S&P 500: Did the 13.74-Point Rally Finish the Move?
From an Elliott wave perspective, there was a good reason for the June 15 rally 
June 19, 2012

By Elliott Wave International

There were few “fundamental” reasons to be bullish on U.S. stocks on Friday morning (June 15).

If anything, the news that the U.S. unemployment rose in 18 states in May sounded downright bearish. But stocks rallied anyway — for a seemingly unlikely reason, explained the pundits: Because all the bad news lately makes it likely that the Fed will step in again.

(Just as a side note, how many times did the Fed “step in” in 2007-2009 while the DJIA was dropping from over 14,000 to below 6,500? But hey, that’s ancient history, and besides — “it’s different this time,” right?)

From an Elliott wave perspective, there was another reason for the June 15 rally: the S&P 500 had some unfinished technical business on the upside. Here’s what the editor Tom Prindaville wrote on Friday morning in EWI’s U.S. Intraday Stocks Specialty Service (try it free now, during June 14-21 FreeWeek):

S&P 500 (Intraday)
Posted On: Jun 15 2012 9:30AM ET / Jun 15 2012 1:30PM GMT
Last Price: 1331.33

Trade pushed beyond the 1319.74 level yesterday…[which] is significant because it implies that, minimally, the S&P wants to take a closer, more deliberate look at 1338, and the overall proportionally of the recent Elliott wave action backs that up. For today, persistence atop 1319.74 is needed to see the very near-term trend up with a minimum upside target of 1338.32.

The S&P 500 closed trading on June 15 at 1342.84, exceeding the bullish price target U.S. Intraday Stocks Specialty Service gave on Friday morning by 4 points.

European Central Bank: “Great White Fear” Takes A Bite Out of Recovery
EWI’s Global Market Perspective foresaw the shift in European banks from lenders to savers via one remarkable chart 
April 23, 2012

By Elliott Wave International

It’s been over two years since the European Central Bank began its open-heart surgery of the eurozone’s anemic economy. So far, the procedure has included an unprecedented $3 trillion-plus in bailouts, monetary transfusions, AND toxic debt transplants.

Yet, according to a recent slew of discomforting news reports, the economies across the pond would still flatline in seconds without constant life support. Here, an April 18, 2012, Wall Street Journal writes:

“Europe Hemorrhages through Refinancing Operation Band-Aid” and reveals that Europe’s banking sector has wolfed down three years of Long Term Refinancing Operations (LTROs) in under four months.

The question is — what went wrong?

Well, to answer this, we have to go back to the drawing board to mid-2010. It was then that the European Central Bank and company released the rescue-package Kraken via a $1 trillion bailout of Greece and a full-fledged initiation of its LTRO.

And, as the following May 10, 2010, news items make plain, this credit-reflating beast was set to tear Europe’s economic bear to shreds:

• “This is shock-and-awe, part II, in 3D, with a much bigger budget and more impressive array of special effects. The EU package eliminates the danger that Greece’s debt woes will ricochet through Europe’s banks.” (USA Today)
• “This is a truly overwhelming force and should be more than sufficient to stabilize markets, prevent panic and contain the risk of contagion.” (Bloomberg Businessweek)

In the July 2010 Global Market Perspective, however, our analysts foresaw a fatal flaw in the plan. The first part was fine: The European Central Bank (ECB) bought packages of debt and resold them to smaller banks at a historically low interest rate.

BUT the second part didn’t work out: Instead of rebundling those loans and passing them on to small businesses to stimulate investment, THOSE banks redeposited the funds with the ECB. Riffing off the famous “Jaws” quote (“We’re gonna need a bigger boat”), the July 2010Global Market Perspective captured the great-white fear circling the lending sector via the following chart of commercial banks’ usage of the ECB’s Deposit Facility and wrote:

“The chart roughly indicates the degree to which banks fear for the insolvency of one another. Banks receive below-market interest rates on their ECB deposits, so they’re generally loathe to hold significant funds there. As anxiety grows, however, so do banks’ deposits in the Facility, mainly because their desire for adequate interest gives way to their more essential need to safeguard principal … Because the [economic downturn] is still young, deposits at the ECB will likely keep rising. Like stocks, the casual approach to banking that existed up until now is in for a massive shift.”

