In this next chapter, entitled Waves and the 7th reason, we'll examine the world renowned research known as the Elliott Wave Principle. Are you curious about this Principle and the knowledge it can impart to you about the coming world economic storm? Do you remember hearing about Elliott Wave's primary spokesman and author today, Robert Prechter?
Waves
As we move forward in this chapter, you may hear a number of new names. Hopefully, you already know something about the founder of this Wave research, Ralph N. Elliott. Do you? Well, here's a decent brief to know his work better.
Ralph Nelson Elliott (1871-1948) was an accountant in the 1930’s who became sick and bedridden whereupon he began studying the Dow Jones trading averages since 1896. From his research, he proposed that market prices occur in specific patterns, which today are known as Elliott waves.
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He published his research in a book in 1938 titled The Wave Principle . He expanded this work with his second book in 1946 entitled Nature’s Laws – The Secret of the Universe . In this book, he stressed that humans’ activities and decisions come in rhythms or waves that can be predicted.
While the stock market is an excellent medium verifying his research, these waves are applicable in virtually every area of a person’s life as well. Elliott held that investor or crowd psychology moves from optimistic to pessimistic and then back again. The culmination of his research has become known as the Elliott Wave Principle.
Since Elliott’s initial findings and related writings, many noted market analysts, such as A. Hamilton Bolton of the Bank Credit Analyst , A. J. Frost, Richard Russell, Robert Prechter, Glenn Neely, and Zoran Gayer – just to cite a few, have expanded upon his early research. Many other traders and investment advisors rely on their own Elliott Wave analysis or buy this research through market newsletters and subscription services.
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Dr. Robert McHugh offers Elliott Wave research through his subscription service for investments: https://www.technicalindicator index.com .
Dr. McHugh uses Elliott Wave Analysis as just one important tool among a number of technical indicators he utilizes to make trading recommendations to his readers. On his website glossary, he offers this reasonable and concise explanation for the Elliott Wave Analysis employed among his indicators, which should be helpful in our own understanding, as follows:
I n a nutshell Elliott Wave analysis goes like this: Markets reflect all information, and all knowledge available to man. They have a language of their own, and communicate where they are going next. Elliott Wave is one of many languages the markets use to tell us where they are headed next. Market moves are not reactive to news announcements, but rather independent of news. News comes as a result of the position of the Elliott Waves — the psychological state of man at that particular time . How news is interpreted depends upon the wave. If the wave formation indicates a Bullish move in progress, then bad news will be ignored or reacted to in a positive way, i.e.., markets will go up anyway. And, if the wave pattern is Bearish, then good news will be ignored or reacted to negatively — markets will sell off. Thus, it is helpful to investors if they are aware of the Elliott Wave position markets find themselves in, and which wave pattern is next expected to arrive. Again, oversimplifying, and using the stock market as an example, in Elliott Wave analysis, equity prices move up or down with the primary trend impulsively. These impulsive (dramatic) moves come in stair-step fashion, five waves at a time. Waves 1, 3, and 5 progress and waves 2 and 4 regress (or correct). The total move in the direction of the primary trend progresses because the sum of waves 1, 3, and 5 exceeds the sum of waves 2 and 4. Waves 1, 3, and 5 move in the direction of the primary trend, while waves 2 and 4 can either move in the opposite direction or sideways . Degrees of waves are distinguished based upon the time period they cover. Very long-term degrees of waves could cover hundreds of years, such as the Grand Supercycle degree. Very short-term degrees of waves might only cover a few weeks, or days. Elliott Waves can even be broken down and identified intraday by hour or minute.
From Dr. McHugh’s glossary explanation, there are a few rules which are also important relative to the worth of Elliott Wave Analysis towards this book’s economic outlook presently. Those noteworthy rules are:
There are three cardinal rules: 1) Wave 2, when it corrects wave 1, may never move prices beyond the starting point of wave 1. 2) Wave 3 may never be the shortest wave. 3) Wave 4 must never enter the price territory of the same degree wave 1. If any of these rules are violated, then the Elliott Wave count is wrong. In addition to rules, what is extremely helpful is knowing the different personalities of each wave. 1) Wave 3’s are usually (not always) the most dramatic, most powerful, and extend the furthest. 2) Wave twos often reverse so sharply , and so much of the previous wave 1’s move, that it confuses the Elliottician as to whether in fact the trend has really changed or not. Retracements of as much as 61.8 percent or 78.6 percent are not uncommon in wave twos.
Most notable among today’s Elliott Wave practitioners and writers is Robert R. Prechter, Jr., a resident of Gainesville, Georgia. I first came to know him in the early 80’s and have maintained touch with him - picking his brain, as his time will allow me - up until the present.
[cclxxviii] Prechter, aside from being a very astute and successful business person, is a modest man who has always remained so despite being on TV shows, magazine covers, and many other spotlight venues with regularity since before we came to know one another. He conducts his intensive research accompanied by his ever expanding and talented support staff from his lakeside home and office. This is consistent with his humility – if not sanity, too, as he’s never considered moving to the nearby, ever growing, and busy 6BN+ population of Atlanta or other large, similarly busy cities that most market gurus call home.
