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Slicing The Neckline: Classic Pattern Agrees With Elliott Wave at Trader’s Narrative

This is a guest post by Elliott Wave International:

In the August issue of his Elliott Wave Theorist, market forecaster Robert Prechter alerted readers that the U.S. stock market was slicing the neckline of a classic head-and-shoulders pattern in technical analysis, and that this may send the market into critical condition.

Prechter said that when the Elliott wave count and a head-and-shoulders pattern are saying the same thing about the stock market, it’s best to pay attention.

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Here’s how the August issue of the Elliott Wave Financial Forecast, the sister publication to Prechter’s Theorist, described the head and shoulders pattern unfolding in the stock market:

“The weekly Dow chart [below] shows the development of an intermediate-term, head-and-shoulders pattern from the January high at 10,729.90 to the present. The January high marks the left shoulder, the April 26 high at 11,258 is the head, and the right shoulder is now ending. The April [Theorist] discussed the pertinent characteristics that Edwards and Magee used to define this technical pattern … all apply to the current formation. Observe how weekly stock trading volume has contracted during the development of the right shoulder, a necessary trait of this pattern. The downward-sloping neckline — exactly as on the big ten year pattern — displays market weakness, which is consistent with our interpretation of the wave structure.”

This chart shows the head-and-shoulders pattern.

SP500 head shoulder EWI Aug 2010

Here’s what Robert Prechter himself said in a recent Elliott Wave Theorist:

“Generally, when the neckline slopes downward, the right shoulder does not rise to the level of the left shoulder …”

Please look at the chart again — then re-read Prechter’s quote.

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11 Responses to “Slicing The Neckline: Classic Pattern Agrees With Elliott Wave”  

  1. 1 Stoploss

    ah, but the POMO! Ben is becoming a closet technician.

  2. 2 rrose

    If Robert Prechter is so infallible why doesn’t he just sit at home making money all the time instead of preaching doom and gloom to anyone who will listen? Just curious.

  3. 3 Joel

    Because he’s an analyst.

  4. 4 Dr Bohica

    Well, that just begs the question. If Robert Prechter is an “analyst”, he is also a merchandiser who aggressively promotes and sells his analysis.

  5. 5 rrose

    Yes, that’s my point. I don’t believe this guy has any special knowledge. Just an interest in affecting outcomes by publishing his “predictions”.

  6. 6 Kevin

    We shouldn’t forget the smaller H&S on the same chart (mid 2009) that was widely noted and failed spectacularly.

    Re Prechter: EWT is a technical tool, nothing more. Like any other tool it can give you trading setups with a nonzero edge, and like any other tool it can give false signals.

    Prechter is well aware of the strengths and weaknesses of EWT, but he oversimplifies in the direction of overpromoting the both the usefulness and the bearish side of the technique. Over time, he has used it to make some spectacularly good calls but also some spectacularly bad ones.

    The reason he preaches doom and gloom is because it makes him famous. How many of the rich traders out there are also famous, however rich?

    Also he has a cult of supposedly objective Elliotticians who are really permabears, always trying to call the top. There is some real objective EWT analysis out there, but Prechter is selling to the people who want top calls, and much of the free EW analysis out there is from people who want to top call, who are emotionally biased to want the market to crash. (I should know, I started out as one. I had to lose a lot of money to learn my lesson.)

    Also, technical trading is hard, and risky. Convincing tens of thousands of people to send you subscription money is also hard, but not risky.


  7. 7 rrose

    Kevin- I appreciate your reply. Thanks.

  8. 8 Babak

    Kevin, et al. you’re right, Prechter is not a money manager. Having said that, I find it hard not to listen to him, especially lately. He was correctly bullish on March 2009. How many others were? seriously? very very few. Also, to the chagrin of a few vocal readers he called the April 2010 top. So far he seems to have nailed it again. We’ll see.

  9. 9 Stacey Burke

    Prechter has probably forgotten more than I will ever learn! This is an intriguing post! Really gets you to think and your analysis gets very fine tuned. Great post thanks!

  10. 10 Dr. Bohica

    Stacey sells herself a little short, me thinks. People simply quietly forget Robert Prechter’s very bad calls, which he makes a little less than 75% of the time.
    He’s not particularly good at owning up to his bad calls, either. So perhaps it can be said he also forgets more than he ever learns!

  11. 11 Kevin Quail

    There are a lot of theories out there. Buy and hold is dead, EWT, buy gold, short gold, etc. Warren Buffett is still investing in America by way of his recent purchase of the rest of Burlington Northern. I think I’ll stick with Buffett. How rich is Prechter?

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