Flash two years ahead. The April 2012 Global Market Perspective’s updated chart below shows that usage of the ECB’s Deposit Facility has indeed risen, nay doubled, since the original forecast.

The question now is not whether monetary policy will save Europe’s economy, but whether the one precondition for recovery — confidence — will return to lenders.

What the European Debt Crisis Could Mean for YOUR Investments The European Debt Crisis is affecting investments across the globe. Gain a valuable perspective on the European debt crisis and get ahead of what is yet to come in this FREE club resource from Elliott Wave International. Read Your Free Report Now: The European Debt Crisis and Your Investments.

The Biggest Bubble of All: This One Has Yet to Deflate (Are You Ready?)
More Threatening Than Any Single Economic Sector 
April 20, 2012

By Elliott Wave International

History shows that once a financial bubble bursts, it can take a long time to bounce back.

Recent history offers an example: Real estate prices topped in 2006-2007 — then came the worst part of the sub-prime mortgage crisis in 2008.

Yet instead of recovering with the passage of time, real estate prices just keep getting worse:

Home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.

– CNNMoney, March 27

As values sink and desperation grows, the number of owners giving their timeshares away for $1 — or less — has doubled in the past year, says Brian Rogers, of Timeshare Users Group, an owner advocacy group. “There’s never been a worst time to try to sell a timeshare,” he says.

– SmartMoney, April 4

Observers have called for a bottom numerous times in the five or so years since the bubble burst.

Again, this is what can happen. Recovery can take far longer than many expect.

Real estate is just one sector of the economy. Let’s consider another sector:

According to Citigroup economist Steven Wieting health care is the next big bubble looming in the distance.

And to make matters all the more worrisome, his analysis suggests it’s like nothing we’ve seen before.

– CNBC.com, April 12

Although health care is a huge part of the economy, it’s still just one sector. Let’s consider yet another sector:

The amount Americans owe on student loans is far higher than earlier estimates…Total student debt outstanding appears to have surpassed $1 trillion late last year…That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York.

– Wall Street Journal online, March 22

As big as each of the above sectors are, they are just a fraction of the bigger picture:

…the property market, to me, was a microcosm…of what shape the whole world is in right now — in debt up to its ears and ultimately unable to pay. And that’s what crushed the real estate market and I think it’s going to crush…the entire debt market across the globe…Nobody’s worried…

– Robert Prechter, Financial Sense Newshour interview, March 22

Far from being worried, lenders are once again trying to push credit on risky clients:

[A Brooklyn resident] just emerged from bankruptcy and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail.

– New York Times, April 10

As bubbles balloon in individual sectors of the economy, the psychology of the pre-financial crisis days have returned.

That’s why it’s important to remember that hardly anyone was concerned about the real estate market in 2006. Then the whole house of cards fell in.

Now consider the entire global debt market: the biggest bubble of all time.

How Should YOU Prepare for the Next Major Market Move? Download this free report to gain a perspective on the markets that will help you position your portfolio for prosperity. You’ll receive recent, chart-filled analysis from Bob Prechter with information you won’t find in the financial news. Download the free report now >>

How to Handle an Economic Implosion

April 18, 2012

By Elliott Wave International

I came across some research on the subject of worry. Here’s how it was presented:

Things People Worry About:

• things that never happen – 40%
• things which did happen that worrying can’t undo – 30%
• needless health worries – 12%
• petty, miscellaneous worries – 10%
• real, legitimate worries – 8%

Of the legitimate worries, half are problems beyond our personal ability to solve. That leaves 4% in the realm of worries people can do something about.

I thought about our gigantic national debt and weak economy. These seem to fit into both subcategories of “real” worries. You can’t do much as an individual to solve the nation’s debt and economic problems, yet you can prepare for a worsening economic downtrend.

Do we see evidence for an economic turn for the worse?

