Beyond the Planet of the Wolf! Wolf!

I do not normally drop in personal notes but after all the comments recently on Prechter I feel it is time to give a perspective. 

I encourage readers to also read and contribute to the comments. We have some readers who follow Elliott Waves fairly closely, and others new to it, and others just out to have a bit of fun; but there is a lot to be learned by following the comments and in particular the more astute commentators. I read the comments and incorporate their analysis & questions into subsequent posts.

As an aside, I do not do Elliott Wave analysis. Doing it right takes rigor and discipline - and interpretation.  Even The Elliottician with their Refined Elliott Trader software need to interpret the possible wave patterns. Instead I report it, and try to suss out a consensus. Having watched Prechter and others going back to the '80s, I have developed a certain feel for the pattern, and can more easily see the miscalls than the correct calls. I started the Wolf! Wolf! series because I thought Prechter's initial Wolf call was off the mark. So far, way off.

That said, at the end of this post I will give my current view of where we are with wolves (or bears or bulls), but first wanted to discuss Prechter.

The reason to follow Prechter is that he is this generation's premier Elliott Wave pundit. This does not mean he is the most accurate, but that he is the most followed. His analysis sets the standard against which others are compared. The mantle passed to him (or perhaps better said he seized it, as Elliott Wave had fallen into obscurity in the '70s) from a prior chain of analysts that link back to R. N. