Trader’s Narrative

This is a guest post by EWI.

As the major stock markets turned down in late 2007 and then started to rally in March 2009, many people who believed in fundamental analysis have begun to question its validity.

Famed technical analyst and Elliott wave expert Robert Prechter has long called for the bear market we are now in the midst of. (He views the rally of 2009 to be a bear-market rally not the beginning of a new bull market.) But over the years, his methods of technical analysis have been criticized. Here are his most succinct arguments as to why wave analysis outdoes competing forms of analysis.

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Excerpted from Prechter’s Perspective, re-issued 2004

Question: Suppose everyone agreed, “The Wave Principle is not always right, but it really is the answer”?
Robert Prechter: Well, let me begin my answer with a quote from a national financial magazine dated October 1977. “Over the last few years, the Wave Principle has gathered too much of a following and, therefore, it has less value today. Almost invariably, you can write off a technique when it gets too much of a following.” How does this statement look in light of the decade that followed it? “Elliott” had one of its greatest successes. Like the Energizer Bunny, it keeps going and going. And I believe its next success will be its biggest ever. The Principle itself is undoubtedly on an upward spiral of acceptance: three steps forward and two steps back.

Now let’s suppose that a large number of educated people accepted the Wave Principle, which is not an impossible idea for, say, a thousand years from now. There would still be room for differences of opinion on the market and the future. And there are countless other factors. Even people who practice the craft don’t necessarily take action when they get a signal. Unconscious doubt and worry often foil people’s actions. Very few traders have the emotional strength to turn even good analysis into profits.

Q: The Wave Principle is intrinsically contrarian. Does it have some built-in defense against becoming the consensus?
RP: I think so. The Wave Principle is a description of natural human behavior. This is what human beings are; this is part of their nature — how they behave. In order for markets to continue to go through these stages, a part of human nature must be to believe that such theories of mass psychology are incapable of being true — that is, something not worth examining. They must be primed to accept bullish arguments at tops and bearish arguments at bottoms. That means they have to be ever open to bogus theories of market behavior. How else will they create the patterns that fear, greed and hope produce?
Continue reading ‘Q&A With Prechter: Technical vs. Fundamental Analysis’

By Mark Galasiewski
This article was originally published as a special Interim Report of EWI’s Asian-Pacific Financial Forecast on March 23, 2009. Since then the Sensex has risen as much as 65%. For a limited time, Elliott Wave International is offering a full 10-page issue of the Asian Pacific Financial Forecast, Discover The Bull Markets You’re Missing, free.

Prices in India’s Sensex have just broken above a downtrend line, imitating a pattern from 2004 that led to a strong rally. This interim report updates our wave count for India, since its wave pattern in particular may offer investors a rewarding long-term opportunity.

In the March 2009 issue of The Asian-Pacific Financial Forecast, we showed how pattern, price, time and sentiment considerations were pointing to the end of multi-month, five-wave declines in most major Asian-Pacific indexes by late March. In most cases, those lows have likely been achieved.

Although we have looked for a fifth wave down to below the October low in the Sensex, it has failed to materialize. That failure plus the recent sharp reversal rally prompts our return to an earlier wave count. The daily Sensex chart shows how the decline since the 2008 high can be counted as three waves. A three-wave decline opens the possibility of a rally back to near the 2008 highs. But there is reason to set our sights even higher.

Perhaps the best argument for a bull market in Indian stocks is the potential fractal relationship we identified in the November 2008 issue, published just four days after the October low. The weekly chart below is an updated version of the one we showed at that time. Here is our analysis from the November issue:

“The Wave Principle teaches that the stock market is a self-similar fractal. That means that some pieces of its price record—which Ralph Nelson Elliott called waves—resemble other pieces elsewhere in that record. The weekly chart of India’s Sensex shows just such an example.Notice how the up-down sequence labeled Intermediate waves (1) and (2) (in the small red box) is a microcosm of the larger up-down sequence from the 2003 low to the present (i.e., waves and , in the large black box). In both cases, the wave-two correction retraced approximately 50% of the wave-one advance. (We have calculated those retracements using the same logarithmic scale shown in the chart: logarithmic charting displays equal percentage moves proportionally).

“If we have identified this “nested fractal” relationship correctly, it means that Indian stocks are about to begin Primary wave of the bull market that began in 2003. Waves and lasted more than four times the duration of waves (1) and (2). If that same proportion holds going forward, the SENSEX may continue advancing for 15 years before reaching the end of wave.”

Since then, the analogy to the 2004 period (“The 2004 Analog”) has become even more interesting.

Just as then, prices have broken down from an apparent triangle, and then reversed and broken out above the downtrend line. In 2004, prices never looked back after the breakout. As long as prices do not fall back below the low of today’s breakout bar, we will assume that the 2003-2008 bull market will continue to provide a road map to the future of India’s stock market.

For more information emerging opportunities in Asian markets, download Elliott Wave International’s free 10-page issue of the Asian Financial Forecast.

Mark Galasiewski is the editor of Elliott Wave International’s Asian-Pacific Financial Forecast and member of EWI’s Global Market Perspective team covering Asian stock indexes.