Well, consider that the evidence is so overwhelming that it took 456 pages of the second edition of Robert Prechter’s book, Conquer the Crash, to cover it. And since that book published, Prechter has consistently devoted his monthly Elliott Wave Theorist to the facts and evidence behind his forecast.

Here’s a chart from the book that was updated by Elliott Wave International in March 2012:

The downturn from 2008 is critically important, as it shows that after an almost unbroken 60-year climb, the contraction is underway. It surely has much further to go, because it is still a third higher than it was at the outset of the last debt deflation in 1929.

– The Elliott Wave Financial Forecast, March 2012

The rating agencies are well aware of what the above chart means. You probably know that Standard & Poor’s downgraded U.S. debt from the nation’s long-standing triple-A to AA+. Now, another rating agency has taken their rating even lower:

Rating firm Egan-Jones cuts its credit rating on the U.S. government to “AA” from “AA+” with a negative watch, citing a lack of progress in cutting the mounting federal debt.

– CNBC.com, April 5

Robert Prechter’s bestseller, Conquer the Crash, provides practical information about what you can do to protect your finances in the coming economic implosion. And right now, Elliott Wave International is offering 8 lessons from Conquer the Crash in a free 42-page report that covers:

• What to do with your pension plan
• How to identify a safe haven
• What you should do if you run a business
• A Short List of Imperative “Dos” and Don’ts”
• And more

In every disaster, only a very few people prepare themselves beforehand. Discover the ways you can be financially prepared and safe.

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Fibonacci Technical Analysis

Brand new report details how to use Fibonacci as a tool to improve your trading at no extra cost to you the trader.

Understanding Fibonacci
Learn to apply Fibonacci ratios to calculate price targets in stocks
October 07, 2011

By Elliott Wave International

The Fibonacci ratio can be an invaluable tool for calculating price retracements and projections in your analysis and trading. This excerpt from The Best Technical Indicators for Successful Trading explains the origins of the Fibonacci sequence and how you can apply it to the markets.

You can read the entire Fibonacci section — plus 7 more lessons on how to use technical indicators to improve your trading for FREE — see below.

Leonardo Fibonacci da Pisa was a thirteenth-century mathematician who posed a question: How many pairs of rabbits placed in an enclosed area can be produced in a single year from one pair of rabbits, if each gives birth to a new pair each month starting with the second month? The answer: 144.

The genius of this simple little question is not found in the answer, but in the pattern of numbers that leads to the answer: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, and 144. This sequence of numbers represents the propagation of rabbits during the 12-month period and is referred to as the Fibonacci sequence.

The ratio between consecutive numbers in this set approaches the popular .618 and 1.618, the Fibonacci ratio and its inverse. (Relating non-consecutive numbers in the set yields other popular ratios – .146, .236, .382, .618, 1.000, 1.618, 2.618, 4.236, 6.854….)

…In addition to recognizing that the stock market undulates in repetitive patterns, R. N. Elliott also realized the importance of the Fibonacci ratio. In Elliott’s final book, Nature’s Law, he specifically referred to the Fibonacci sequence as the mathematical basis for the Wave Principle. Thanks to his discoveries, we use the Fibonacci ratio in calculating wave retracements and projections today.

How to Identify Fibonacci Retracements
The primary Fibonacci ratios that I use in identifying wave retracements are .236, .382, .500, .618 and .786. Some of you might say that .500 and .786 are not Fibonacci ratios; well, it’s all in the math. If you divide the second month of Leonardo’s rabbit example by the third month, the answer is .500, 1 divided by 2; .786 is simply the square root of .618.

There are many different Fibonacci ratios used to determine retracement levels. The most common are .382 and .618. However, .472, .764 and .707 are also popular choices. The decision to use a certain level is a personal choice. What you continue to use will be determined by the markets.

…It’s worth noting that Fibonacci retracements can be used on any time frame to identify potential reversal points. An important aspect to remember is that a Fibonacci retracement of a previous wave on a weekly chart is more significant than what you would find on a 60-minute chart.

See charts that show the application of Fibonacci ratios, plus 7 other lessons on technical indicators, by accessing your free report now.

