They have been known to use force to change the course of who gets hurt and who is spared, which means that the prudent are punished and the thriftless are rewarded, reversing the result from what it would be according to who deserves to be spared or get hurt. In extreme cases, such as when authoritarians assume power, they simply appropriate or take de facto control of your property.
You cannot anticipate every possible law, regulation or political event that will be implemented to thwart your attempt at safety, liquidity and solvency. This is why you must plan ahead and pay attention. As you do, think about these issues so that when political forces troll for victims, you are legally outside the scope of the dragnet.

– Conquer the Crash, Chapter 27

3) Should you invest in commercial bonds?

Short Answer: NO

Long Answer: If there is one bit of conventional wisdom that we hear repeatedly with respect to investing for a deflationary depression, it is that long-term bonds are the best possible investment. This assertion is wrong. Any bond issued by a borrower who cannot pay goes to zero in a depression. In the Great Depression, bonds of many companies, municipalities and foreign governments were crushed. They became wallpaper as their issuers went bankrupt and defaulted. Bonds of suspect issuers also went way down, at least for a time. Understand that in a crash, no one knows its depth, and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.

– Conquer the Crash, Chapter 15

4) Should you take precautions if you run a business?

Short Answer: YES

Long Answer: Avoid long-term employment contracts with employees. Try to locate in a state with “at-will” employment laws. Red tape and legal impediments to firing could bankrupt your company in a financial crunch, thus putting everyone in your company out of work.

If you run a business that normally carries a large business inventory (such as an auto or boat dealership), try to reduce it. If your business requires certain manufactured specialty items that may be hard to obtain in a depression, stock up.

If you are an employer, start making plans for what you will do if the company’s cash flow declines and you have to cut expenditures. Would it be best to fire certain people? Would it be better to adjust all salaries downward an equal percentage so that you can keep everyone employed?

Finally, plan how you will take advantage of the next major bottom in the economy. Positioning your company properly at that time could ensure success for decades to come.

– Conquer the Crash, Chapter 30

5) Should you invest in collectibles?

Short Answer: NO

Long Answer: Collecting for investment purposes is almost always foolish. Never buy anything marketed as a collectible. The chances of losing money when collectibility is priced into an item are huge. Usually, collecting trends are fads. They might be short-run or long-run fads, but they eventually dissolve.

– Conquer the Crash, Chapter 17

6) Should you do anything with respect to your employment?

Short Answer: YES

Long Answer: If you have no special reason to believe that the company you work for will prosper so much in a contracting economy that its stock will rise in a bear market, then cash out any stock or stock options that your company has issued to you (or that you bought on your own).

If your remuneration is tied to the same company’s fortunes in the form of stock or stock options, try to convert it to a liquid income stream. Make sure you get paid actual money for your labor.

If you have a choice of employment, try to think about which job will best weather the coming financial and economic storm. Then go get it.

– Conquer the Crash, Chapter 31

7) Should you speculate in stocks?

Short Answer: NO

Long Answer: 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 [spend to read Conquer the Crash].

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.

– Conquer the Crash, Chapter 20

8) Should you call in loans and pay off your debt?

Short Answer: YES

Long Answer: Have you lent money to friends, relatives or co-workers? The odds of collecting any of these debts are usually slim to none, but if you can prod your personal debtors into paying you back before they get further strapped for cash, it will not only help you but it will also give you some additional wherewithal to help those very same people if they become destitute later.

If at all possible, remain or become debt-free. Being debt-free means that you are freer, period. You don’t have to sweat credit card payments. You don’t have to sweat home or auto repossession or loss of your business. You don’t have to work 6 percent more, or 10 percent more, or 18 percent more just to stay even.

– Conquer the Crash, Chapter 29

9) Should you invest in commodities, such as crude oil?

Short Answer: Mostly NO

Long Answer: Pay particular attention to what happened in 1929-1932, the three years of intense deflation in which the stock market crashed. As you can see, commodities crashed, too.

You can get rich being short commodity futures in a deflationary crash. This is a player’s game, though, and I am not about to urge a typical investor to follow that course. If you are a seasoned commodity trader, avoid the long side and use rallies to sell short. Make sure that your broker keeps your liquid funds in T-bills or an equally safe medium.

There can be exceptions to the broad trend. A commodity can rise against the trend on a war, a war scare, a shortage or a disruption of transport. Oil is an example of a commodity with that type of risk. This commodity should have nowhere to go but down during a depression.

– Conquer the Crash, Chapter 21

10) Should you invest in cash?

Short Answer: YES

Long Answer: For those among the public who have recently become concerned that being fully invested in one stock or stock fund is not risk-free, the analysts’ battle cry is “diversification.” They recommend having your assets spread out in numerous different stocks, numerous different stock funds and/or numerous different (foreign) stock markets. Advocates of junk bonds likewise counsel prospective investors that having lots of different issues will reduce risk.

This “strategy” is bogus. Why invest in anything unless you have a strong opinion about where it’s going and a game plan for when to get out? Diversification is gospel today because investment assets of so many kinds have gone up for so long, but the future is another matter. Owning an array of investments is financial suicide during deflation. They all go down, and the logistics of getting out of them can be a nightmare. There can be weird exceptions to this rule, such as gold in the early 1930s when the government fixed the price, or perhaps some commodity that is crucial in a war, but otherwise, all assets go down in price during deflation except one: cash.

– Conquer the Crash, Chapter 18

……….

For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.

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Jun 11

Banks Are in Trouble, Are You?

Posted in Economy

Is Your Bank on the “100 Safest” List? Maybe You Should Find Out
Close to Collapse: Bailed-Out Banks Facing Bankruptcy

We want to trust in the financial stability of our bank. After all, most of us have money in these institutions.

In spite of our wishful thinking, the tide of bank failures has not stopped. And these failures are occurring well after the heart of the financial crisis — and even after some of these banks received bailouts.

“Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.

The total, based on an analysis of third-quarter financial results by The Wall Street Journal, is up from 86 in the second quarter, reflecting eroding capital levels, a pileup of bad loans and warnings from regulators.

The 98 banks in shaky condition got more than $4.2 billion in infusions from the Treasury Department under the Troubled Asset Relief Program.”

Wall Street Journal (12/26)

Seven of the 98 small banks mentioned have already failed.

In the U.S. so far this year, 157 banks have failed — that’s the highest number since 1992.

More failures are likely because many banks are burdened by questionable “assets” and bad real estate loans.

“…your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults.

If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone.”

Conquer the Crash, 2nd edition, pp. 175-176

Yes, the Federal Deposit Insurance Corporation (FDIC) insures depositors, but the question is: Does the FDIC have the wherewithal to “make whole” all depositors if scores of banks go under at the same time? Here at Elliott Wave International, we do not recommend that you count on the FDIC. Here’s why:

“…did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. 

When the FDIC rescues weak banks by charging healthier ones high ‘premiums,’ overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. 

The result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.”

Conquer the Crash, 2nd edition, p. 177

Are some banks safer than others? We think so.

“Hope is not a strategy.” If you plan to have money on deposit at a bank, we suggest reading our FREE report, Discover the Top 100 Safest U.S. Banks.” This 10-page bank safety report is available to you after you become a Club EWI member. Inside the revealing free report, you’ll discover:

  • The 100 Safest U.S. Banks (2 for each state)
  • Where your money goes after you make a deposit
  • How your fractional-reserve bank works
  • What risks you might be taking by relying on the FDIC’s guarantee

Please protect your money. Download the free 10-page “Safe Banks” report now.
Learn more about the “Safe Banks” report, and download it for free here.

Bank failures still dominate headlines as the number of failing banks continues at an alarming pace in 2011. The odds are that you’ve seen at least one bank failure in your community since the financial crisis hit in 2008. Some economists claim we’re in a recovery, yet hundreds of smaller financial institutions still suffer from the debt crisis that began a few years back.

Consider this May 25 post from author Kalyan Nandy, on the popular Atlanta real estate site CityBiz: 

“Bank failures continue with no end in sight. Last Friday, U.S. regulators closed down three more banks, taking the total number to 43 so far in 2011…Looking back, there were 157 bank failures in 2010, 140 in 2009 and 25 in 2008.

“Issues like rock-bottom home prices, still-high loan defaults and deplorable unemployment levels are nagging troubles for such institutions…

“The number of banks on FDIC’s list of problem institutions shot up to 884 in the fourth quarter of 2010 from 860 in the previous quarter. This is the highest number since the savings and loan crisis in the early 1990s.”

The following excerpt from Elliott Wave International’s free report, Discover the Top 100 Safest U.S. Banks, explains the true risk that you may face when a bank fails.

Why do banks fail? For nearly 200 years, the courts have sanctioned an interpretation of the term “deposits” to mean not funds that you deliver for safekeeping but a loan to your bank. Your bank balance, then, is an IOU from the bank to you, even though there is no loan contract and no required interest payment. Thus, legally speaking, you have a claim on your money deposited in a bank, but practically speaking, you have a claim only on the loans that the bank makes with your money. If a large portion of those loans is tied up or becomes worthless, your money claim is compromised.

A bank failure simply means that the bank has reneged on its promise to pay you back. The bottom line is that your money is only as safe as the bank’s loans. In boom times, banks become imprudent and lend to almost anyone. In busts, they can’t get much of that money back due to widespread defaults. If the bank’s portfolio collapses in value, say, like those of the Savings & Loan institutions in the U.S. in the late 1980s and early 1990s, the bank is broke, and its depositors’ savings are gone…

The U.S. government’s Federal Deposit Insurance Corporation guarantee just makes things far worse, for two reasons. First, it removes a major motivation for banks to be conservative with your money. Depositors feel safe, so who cares what’s going on behind closed doors? Second, did you know that most of the FDIC’s money comes from other banks? This funding scheme makes prudent banks pay to save the imprudent ones, imparting weak banks’ frailty to the strong ones. When the FDIC rescues weak banks by charging healthier ones higher “premiums,” overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. This result, in turn, means that in times of bank stress, it will take a progressively smaller percentage of depositors to cause unmanageable bank runs.

If banks collapse in great enough quantity, the FDIC will be unable to rescue them all, and the more it charges surviving banks in “premiums,” the more banks it will endanger. Thus, this form of insurance compromises the entire system. Ultimately, the federal government guarantees the FDIC’s deposit insurance, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. The FDIC calls its sticker “a symbol of confidence,” and that’s exactly what it is.

So what is the best course of action to safeguard your money?Read our free 10-page report, Discover the Top 100 Safest U.S. Banks, to learn:

• The 5 major conditions at many banks that pose a danger to your money.
• The top two safest banks in your state.
• Bob Prechter’s recommendations for finding a safe bank.
• And more!

Download your free report, Discover the Top 100 Safest U.S. Banks, now.

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Jun 11

Moving Averages

The Trend Is Your Friend: How Moving Averages Can Improve Your Market Analysis

Many traders and investors use technical indicators to support their analysis. One of the most popular and reliable also happens to be an indicator that has been around for years and years — moving averages.

A moving average is simply the average value of data over a specific time period. Analysts use it to figure out whether the price of a stock or a commodity is trending up or down. It effectively “smooths out” the daily fluctuations to provide a more objective way to view a market.

Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, from tick data to monthly price data or longer.

Moving Averages can help you identify the trend in a market, which is important since we all know that the trend is your friend. Yet certain moving averages can serve as support or resistance, and also alert you to trading opportunities.

This excerpt from EWI Senior Analyst Jeffrey Kennedy’s free eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages, shows how a popular moving average setting identified trading opportunities in the stock of Johnson & Johnson. Download the full 10-page eBook here.

A popular moving average setting that many people work with is the 13- and the 26-period moving averages in tandem. The figure below shows a crossover system, using a 13-week and a 26-week simple moving average of the close on a 2004 stock chart of Johnson & Johnson. Obviously, the number 26 is two times 13.

 

During this four-year period, the range in this stock was a little over $20.00, which is not much price appreciation. This dual moving average system worked well in a relatively bad market by identifying a number of buyside and sellside trading opportunities.

Learn to apply Moving Averages to your trading and investing by downloading Jeffrey Kennedy’s free 10-page eBook. Here’s what you’ll learn:

  • How to apply the three most popular moving average techniques.
  • How to decide which moving average parameters are best for the markets and time frames you trade.
  • How to avoid several common but dangerous myths about moving averages.

Download How You Can Find High-Probability Trading Opportunities Using Moving Averages now.

comments: 0 »
Jun 11

How to Use Bar Patterns to Spot Trade Setups

Bar chart patterns often introduces sizable moves in price
April 14, 2011

To many novice investors, chart patterns might as well be tea leaves. Can they really tell you anything reliable? And even if they can, how in the world do you know what to look for?

Experienced traders know that the answer to the first question is a resounding “yes.” As for the second one, we at EWI are all about recognizing chart patterns. To help you get started on this path, we’ve put together a free Club EWI resource called How to Use Bar Patterns to Spot Trade Setups.

It’s a collection of lessons in trading and pattern recognition by one of EWI’s top trading seminar instructors, Jeffrey Kennedy (who is also the firm’s senior commodities analyst).

Enjoy this quick excerpt — and for details on how to read this report in full, free, look below.

Chapter 1: How To Use Bar Patterns To Spot Trade Setups
Double Inside Bars

While many of my co-workers jog, bicycle or play in bands for a hobby, I amuse myself by looking through old price charts of stocks and commodities. Let’s look at a bar pattern that I call a “double inside day.”

Many of you who subscribe to my Daily Futures Junctures have seen me mention this bar pattern. I think everyone should be familiar with it. Why? Because it often introduces sizable moves in price — always a good reason for a trader to pay attention.

So let’s begin with a basic definition: A double inside day, or bar, occurs when two inside bars appear in a row. An inside bar is simply a price bar with a high below the previous high and a low above the previous low.

Notice that the range of price bar number two encompasses price bar number one, and price bar number three encompasses price bar number two.

Figures 11-2 (Wheat) shows an example of double inside days and the price moves that followed. (Continued.)