Prechter founded and heads a number of first-rate Elliott Wave analysis services which can be accessed from this website: http://www.elliottwave.com/. He and his capable staff’s outlook on America’s current financial system are most worthy of consideration and inclusion in this book. What better means might we glean the important understanding in Elliott Wave analysis than direct from the regular research and writings from Prechter’s companies, as follows:
Readers sometimes ask if I am serious about the Dow eventually falling below 1000. People can understand that the Dow can fall in terms of gold, but they are so convinced about coming hyperinflation that they consider the idea of the nominal Dow in triple digits to be simply out of touch with reality. The primary reason I believe the Dow is going to fall that far is its Elliott wave structure, which calls for it. But I can also see a monetary reason for this event. The tremendous inflation of the past 76 years has occurred primarily by way of instrument of credit, not banknotes. Credit can implode. The only monetary outcome that will make sense of the Elliott wave structure is for the market value of dollar-denominated credit to shrink by over 90 percent. Given the eroded state of capital goods in the U.S. and the depletion of manufacturing capacity, it is not hard to see why all these IOUs have a deteriorating basis of repayment. The future has already been fully mortgaged; it's time to pay. But there is no money to pay, only more IOUs, which cannot be paid, either. So the credit supply (after a brief respite) will continue to shrink, which means that wealth, and therefore purchasing power, will disappear along with it. In the broadest sense, this change will constitute a collapse in the "money supply." Such a monetary background would be consistent with the Dow falling below 1000 in nominal terms. It is one of the reasons that Conquer the Crash is subtitled “How To Survive and Prosper in a Deflationary Depression.” To be sure, the central bank does have the capacity to print banknotes. But I expect that the final implosion in credit value will be so swift that the authorities will not act in time to counter it. They will continue to try to maintain the fictions of full face value for IOUs until they fail spectacularly to keep up the scam. Then they will start to scramble, but it will be too late
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To better comprehend, the manner in which Prechter and others make their wave counts, study this piece from Prechter’s market newsletter on April 1, 2009, about the Dow high in 2007, and how that wave count resembles what happened when stocks bottomed on March 9, 2009, before rallying to this present day:
Do you remember when the DJIA registered its all-time high? It was at 14,093 on October 12, 2007. That’s when EWI’s monthly Elliott Wave Financial Forecast (EWFF) made this forecast:
Elliott Wave Financial Forecast
November 2007 (data through November 1)
BOTTOM LINE: An across-the-board extreme in optimism toward a wide range of markets should lead to an across-the-board decline. In a rare event that is consistent with EWI’s all-the-same market thesis, stocks, oil, metals, commodities and many foreign currencies all sport recent 90%+ bullish sentiment readings. These extremes typically coincide with market tops.
That forecast was largely based on this Elliott wave picture showing in the DJIA at the time (as presented in the October 2007 EWFF):
As you can see, the Dow’s advance into the October 2007 peak followed an idealized Elliott wave path. And, as the pattern suggested, what would come next was a strong decline.
The Dow’s 54% drop into the 6,470 intraday low on March 6 speaks for itself.
But markets don’t move in straight lines. For every rally, there is a setback. For every decline, there is a correction. And if you’ve been wondering whether or not the DJIA’s latest advance is just a short-term bear market trap or the bottom, wonder no more.
Prechter, McHugh, and other Elliott Wave practitioners make the convincing case that the US stock market is presently in Wave 2 of a Bear market with Wave 3 down, likely. Of course, Wave 3, as defined, will be the longest of this Bear market, and the most devastating wave down with estimates of its Dow bottom before Wave 4, up, at 5000-3000, minimum.
As Prechter writes above, when the Dow bottoms in this larger Bear market, it’ll be below 1000, in his opinion, and that will happen in the final Wave 5, down. Of course, moves up or down are never in a straight line.
This Elliott Wave count and its historical accuracy further confirm the belief in the tough economic times ahead for America as it leads the rest of the world into hard financial times - similar to a violent storm.
[McGee and Edwards'] Technical Analysis of Stock Trends and The Elliott Wave Theorist both give very specific and systematic ways to approach developing great reward/risk ratios for entering into a business contract with the marketplace, which is what every trade should be if properly and thoughtfully executed. [cclxxxi]
It is intriguing that the log-periodic structures documented here bear some similarity with the 'Elliott waves' of technical analysis …. A lot of effort has been developed in finance both by academic and trading institutions and more recently by physicists (using some of their statistical tools developed to deal with complex times series) to analyze past data to get information on the future. The 'Elliott wave' technique is probably the most famous in this field. We speculate that the 'Elliott waves', so strongly rooted in the financial analysts’ folklore, could be a signature of an underlying critical structure of the stock market . [cclxxxii]
Paul Tudor Jones, the multi-billionaire commodity trader, calls Prechter and Frost's standard text on Elliott "a classic," and one of "the four Bibles of the business". [cclxxxiii]
The observation made by contrarians is that at the top of a market, there will be a substantially greater number of bulls than bears. This is a fact, but it doesn't tell you how far the pendulum can swing in one or the other direction. That is why the Wave Principle is necessary. It provides a background for knowing when to go with a trend and when to go against it. [cclxxxiv]
In Conclusion, most Elliott Wave Analysts, in chorus with Kondratieff's Long Cycle Students, believe America is headed into its Next Great Depression beginning with a period of Deflation followed by rampant Inflation.