Learn the Best Technical Indicators for Successful Trading In this free report, you will learn the tools of the trade directly from the analysts at Elliott Wave International. Using both video lessons and reports, they teach you how to incorporate technical indicators into your analysis to improve your trading decisions. You will learn: How to employ Fibonacci ratios to calculate possible turning points. How to interpret technical indicators such as Moving Average Convergence/Divergence — MACD. How to exploit trendlines to uncover trading opportunities when stock charting. Technical patterns that can alert you to major moves, and how to know if it�s a legitimate pattern. And more — 8 lessons in all! Get your Technical Indicators report now>>

Understand Fibonacci technical analysis, Fibonacci ratios and Fibonacci retracements and use the techniques to your financial advantage.

How Punk Rock and Pop Music Relate to Social Mood and the Markets

March 10, 2011

By Elliott Wave International

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 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.

EWI’s Newest Service Picks ETFs: Interview with the Editor

EWI’s Wayne Stough adds another Flash opportunity service to the line-up: ETFs
October 8, 2010

By Elliott Wave International

Every trader or active investor at times wishes they could pick the brain of a pro that has “pulled the trigger” on real-money trades before.

EWI Director of Analysis Wayne Stough is one of these pros. For several years, several times per month, he’s been alerting his Flash service subscribers to opportunities in futures markets.

And now, there is a new addition to the Flash service line-up: ETF Opportunity Flash. We caught up with Wayne in his office and asked him a few questions:

Q: What method do you use when looking for high-probability trade set-ups?

Wayne Stough: My main approach is The Elliott Wave Principle. I look for clean, precise wave counts — usually ones that other analysts can confirm, so there is a general consensus on market direction. Once the market meets my other criteria for a high-confidence trade, I send out a Flash recommendation to my subscribers.

Q: How do you define a “high-confidence” trade?

WS: That’s a good question, because no market forecast is ever guaranteed, whether you use Elliott or some other forecasting method. Having said that, there are definitely moments when probabilities (or odds, if you will) strongly suggest a particular move. For example — and this is just basic Elliott — the Wave Principle says that markets move in a series of five waves in the direction of the larger trend (labeled on a chart 1, 2, 3, 4, 5) and three waves against the trend (labeled A, B, C). Also, there are certain proportions between these waves that markets often adhere to. So whether I’m counting a 1, 2, 3, 4, 5 pattern in a rally or a decline (i.e., in a bull or bear market), I focus on where the fifth wave should end, according to Elliott wave guidelines.

Once I’ve identified that price termination point, it becomes a matter of waiting for the market to get there. Fifth waves come at the end of the pattern and are usually weaker than third waves. So once I see certain technical indicators diverging (e.g. the RSI), my confidence grows: We are near the end of the pattern, and prices are about to reverse. That’s just one example of a high-confidence situation. But I do suggest a protective stop with every new Flash alert, in case the forecast doesn’t come true.

Q: Are you aiming for a particular percentage gain?

WS: Absolutely. When I send a Flash alert, I’m typically looking for a 3-to-1 ratio, at a minimum.

Q: Does that always work out?

WS: No. I monitor the recommendation for warning signals that let me know when a different scenario is unfolding in the charts. In those cases, I send out another Flash alert suggesting to lower or raise the stop-loss level, or exit the recommendation entirely.

Q: They say you love the S&P Mini as a trading vehicle. Why?

WS: I’d put it differently. I have traded the S&P for a long time, I understand that market’s nuances, and I like the leverage and volatility. But while the S&P comes naturally to me, I’ve also made many Flash recommendations on other markets, like gold and currencies. So, a better way would be to say that I love any market that gives me the desired risk-reward ratio. Now I’m also “looking for love” among various ETFs.

Special Introductory Offer: Get ETF Opportunity Flash now and have 2nd month FREE. Details.

Q: If traders expect a bear market, should they still consider Flash Services?

WS: Absolutely. I think we’re at the cusp of something very big in the stock market. And this is the time to act. Just keep in mind that speculating in severe bear markets (or during extreme volatility) carries additional risks. So be sure you do your research and know how your financial instruments behave under these conditions. And anyone who chooses to trade in this environment must only risk the money they absolutely can afford to lose.