Read the rest of this 15-page report online now, free! All you need is to create a free Club EWI profile. Here’s what else you’ll learn: 

  • How To Use Bar Patterns To Spot Trade Setups
  • How To Make Bar Patterns Work For You
  • How To Use An Outside-Inside Reversal to Spot Trade Setups

Keep reading this free report now — all you need to do is create a free Club EWI profile.

comments: 1 »
Jun 11

Pop Music, Social Mood and Stock Market

Posted in Stock Market

We can now add the recent uprisings in North Africa and the Middle East to the category of life imitating art — specifically, music lyrics. Those who lived through the 1980s might be forgiven for hearing an unbidden snatch of music run through their heads as they watched first Hosni Mubarak and now Moammar Gadhafi try to hold onto power — “Should I Stay or Should I Go” by The Clash. In Libya, where Gadhafi has used air strikes and ground forces against the rebels, The Clash’s other huge hit from 1981, “Rock the Casbah,” describes the current situation so well it’s almost eerie:

The king called up his jet fighters
He said you better earn your pay
Drop your bombs between the minarets
Down the Casbah way

Punk rock played by bands like The Clash, X, The Ramones, and the Sex Pistols had that in-your-face, defy-authority attitude that crashed onto the scene in Great Britain and the United States in the ’70s and ’80s. It’s interesting that the lyrics can still ring true 30 years later, but even more trenchant is how the prevailing mood is reflected by the music of the times, as seen in this chart that Robert Prechter included in a talk he gave last year.

Popular culture reflects social mood, and the stock market reflects that same social mood. That’s why we get loud, angry music when people are unhappy with their situation; they want to sell stocks. We get light, poppy, bubblegum music when they feel happy and content; they want to buy stocks. In a USA Today article about music and social moods in November 2009, reporter Matt Frantz made clear the connection that Elliott Wave International has been writing about for years:

The idea linking culture to stock prices is surprisingly simple: The population essentially goes through mass mood swings that determine not only the types of music we listen to and movies we watch, but also if we want to buy or sell stocks. These emotional booms and busts are followed by corresponding swings on Wall Street.

“The same social elements driving the stock market are driving the gyrations on the dance floor,” says Matt Lampert, research fellow at the Socionomics Institute, a think tank associated with well-known market researcher Robert Prechter, who first advanced the idea in the 1980s. [USA Today, 11/17/09]

In the talk he gave to a gathering of futurists in Boston, Prechter explained how the music people listen to relates to social mood and the stock market:

When the trend is up, they tend to listen to happier stuff (see chart). Back in the 1950s and ‘60s, you had doo-wop music, rockabilly, dance music, surf music, British invasion — mostly upbeat, happy material. As the value of stocks fell from the 1960s into the early 1980s, you had psychedelic music, hard rock, heavy metal, very slow ballads in the mid-1970s, and finally punk rock in the late ’70s. There was more negative-themed music. [excerpt from Robert Prechter’s speech to the World Future Society’s annual conference, 7/10/10]

Which brings us right back to punk rock. Although there’s lots of upbeat music in the air now, we can assume that after this current bear market rally, we will hear angrier music on the airwaves as the market turns down. It might be a good time, then, to pay attention to what the markets were doing the last time punk rock blasted the airwaves. Here’s an excerpt from “Popular Culture and the Stock Market,” which is the first chapter of Prechter’s Pioneering Studies in Socionomics.

The most extreme musical development of the mid-1970s was the emergence of punk rock. The lyrics of these bands’ compositions, as pointed out by Tom Landess, associate editor of The Southern Partisan, resemble T.S. Eliot’s classic poem “The Waste Land,” which was written during the ‘teens, when the last Cycle wave IV correction was in force (a time when the worldwide negative mood allowed the communists to take power in Russia). The attendant music was as anti-.musical. (i.e., non-melodic, relying on one or two chords and two or three melody notes, screaming vocals, no vocal harmony, dissonance and noise), as were Bartok’s compositions from the 1930s.

It wasn’t just that the performers of punk rock would suffer a heart attack if called upon to change chords or sing more than two notes on the musical scale, it was that they made it a point to be non-musical minimalists and to create ugliness, as artists. The early punk rockers from England and Canada conveyed an even more threatening image than did the heavy metal bands because they abandoned all the trappings of theatre and presented their message as reality, preaching violence and anarchy while brandishing swastikas.

Their names (Johnny Rotten, Sid Vicious, Nazi Dog, The Damned, The Viletones, etc.) and their song titles and lyrics (“Anarchy in the U.K.,” “Auschwitz Jerk,” “The Blitzkrieg Bop,” “You say you’ve solved all our problems? You’re the problem! You’re the problem!” and “There’s no future! no future! no future!”) were reactionary lashings out at the stultifying welfare statism of England and their doom to life on the dole, similar to the Nazis backlash answer to a situation of unrest in 1920s and 1930s Germany.

Actually, of course, it didn’t matter what conditions were attacked. The most negative mood since the 1930s (as implied by stock market action) required release, period. These bands took bad-natured sentiment to the same extreme that the pop groups of the mid-1960s had taken good-natured sentiment. The public at that time felt joy, benevolence, fearlessness and love, and they demanded it on the airwaves. The public in the late 1970s felt misery, anger, fear and hate, and they got exactly what they wanted to hear. (Luckily, the hate that punk rockers. reflected was not institutionalized, but then, this was only a Cycle wave low, not a Supercycle wave low as in 1932.)

In summary, an “I feel good and I love you” sentiment in music paralleled a bull market in stocks, while an amorphous, euphoric “Oh, wow, I feel great and I love everybody” sentiment (such as in the late ’60s) was a major sell signal for mood and therefore for stocks. Conversely, an “I’m depressed and I hate you” sentiment in music reflected a bear market, while an amorphous tortured “Aargh! I’m in agony and I hate everybody” sentiment (such as in the late ’70s) was a major buy signal.

Popular Culture and the Stock Market. Read more about musical relationships to social mood and the markets in this 40-page-plus free report from Elliott Wave International, called Popular Culture and the Stock Market. All you have to do to read it is sign up to become a member of Club EWI, no strings attached. Find out more about this free report here.

comments: 1 »
Jun 11

Elliott Wave Theory

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered evidence of his discovery by making a number of accurate stock market forecasts. What appears random and unrelated, Elliott said, is actually tracing out a recognizable pattern once you learn what to look for. Elliott called his discovery “The Wave Principle,” and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he located copies of R.N. Elliott’s books in the New York Public Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In the late 1970s, gloom was pervasive, but in Elliott Wave Principle, Prechter and Frost called for a roaring bull market akin to that of the 1920s, to be followed by a record bear market. As the stock market rose, knowledge of the Wave Principle among private and professional investors grew dramatically.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

  • Disbelief that markets are patterned and largely predictable
  • Joy at having found a “crystal ball” to foretell the future
  • And finally the correct, and useful response – “Wow, here is a valuable model I should learn to use.”

Just like any system in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology and the things humans create, such as roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices. 

The first step in Elliott wave analysis is to identify patterns in market prices. At their core, wave patterns are simple; there are only two types: “impulse waves,” and “corrective waves.”

Elliott Wave Principle

Impulse waves are composed of five subwaves (labeled as 1, 2, 3, 4, 5) and move in the same direction as the trend of the next larger size. Impulse waves are so named because they powerfully impel the market.

A corrective wave follows, composed of three subwaves (labeled as a, b, c), and it moves against the trend of the next larger size. Corrective waves accomplish only a partial retracement, or “correction,” of the progress achieved by any preceding impulse wave.