And as you are thinking about all you've read so far in support of the coming world economic storm, let me suggest some Reflections by introducing the next chapter of that name. This chapter will offer more evidence on the storm ahead. Isn't it time you reflected a bit on what's been covered so far, while getting prepared for the final chapters delivering the valuable knowledge to help protect your finances, your family, and your business?
Reflections
At this juncture, we’ve covered seven key reasons supporting a coming worldwide economic storm, as follows:
1. Debt;
2. Population & Demographics;
3. Entitlements;
4. Retirement;
5. Political Failings;
6. Cycles; and,
7. Waves.
Virtually nobody foresaw the Great Depression of the 1930s , or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a “new era” had arrived. [cclxxxv]
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Additionally, this book has presented several other compelling and complimentary considerations that support the belief in this approaching economic storm with “America leading the world into the toughest financial times in man’s history.” Any one of these seven ingredients by their own merits is sufficient to insure further troubling financial times ahead for these United States, though what compounds these concerns is that each and every factor will begin to take place within these expected next six months.
This is the first time since the Great Depression that the international financial system has come close to a genuine meltdown. That is the crucial difference between this financial crisis and previous ones. [cclxxxvii]
Will you be ready? Your business ready? Your family ready?
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When the unraveling is fully under way, there will be a flood of lurid headlines. Amid the avalanche of hearings, lawsuits, arrests, trials, stories about violent strikes and protests will vie with news of plunging markets and businesses going belly up. Every day, tales of foreclosures and broken lives will blanket the airwaves. Rumor-filled bank runs will be commonplace. Finger-pointing will also be widespread, as politicians, regulators, and corporate chiefs scramble for cover in the face of increasingly hostile public opinion. Meanwhile, Americans will scratch their heads and wonder how it all went so wrong so fast, or why they had not been aware of the dangers before. In reality, we should have seen it coming. Signs of impending doom were everywhere, plain for all to see, in the years leading up to the wide-ranging meltdown. [cclxxxix]
Can you imagine being unprepared as were the masses when the Great Depression of the 1930s rained down upon everyone's heads? Do you remember how you felt, where you were, what you did, when you heard ... of John Kennedy's assassination, of the stock market crash on October 19, 1987, of the dot com bubble burst on March 10, 2000, of the horrific 9/11 attack in 2001 with the tragic loss of so many innocent lives, and/or the more recent housing price collapse from the highs of 2006?
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If you were old enough for any of these first 4 single date occurrences, they each offer a feeling of surprise on a circumstance that may have affected you. In only the examples of stocks on October 19, 1987, and March 10, 2000, or housing in 2006 until the present, can the case be made for financial harm because you were not prepared? Can you put a dollar value on what being prepared could have meant to you in any of these three circumstances?
Imagine what it would be like if you could be prepared when this economic storm hits. Again, that is the objective of this book's message for you and yours.
Unlike an earthquake that will often erupt unexpectedly, the economy gives fair warnings of an impending disaster. Unfortunately, most people don’t heed the warnings and usually get caught unaware. A proverb says, “A wise man looks ahead and sees a problem and avoids it. A fool proceeds without ca
ution.” When the interest on the national debt exceeds the total income of our government, it would be prudent to assume the system is about to “roll over.” [ccxci]
You now have at least 7 solid reasons behind the coming economic storm. You understand how devastating this economic storm might be if you are surprised by it. Are you curious about what might trigger this storm?
While there seem a myriad of possible triggers into this economic storm, such as America’s recent housing collapse and mortgage fiasco, or Lehman Brothers bankruptcy, or Dubai World looking for a six month break in its interest payments on its $60BN in loans, or the US government approving a “national health plan” that the majority of citizens oppose ( WSJ poll in December 2009 showed 93% of readers are against the current plans being proposed) and may well be the costliest of Entitlements, or the collapse of Greece and/or other Western European economies, or the collapse of the US commercial real estate market, or another downgrade of the US credit worthiness as S & P rating service has already suggested – just to cite a few possibilities, Elliott Wave analysis teaches that any such event will be driven by the sentiment in the marketplace rather than any single event.
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Historically, and what is most likely - as it was in the 1930's, is a sell-off in US and world stock markets. Earlier in this book, you've learned of several situations where there have been wrongful efforts to circumvent the normal and natural corrective actions by our free market. As concerns the US stock market, you're intelligent enough to recognize from your readings here that the PPT, as instituted in early 1988, has allowed each president from Reagan until Obama, to expend billions of dollars in trying to push up the US stock market.
America's Worst Economic Depression Page 11