Q: Who do you think should consider subscribing to EWI’s Flash Services — including the newest addition, the ETF Flash?

WS: Anyone who has some risk capital but not enough time or experience to find their own opportunities. Anyone who understands and accepts the fact that when you bet your money, there will be winners and losers. (Sometimes more of one than the other.) Anyone who knows better than to risk all their capital on a single recommendation; the old “all eggs in one basket” situation. I think in terms of quarters: I want all my subscribers smiling at the end of a quarter.

EWI ETF Opportunity Flash service now brings you potential high-probability opportunities in exchange-traded funds (ETFs). Don’t miss this special offer.

This new service from EWI is not designed or suitable for novice traders.

Video (Part 2): Prechter: Ominous Pattern in the DJIA

(Note: This interview was originally recorded on September 20, 2010)

In the video below, Robert Prechter talks to Yahoo! Finance Tech Ticker host Aaron Task and Henry Blodget about a technical pattern he sees forming in the Dow.

Get Up to Speed on Robert Prechter’s Latest Perspective — Download this Special FREE Report Now.

A Trader Walks Into A Bar… Pattern: HOP-portunity On Tap
A free Club EWI resource reveals how bar patterns signal high-probability trade setups
By Elliott Wave International

There’s a little known joke among the trading community that goes like this: “A trader walks into a bar… pattern: ‘Ouch!’” Fact is, if you don’t know what you’re doing, price bar analysis can be a bit “painful.” Finding a discernable pattern in their grouping can feel like finding a hair in a hay stack. But if you have the right teacher — say someone who has used bar pattern analysis for twenty-plus years to signal dramatic moves in some the world’s most watched markets — well, then the discipline is invaluable. Read more.

Your Free Chance to Learn How to Forecast Markets Using Technical Analysis
EWI’s Senior Tutorial Instructor Jeffrey Kennedy gives you practical lessons — free
By Elliott Wave International

There are two camps of market analysts out there: the fundamental camp and the technical one. Fundamental analysts look at things like the GDP, unemployment, interest rates, etc. to make logical assumptions about where the stock market is going. Technical analysts use none of that. They look at the market’s internals to gauge the trend: things like momentum, trend channels — and yes, Elliott wave patterns. Well, this is your free chance to learn how they do it. Read more.

Today’s guest article is from Bob Prechter of Elliott Wave International.

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

3 Reasons Now is Not the Time to Speculate in Stocks
Sometimes the investment weather forces you to ‘buy a coat,’ says Robert Prechter
By Elliott Wave International

When it’s sunny, you head outside without a thought, but when it’s rainy, you look for your umbrella. When the markets are trending up, you don’t worry about your investments much, but when the markets turn bearish … what do you do? Read more.

The Hindenburg Omen — Omen-ous or Not?

Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator
By Elliott Wave International

Last week’s volatile market action coincided with a technical signal called the Hindenburg Omen whereby a relatively high number of new highs and lows in individual stocks occur at the same time. This indicator instantly gained an enormous amount of media attention. In this interview, Steve Hochberg, EWI’s Chief Market Analyst shares his perspective on this indicator and the “re-emergence” of technical analysis. Read more.

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

By Elliott Wave International

To be a successful trader demands knowledge.

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

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

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

——–

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

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

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

EWI: What are two common mistakes among options traders?

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

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

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

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

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

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

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

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

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

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

• How to Spot Trading Opportunities, Parts 1 and 2
• How to Trade Choppy, Sideways Markets
• 5 Options Strategies Every Elliott Wave Trader Should Know
• Trading the Line – How to Use Trendlines to Spot Reversals and Ride Trends

July 13, 2010

By Elliott Wave International

While many people spend time yearning for the financial markets to turn back up, a rare few have looked back in time to compare historical markets with the current situation – and then delivered a clear-eyed view of the future informed by knowledge of the past.

One who has is Robert Prechter. When he thinks about markets and wave patterns, he goes back to the 1700s, the 1800s, and — most tellingly for our time now — the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.

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

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

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

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

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

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

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

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

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

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