As the figure above shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose subwaves are denoted by numbers, and the three-wave corrective phase, whose subwaves are denoted by letters.

R.N. Elliott was not an ivory tower theorist. He set out to observe and then describe how the market actually behaves. Later he realized that his model had an important theme of self-similarity and a relationship to nature. There are a number of specific variations on the underlying pattern, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable certainties as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is helpful in understanding what a market can do, and at least as important, what it will not do.

You have just begun to learn the power and complexity of the Elliott Wave Principle. So, don’t let your Elliott wave education end here. Join Elliott Wave International’s free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

How the waves of social mood led to an investment method worth looking into

Have you ever been at the ocean body surfing, just waiting for that perfect wave? When you begin to truly feel it, your adrenaline starts pumping.

I came to work for Elliott Wave International in the late 1980s — before the Internet, before ETFs, before smartphones. Part of my job was to review the many publications that came to our offices, in search of articles that spoke to the “mood” of the markets.

It was a task that constantly searched for an answer to the question, Is there a large cluster of articles in print right now to indicate that people are extremely “bullish” or “bearish”? At that time my searches related mostly to the commodities markets, but I also kept close tabs on stock market news.

At first it was tedious. When I found groups of articles that reflected a certain mood, I would clip and save them to a file for our analysts to review. Yet after several months, I actually began to develop a feel for the mood patterns in the articles. I started to use this to see if I could anticipate where the price trend would go over the next several days or weeks.

The idea was simple: When the mood in the news articles got extremely bullish – and our Elliott wave counts suggested that a rally was completed — it would often represent a downside opportunity; when that mood became deeply gloomy, it was usually time to get bullish.

I was amazed — my adrenaline was pumping. I actually started to get a feel for the waves — a feeling for the direction of the market! I was hooked, so I took it to the next level.

I had read Prechter and Frost’s Elliott Wave Principle – Key to Market Behavior before I interviewed for my position. It was interesting, but it didn’t really speak to me. But after I had personally experienced and understood what it means to feel the mood of the markets, I read it again. The second time took on a whole new meaning.

If you read Elliott Wave Principle a long time ago, or wish to read it for the first time, Elliott Wave International has just released an online edition of this investment classic, free to members of Elliott Wave International’s Club EWI. Membership is free. This is your chance to learn how the waves of social mood can change the way you invest forever.

Follow this link to become a member, and to receive FREE online access to Elliott Wave Principle, and the many other free investment and trading reports available to Club EWI members.

What advantages does the Wave Principle offer to traders?

Here’s one of the big advantages of using the Wave Principle when trading: you can increase your understanding of how current price action relates to the market’s larger trend.

Other tools fall short in this regard. Several trend-following indicators such as oscillators and sentiment measures have their strong points, yet they generally fail to reveal the maturity of a trend. Moreover, these technical approaches to trading are not as useful in establishing price targets as the Wave Principle.

Here’s another big advantage of using the Wave Principle in your trading, which comes directly from the free eBook “How the Wave Principle Can Improve Your Trading”

“Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful.” 

Indeed, this valuable free eBook shows you how to identify and exploit the market’s price pattern, as shown in the Elliott wave structure below:

The Wave Principle also helps you to identify price levels where you may want to place protective stops.

“…although the Wave Principle is highly regarded as an analytical tool, many traders abandon it when they trade in real-time — mainly because they don’t think it provides the defined rules and guidelines of a typical trading system.

But not so fast — although the Wave Principle isn’t a trading “system,” its built-in rules do show you where to place protective stops in real-time trading.”
“How the Wave Principle Can Improve Your Trading”

Before you attempt to identify price levels for protective or trailing stops, you should first become familiar with these three rules of the Wave Principle:

  • Wave 2 can never retrace more than 100 percent of wave 1
  • Wave 4 may never end in the price territory of wave 1
  • Wave 3 may never be the shortest impulse wave of waves 1, 3, and 5 

The details and specific instructions for placing protective and trailing stops are in the BONUS section of the free eBook, “How the Wave Principle Can Improve Your Trading.”

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.

Everything You Ever Wanted to Know About the Elliott Wave Principle, Free
Club EWI’s free introductory tutorial on the Wave Principle is the key to unlocking the mystery of market behavior

Okay. There can be only two reasons why you are reading this article right now:

  1. You thought “Elliott wave” was a surfing term for a wicked breaker, dude.

— OR —

  1. You’re tired of fundamental analysis of financial markets leaving you behind the trend-moving curve, AND you’re ready for an alternative.

If you answered the second choice, then you’re in the right place. Fact is, you can probably count on all hands — of a millipede — the number of times the mainstream financial media has provided conflicting reports on how a certain news event “moves” a particular market. Case in point, the recent headlines below on the Dow Jones Industrial Average:

  • March 31 at 8:44 AM: “US Stocks Edge Lower After Jobless Claims Data” (International Business Times)
  • March 31 at 9:53 AM: “US Stocks Slightly Higher After Jobless Claims Data” (Wall Street Journal)

The Elliott Wave Principle resets the stage from an entirely different starting point. Wave analysis asserts that while certain news events can have a temporary, near-term effect on market prices, the larger trend is governed by one consistent force: social mood, or collective investor psychology.

This source of markets’ trending power unfolds in calculable wave patterns visible on a market’s price chart. Elliotticians know of 13 such patterns, each of which adheres to specific rules and guidelines. Ultimately, if you can identify one of these patterns, you can project what direction the pattern will move prices AND how far into that direction prices may go.

The best part is, Club EWI has recently re-released our most comprehensive Wave Principle tutorial ever, at no monetary cost. This 10-lesson course leaves no stone unturned and no question unanswered about the basic recognition of all Elliott patterns and their practical application in real-world markets.

In the end, the difference comes down to this simple reality: Before taking the Wave Principle tutorial, the price chart of a major financial market looked like this:

After taking the tutorial, that same chart comes into breathtaking being as the clearly labeled blue print to opportunity we see below: 

Join the rapidly expanding Club EWI community today and get the complete, free Wave Principle Tutorial.

What Does a Fractal Look Like?
And What Does It Have to Do with the Stock Market?

If the word ‘fractal’ comes up at all in conversation, that conversation is probably being held in a mathematics department. However, anyone who is interested in the Wave Principle and how it applies to the stock market may have stumbled across the phrase “robust fractal.” If you want to know more about what it means in that context, here’s an excerpt from Elliott Wave International’s primer on fractals that explains the connection.

* * * * *

Excerpted from The Human Social Experience Forms a Fractal
by Robert R. Prechter

In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. In a series of books and articles published from 1938 to 1946, he described the stock market as a fractal. A fractal is an object that is similarly shaped at different scales.

Although Elliott came to his conclusions fifty years before the new science of fractals blossomed, he took a step that current observers of natural processes have yet to take. He explained not only that the progress of the market was fractal in nature but discovered and described the component patterns. The patterns that Elliott discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated and defined a number of patterns, or “waves,” that recur in market price data. He named and illustrated the patterns. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle….

The Stock Market as a Robust Fractal
A classic example of a self-identical fractal is nested squares. One square is surrounded by eight squares of the same size, which forms a larger square, which is surrounded by eight squares of that larger size, and so on.

A classic example of an indefinite fractal is the line that delineates a seacoast. When viewed from space, a seacoast has a certain irregularity of contour. If we were to drop to ten miles above the earth, we would see only a portion of the seacoast, but the irregularity of contour of that portion would resemble that of the whole. From a hundred feet up in a balloon, the same thing would be true.

Photo of Madeira coastline, near Sao Jorge, by Plane Person (source: Wikimedia Commons)
Scientists today recognize financial markets’ price records as fractals, but they presume them to be of the indefinite variety. Elliott undertook a meticulous investigation of financial market behavior and found something different. He described the record of stock market prices as a specifically patterned fractal yet with variations in its quantitative expression. I call this type of fractal, which has properties of both self-identical and indefinite fractals, a robust fractal. Robust fractals permeate life forms. Trees, for example, are branching robust fractals, as are animals, circulatory systems, bronchial systems and nervous systems. The stock market record belongs in the category of life forms since it is a product of human social interaction.

How Is the Stock Market Patterned?

Idealized Wave Development and Subdivisions

Figure 1 shows Elliott’s idea of how the stock market is patterned. If you study this depiction, you will see that each component, or “wave,” within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation). These are called motive and corrective waves, respectively. Each of these waves adheres to specific traits and tendencies of construction, as described in Elliott Wave Principle (1978).

Waves subdivide this way down to the smallest observable scale, and the entire process continues to develop larger and larger waves as time progresses. Each wave’s degree may be identified numerically by relative size on a sort of social Richter scale.

Want to Know More About Fractals and the Stock Market? Then read the whole special report, called “The Human Social Experience Forms a Fractal.” It’s free of charge, so long as you are a member of Club EWI, which gives you access to many free reports that explain Elliott wave analysis and the Wave Principle.

5 Ways the Wave Principle Can Improve Your Trading

Jeffrey Kennedy brings more than 15 years of experience to his position as Elliott Wave International’s Senior Analyst and trading instructor. He knows firsthand how hard it can be to get simple explanations of a trading method that works — so he shares his knowledge with his subscribers each month in the Trader’s Classroom lessons.

Here’s an excerpt from The Best of Trader’s Classroom, a free 45-page eBook that gives you the 14 most critical lessons every trader should know. Download the full eBook free here.

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. Just as important, it can 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 dominant trend, since it is the path of least resistance and undoubtedly explains the saying, “the trend is your friend.”

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 2-1. 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.
Figure 2-1

4. Provides Price Targets
What traditional technical studies simply don’t offer — high-probability price targets — the Wave Principle again provides. When R.N. Elliott wrote about the Wave Principle in Nature’s Law, he stated that the Fibonacci sequence was the mathematical basis for the Wave Principle. Elliott waves, both impulsive and corrective, adhere to specific Fibonacci proportions, as illustrated in Figure 2-2. For example, common objectives for wave 3 are 1.618 and 2.618 multiples of wave 1. In corrections, wave 2 typically ends near the .618 retracement of wave 1, and wave 4 often tests the .382 retracement of wave 3. These high-probability price targets allow traders to set profit-taking objectives or identify regions where the next turn in prices will occur.
Figure 2-2
5. Provides Specific Points of Ruin
At what point does a trade fail? Many traders use money management rules to determine the answer to this question, because technical studies simply don’t offer one. Yet the Wave Principle does — in the form of Elliott wave rules.

Rule 1: Wave 2 can never retrace more than 100% of wave 1.
Rule 2: Wave 4 may never end in the price territory of wave 1.
Rule 3: Out of the three impulse waves — 1, 3 and 5 — wave 3 can never be the shortest.

A violation of one or more of these rules implies that the operative wave count is incorrect. How can traders use this information? If a technical study warns of an upturn in prices, and the wave pattern is a second wave pullback, the trader knows specifically at what point the trade will fail — a move beyond the origin of wave 1. That kind of guidance is difficult to come by without a framework like the Wave Principle.

Technical studies can pick out many trading opportunities, but the Wave Principle helps traders discern which ones have the highest probability of being successful. This is because the Wave Principle is the framework that provides history, current information and a peek at the future. When traders place their technical studies within this strong framework, they have a better basis for understanding current price action.

Don’t miss the rest of the 14 most critical lessons that every trader should know. Download the free 45-page eBook The Best of Trader’s Classroom.

Learn Elliott Wave Analysis — Free
Often, basics is all you need to know.

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.

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Jun 11

Trend Line

Posted in Technical Analysis

How a Simple Line Can Improve Your Trading Results
Elliott Wave International’s Jeffrey Kennedy explains many ways to use this basic tool
January 19, 2011

By Elliott Wave International

The following trading lesson has been adapted from Jeffrey Kennedy’s eBook, Trading the Line – 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. Now through February 7, you can download the 14-page eBook free. Learn more here.

“How to draw a trendline” is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.

Yet you’d be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, Elliott Wave International’s Chief Commodity Analyst, puts it:

“A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic.”

In other words, a trendline can help you identify the market’s trend. Consider this example in the price chart of Google.


 
That one trendline — drawn between the lows in 2004 and the lows in 2005 — provided support for a number of retracements over the next two years.

That’s pretty basic. But there are many more ways to draw trendlines. When a market is in a correction, you can draw a trendline and then draw a parallel line: in turn, these two parallel lines can create a channel that often “contains” the corrective price action. When price breaks out of this channel, there’s a good chance the correction is over and the main trend has resumed. Here’s an example in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent move.

Here is another example of using trend lines:

Technical analysis of financial markets does not have to be complicated. Here are EWI, our main focus is on Elliott wave patterns in market charts, but we also employ other tools — like trendlines.

A trendline is a line on a chart that connects two points. Simple? Yes. Effective? You be the judge — once you read the free 14-page Club EWI report by EWI’s Chief Commodity Analyst and Senior Tutorial Instructor Jeffrey Kennedy.

Enjoy this free excerpt — and for details on how to read this report in full, free, look below.


Trading the Line — 5 Ways You Can Use Trendlines to Improve Your Trading Decisions
(Free Club EWI report, excerpt)

Chapter 1
Defining Trendlines

Before I define a trendline, we need to identify what a line is. A line simply connects two points, a first point and a second point. Within the scope of technical analysis, these points are typically price highs or price lows. The significance of the trendline is directionally proportional to the importance of point one and point two. Keep that in mind when drawing trendlines.

A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic, as it was in the upwards sloping line in Figure 1-1 or extremely pessimistic, as it was in the downwards sloping line in the same figure.

You can draw them horizontally, which identifies resistance and support. Or, you can draw them vertically, which identifies moments in time. You primarily apply vertical trendlines if you’re doing a cycle analysis.

For more free trading lessons on trendlines, download Jeffrey Kennedy’s free 14-page eBook, Trading the Line – 5 Ways You Can Use Trendlines to Improve Your Trading Decisions. It explains the power of simple trendlines, how to draw them, and how to determine when the trend has actually changed. Download your free eBook.

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Jun 11

Keep Ahead of the Herd

Posted in Market Timing

Learn to Survive and Thrive with Knowledge of Socionomics and the Elliott Wave Principle
December 31, 2010

By Elliott Wave International

Have you ever noticed that much of the time, the forecasts for what’s going to happen next are quite often just more of what happened last? There’s no real insight, just “expect more of the same.”

That’s not how we view the world here at Elliott Wave International, where instead we study patterns of positive and negative mood to predict changes in the stock market, current events and other trends.

Pop culture trends are more than just “interesting” — analysis of social mood trends is part and parcel of Elliott Wave International’s technical approach, helping us anticipate changes that most people never see coming.

Prechter’s groundbreaking paper, “Pop Culture and the Stock Market,” first published in 1985, lays out the foundation for his contrarian analysis:

1) Popular art, fashion and mores are a reflection of the dominant public mood.
           

2) Because the stock market changes direction in step with these expressions of mood, it is probably another coincident register of the dominant public mood and changes in it
.
3) Because a substantial change in mood in a positive or negative direction foreshadows the character of what are generally considered to be historically important events, mood changes must be considered as possibly, if not probably, being the basic cause of ensuing events.

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large.

It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood.

The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise.

The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing ‘negative’ mood on balance, and an advance indicates an increasing ‘positive’ mood on balance.

The positive and negative events and trends of any given year paint a picture of society’s mood as a whole. Haven’t we seen enough conventional forecasting fail miserably (remember the 2007-2009 debacle?)  to consider an alternative method?  

This new year, resolve to look at the world in a different light, and learn to anticipate changes that will keep you ahead of the herd with an understanding of socionomics and the Elliott Wave Principle. 

As we enter 2011, we are happy to offer Prechter’s “Popular Culture and the Stock Market” essay for FREE with your Club EWI sign-up. There is no obligation.When you join Club EWI to access the “Pop Culture” essay, you can also access dozens of other free resources to help you understand how the Elliott Wave Principle and socionomic insight can help your investment strategies.

comments: 1 »
Jun 11

What Moves the Markets?

News? The Fed? The Real Answers Will Surprise You
Elliott Wave International’s free 118-page Independent Investor eBook explains why financial markets are NOT a matter of action and reaction
By Elliott Wave International

“There is no group more subjective than conventional analysts, who look at the same ‘fundamental’ news event a war, interest rates, P/E ratio, GDP, economic policy, the Fed’s monetary policy, you name it and come up with countless opposing conclusions. They generally don’t even bother to study the data.” — EWI president Robert Prechter, March 2004 Elliott Wave Theorist.

If you watch financial news, you probably share Bob Prechter’s sentiment. How many times have you seen analysts attribute an S&P 500 rally to “good news from China,” for example — only to focus on a different, supposedly bearish, news story later the same day if the rally fizzles out?

You need objective tools to make objective forecasts. So, we put together a unique resource for you: a free 118-page Independent Investor eBook, where you see dozens of examples and charts that show what really creates market trends.

Here’s a quick excerpt. For details on how to read the entire Independent Investor eBook online now, free, look below.


Independent Investor eBook
Chapter 1: What Really Moves the Markets? (excerpt)

Action and Reaction

In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” … But is it true?

Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold?

Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.

Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it. 

Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades… Gold’s bear market produced more than a 90% loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation!

How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong. …

Cause and Effect

Suppose the devil were to offer you historic news a day in advance. … His first offer: “The president will be assassinated tomorrow.” You can’t believe it. You and only you know it’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money? …

[…continued in the free 118-page Independent Investor eBook]


Read the rest of the eye-opening report online now, free! All you need is a free Club EWI profile. Here’s what else you’ll learn: 
  • The Problem With “Efficient Market Hypothesis”
  • How To Invest During a Long-Term Bear Market
  • What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
  • Why “Buy and Hold” Doesn’t Work Now
  • How To Be One of the Few the Government Hasn’t Fooled
  • How Gold, Silver and T-Bonds Will Behave in a Bear Market
  • MUCH MORE

Keep reading this 118-page Independent Investor eBook now, free — all you need is a free Club EWI profile.

Breaking News Bulletin: News Is NOT the Main Driver of Stock Market Trends

A FREE myth-busting report from Club EWI reveals the real force behind long-term trend in financial markets

Conventional economic wisdom is founded on one core concept: namely, that events that exist outside the market (part of “market fundamentals”) trigger trend changes in the financial markets.

Because of this belief, you have the mainstream experts of finance watching everything from weather patterns to crop conditions, political exploits to the subtlest changes in punctuation in the Fed’s minutes — all in the hopes of anticipating the next big move in commodities, stocks, gold, the dollar, etc. In a nutshell, “positive” news and events cause a rise in prices, while “negative” news pushes prices down.

In reality, however, things are not as clear-cut. Markets regularly “ignore” the news, shrug it off — and move in the opposite direction of their “fundamental” cues. OR, worse waver in two different directions after the same event.

Take, for instance, the recent slew of news items following Federal Reserve chairman Ben Bernanke’s March 1 testimony before the Senate Banking Committee:

  • “US Stocks Advance Ahead of Bernanke’s Testimony” (International Business Times)
  • VERSUS — “US Stocks Turn Lower As Bernanke Testifies To Congress” (NASDAQ)
  • VERSUS — “US Stocks Rise With Bernanke In Focus” (MarketWatch)
  • VERSUS — “Stocks Decline As Bernanke Comments Fall Flat.” (Wall Street Journal)

What often ends up happening is this: Because the original event fails to predict the movement in stocks, commentators then sift through the day’s news feed in search of a different “trigger” — one that fits price action AFTER the fact.

The fallacy of a news-driven market is the first misconception exposed in Elliott Wave International’s Club EWI free resource “The Independent Investor” eBook. Here’s a short preview of this eye-opening report.

Chapter 1 opens with the question “What Really Moves the Market?” You then get the answer via riveting excerpts and charts from EWI president Bob Prechter’s monthly Elliott Wave Theorist publications, such as this one below:

“Suppose the devil were to offer you historic news days in advance. He doesn’t even ask you for your soul in exchange. He explains, ‘What’s more, you can hold a position for as little as a single trading day after the event or as long as you like.’ It sounds foolproof, so you accept. His first offer: ‘The President will be assassinated tomorrow.’ You can’t believe it. You and only you know what’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money?

DJIA Daily 1962-1964

The first arrow in Figure 6 shows the timing of the assassination. The market initially fell, but by the close of the next trading day, it was above where it was at the moment of the event. You can’t cover your short sales until the following day’s opening because the devil said you could hold as briefly as one trading day after the event, but no less. You lose money.”


Independent Investor eBook further exposes 10 other commonly held economic beliefs for what they truly are: Wall Street myths disguised as reality. Here’s what else you’ll learn: 

  • The Problem With “Efficient Market Hypothesis”
  • How To Invest During a Long-Term Bear Market
  • What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
  • Why “Buy and Hold” Doesn’t Work Now
  • How To Be One of the Few the Government Hasn’t Fooled
  • How Gold, Silver and T-Bonds Will Behave in a Bear Market
  • MUCH MORE

Keep reading this 118-page Independent Investor eBook now, free — all you need is a free Club EWI profile.

Earnings Do not Drive Stock Prices

Since the time of buttonwood trees, Wall Street has had its own version of the Ten Commandments — the cornerstone principles of conventional economic wisdom. The first of these writ-in-stone notions is the widespread belief that earnings drive the stock market.

By this line of reasoning, knowing where a market’s prices will trend next is simply a matter of knowing how the companies that comprise said market are expected to perform. On this, the recent news items below capture the public’s devoted following of earnings data:

  • “Stocks Rebound As Investors Await Earnings.” (Associated Press)
  • “US Stocks Drop As Earnings Data Fall Short” (MarketWatch)
  • “Sideways Market Looks For Direction: Earnings Could Point The Way” (MarketWatch)

In reality, though, much of this belief is based on faith, not facts. While earnings may play a role in the price of an individual stock, the stock market as a whole marches to a different drummer.

You get this ground-breaking revelation in the FREE report from Club Elliott Wave International (Club EWI, for short) titled “Market Myths Exposed.” In Chapter One, our editors shatter the smoke-screen surrounding the widespread notion that “Earnings Drive Stock Prices” with these enlightening insights:

  • “Quarterly earnings reports announce a company’s achievements from the previous quarter. Trying to predict futures prices movements based on what happened three months ago is akin to driving down the highway looking only in the rearview mirror. It leaves investors eating the markets dust when the trend changes.”
  • And — There is no consistent correlation between upbeat earnings and an uptrend in stock prices; or vice a versa, downbeat earnings and a decline in stocks. Case in point: During the 1973-4 bear market, the S&P 500 plummeted 50% while S&P earnings rose every quarter over that period. Here, “Market Myths Exposed” provides the following, visual reinforcement: A chart of the S&P 500 versus S&P 500 Quarterly Earnings since 1998.

Earnings: Yesterday News

As you can see, the market enjoyed record quarterly earnings right alongside the historic, bear market turn in stocks in 2000. Then again, the first negative quarter ever in 2009 preceded the March 2009 bottom in stocks.

“Market Myths Exposed” dispels the top TEN fallacies of mainstream economic thought. The misconception that “Earnings Drive the Stock Market” is number one. The remaining nine are equally capable of knocking your socks off and most importantly, helping you protect your financial future.

Get the 33-page Market Myths Exposed eBook for FREE
Learn why you should think independently rather than relying on misleading investment commentary and advice that passes as common wisdom. Just like the myth that government intervention can stop a stock market crash, Market Myths Exposed uncovers other important myths about diversifying your portfolio, the safety of your bank deposits, earnings reports, inflation and deflation, and more! Protect your financial future and change the way you view your investments forever! Learn more, and get your free eBook here.

Do Strong Earnings Mean a Strong Stock Market?

Earnings season is upon us, so it’s a good time to delve into how earnings affect stock prices. Here’s an excerpt from Bob Prechter’s February 2010 Elliott Wave Theorist. It considers the conventional belief in a cause/effect relationship between earnings and stock prices. EWI’s 50-page Independent Investor eBook includes the entire report on the effect 10 different economic events, political events, and monetary and fiscal policies have on the market. You can download it now for free.

Claim #4: “Earnings drive stock prices.
This belief powers the bulk of the research on Wall Street. Countless analysts try to forecast corporate earnings so they can forecast stock prices. The exogenous-cause basis for this research is quite clear: Corporate earnings are the basis of the growth and the contraction of companies and dividends. Rising earnings indicate growing companies and imply rising dividends, and falling earnings suggest the opposite. Corporate growth rates and changes in dividend payout are the reasons investors buy and sell stocks. Therefore, if you can forecast earnings, you can forecast stock prices.

Suppose you were to be guaranteed that corporate earnings would rise strongly for the next six quarters straight. Reports of such improvement would constitute one powerful “information flow.” So, should you buy stocks?

Figure 9

Figure 9 shows that in 1973-1974, earnings per share for S&P 500 companies soared for six quarters in a row, during which time the S&P suffered its largest decline since 1937-1942. This is not a small departure from the expected relationship; it is a history-making departure. Earnings soared, and stocks had their largest collapse for the entire period from 1938 through 2007, a 70-year span! Moreover, the S&P bottomed in early October 1974, and earnings per share then turned down for twelve straight months, just as the S&P turned up! An investor with foreknowledge of these earnings trends would have made two perfectly incorrect decisions, buying near the top of the market and selling at the bottom.

In real life, no one knows what earnings will do, so no one would have made such bad decisions on the basis of foreknowledge. Unfortunately, the basis that investors did use–and which is still popular today–is worse: They buy and sell based on estimated earnings, which incorporate analysts’ emotional biases, which are usually wrongly timed. But that is a story we will tell later. Suffice it for now to say that this glaring an exception to the idea of a causal relationship between corporate earnings and stock prices challenges bedrock theory.

For more of Robert Prechter’s analysis of cause/effect relationships in the markets, download EWI’s FREE 50-page Independent Investor eBook. It includes essays from recent issues of The Elliott Wave Theorist and its sister publication The Elliott Wave Financial Forecast, in addition to a full chapter from the New York Times bestseller, Conquer the Crash. Download your free eBook.

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Jun 11

Think Bonds are the Best Long Term Investment?

A free Club EWI report reveals why bonds do not provide shelter from the storm
December 23, 2010

By Elliott Wave International

TREASURIES — the very name conveys a thing that is secure, protected, and will appreciate over time. Otherwise, it’d be called something like “TRASHeries” or “Mattress Stuffers.” Then, there’s the official seal of the US Department of Treasury: its image of a scale and a key symbolize “balance” and “trust.”

And, finally, there’s the mainstream economic experts who have it on good authority that long-term bonds increase in value during financial instability and uncertainty.

On this, the following news items from November-December 2010 reflect the enduring faith in fixed-income assets as the ultimate safe-havens:

  • “Bonds Tumble On Signs of Economic Recovery” (Reuters)
  • “US Treasury Prices Rise as traders positioned for negative headlines….” (Associated Press)
  • “Treasury’s rise as investors sought shelter in safe haven assets amid rising fears about sovereign debt woes in the eurozone. The slow motion train wreck is likely to play out over year end as each country plays musical chairs with solvency. The market’s concern here is ‘What is next?’ The 10-year Treasury yield will fall if the problems get worse from here.” (Wall Street Journal)

There’s just one problem with this notion: namely, bonds (of any denomination) do NOT have a built-in disaster premium. This is the myth-busting revelation of the latest, free report from Elliott Wave International. The resource titled “The Next Major Disaster Developing For Bond Holders” includes a thoughtful selection of various EWI publications that expose the very real vulnerability of bond markets to economic downturns.

The premier study on the subject comes from Chapter 15 of EWI President Robert Prechter’s book Conquer The Crash by way of this memorable excerpt:

“If there is one bit of conventional wisdom that we hear repeatedly with respect to investing, it is that long-term bonds are the best possible investment [in downturns]. This assertion is wrong. Any bond issued b a borrower who can’t pay goes to zero in a depression. Understand that in a [major contraction], no one knows its depth and almost everyone becomes afraid. That makes investors sell bonds of any issuers that they fear could default. Even when people trust the bonds they own, they are sometimes forced to sell them to raise cash to live on. For this reason, even the safest bonds can go down, at least temporarily, as AAA bonds did in 1931 and 1932.

The first chart (see below) shows what happened to bonds of various grades in the deflationary crash. And the second chart (see below) shows what happened to the Dow Jones 40-bond average, which lost 30% of its value in four years. Observe that the collapse of the early 1930s brought these bonds’ prices below — and their interest rates above — where they were in 1920 near the peak in the intense inflation of the ‘Teens.”


That’s just the tip of this myth-busting report. “The Next Major Disaster” uncovers flaws in other widely-accepted bond lore, including these two assumptions:
 

  • High -yield bonds rise during economic expansions
  • AND — municipal bonds provide a steady refuge in times of economic stress.

Read more about Robert Prechter’s warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.

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Jun 11

Why Diversification Does not Work

Posted in Market Timing

Prechter and Kendall’s “All the Same Market” Analysis Shows how Diversification Can’t Protect You from Correlated Risk
December 22, 2010

By Elliott Wave International

A dear friend of mine wants to celebrate an important health milestone by going skydiving with friends. She feels happy and healthy and excited. She wants to do something very thrilling to celebrate.

I’m going to help my friend celebrate, by way of something very mundane: I intend to photograph the event from the ground. Of course I’m excited to be there, and I understand my friend’s motivation — it’s just that I am not a thrill seeker (especially when it comes to heights)!

Similarly, I don’t take big risks with my investments. I’m sure it’s a thrill to make a million, but the risk of losing all my capital is too terrifying for me to stomach.

When I started to research my investment choices, the idea of “portfolio diversification” made a lot of sense to me. All of the “experts” said it’s the key to reducing risk. It seemed safe in the same way that ropes and pulleys could really help a novice enjoy rock climbing or the trapeze.

But then I came across this gem of investing wisdom, written in terms that I understood on a visceral level:

Recommending diversification so that novices can reduce risk is like recommending that novice skydivers strap a pillow to their backsides to “reduce risk.” Wouldn’t it be more helpful to advise them to avoid skydiving until they have learned all about it? Novices should not be investing; they should be saving, which means acting to protect their principal, not to generate a return when they don’t know how.

The Elliott Wave Theorist (April 29, 1994)

I can appreciate the metaphor.

What fascinates me even more is how this contrary view of diversification is magnified when you consider how markets can correlate.

In Conquer the Crash, Robert Prechter and Pete Kendall first put forth their “All the Same Market” hypothesis, stating that in the Great Asset Mania and its bear market aftermath, all markets “move up and down more or less together…as liquidity expands and contracts.”

Consider, for instance, the tried and increasingly debilitating strategy of diversification. With the market smash extending across every investment front but cash, one might think that this concept would at least be challenged by now. But it remains a virtually uncontested truism among market advisors and their followers.

The Elliott Wave Financial Forecast (Oct 31, 2008)

The first edition of Conquer the Crash published in 2002; since then, our analysts have produced a multitude of chart-based evidence to demonstrate the coordinated trends across diverse financial markets.

Ready to turn in your pillow?

Anyone interested in making informed financial decisions can benefit from our newly available “Death to Diversification” eBook, which explains more about how you can avoid the false security of a diversified portfolio.

Talk with an investment advisor, and what’s the first piece of advice you will hear? Diversify your portfolio. The case for diversification is repeated so often that it’s come to be thought of as an indisputable rule. Hardly anyone makes the case against diversifying your portfolio. But because we believe that too much liquidity has made all markets act similar to one another, we make that case. Heresy? Not at all. Just because investment banks and stock brokerages say you should diversify doesn’t make it true. After all, their analysts nearly always say that the markets look bullish and that people should buy more now.  For a breath of fresh air on this subject, read what Bob Prechter thinks about diversification.

* * * * *

Excerpt taken from Prechter’s Perspective, originally published 2002, re-published 2004

Question: In recent years, mainstream experts have made the ideas of “buy and hold” and diversification almost synonymous with investing. What about diversification? Now it is nearly universally held that risk is reduced through acquisition of a broad-based portfolio of any imaginable investment category. Where do you stand on this idea?

Bob Prechter: Diversification for its own sake means you don’t know what you’re doing. If that is true, you might as well hold Treasury bills or a savings account. My opinion on this question is black and white, because the whole purpose of being a market speculator is to identify trends and make money with them. The proper approach is to take everything you can out of anticipated trends, using indicators that help you do that. Those times you make a mistake will be made up many times over by the successful investments you make. Some people say that is the purpose of diversification, that the winners will overcome the losers. But that stance requires the opinion that most investment vehicles ultimately go up from any entry point. That is not true, and is an opinion typically held late in a period when it has been true. So ironically, poor timing is often the thing that kills people who claim to ignore timing.

Sometimes the correct approach will lead to a diversified portfolio. There are times I have been long U.S. stocks, short bonds, short the Nikkei, and long something else. Other times, I’ve kept a very concentrated market position. My advice from mid-1984 to October 2, 1987, for instance, was to remain 100% invested in the U.S. stock market. During the bull market, I raised the stop-loss at each point along the wave structure where I could identify definite points of support. If I was wrong, investors would have been out of their positions. The potential was five times greater on the upside than the risk was on the downside, and five times greater in the stock market than any other area. Twice recently, in 1993 and 1995, I have had big positions in precious metals mining stocks when they appeared to me to be the only game in town. In 1993, it worked great, and they gained 100% in ten months. Diversification would have eliminated the profit. And every so often, an across-the-board deflation smashes all investments at once, and the person who has all his eggs in one basket, in this case cash, stays whole while everyone else gets killed.

* * * * *

Excerpt from The Elliott Wave Theorist, April 29, 1994

It is repeated daily that “global diversification” is self evidently an intelligent approach to investing. In brief, goes the line, an investor should not restrict himself to domestic stocks and bonds but also buy stocks and bonds of as many other countries as possible to “spread the risk” and ensure safety. Diversification is a tactic always touted at the end of global bull markets. Without years of a bull market to provide psychological comfort, this apparently self evident truth would not even be considered. No one was making this case at the 1974 low. During the craze for collectible coins, were you helped in owning rare coins of England, Spain, Japan and Malaysia? Or were you that much more hopelessly stuck when the bear market hit?

The Elliott Wave Theorist‘s position has been that successful investing requires one thing: anticipating successful investments, which requires that one must have a method of choosing them. Sometimes that means holding many investments, sometimes few. Recommending diversification so that novices can reduce risk is like recommending that novice skydivers strap a pillow to their backsides to “reduce risk.” Wouldn’t it be more helpful to advise them to avoid skydiving until they have learned all about it? Novices should not be investing; they should be saving, which means acting to protect their principal, not to generate a return when they don’t know how.

For the knowledgeable investor, diversification for its own sake merely reduces profits. Therefore, anyone championing investment diversification for the sake of safety and no other reason has no method for choosing investments, no method of forming a market opinion, and should not be in the money management business. Ironically yet necessarily given today’s conviction about diversification, the deflationary trend that will soon become monolithic will devastate nearly all financial assets except cash. If you want to diversify, buy some 6-month Treasury bills along with your 3-month ones.

Want More Reasons Why Diversification Should be Diverted from your Portfolio? Get our FREE report that explains the holes in the diversification argument. All you have to do is sign up as one of our Club EWI members. It’s free, and it will give you access to more than this diversification report. Follow this link to instantly download this special free report, Death to Diversification – What it Means for Your Investment Strategy.

As a Club EWI member, we are proud to offer you this new FREE e-book: You can see for yourself the kind of analysis our subscribers have received and used for over 30 years.Click here to login or sign up for instant access.
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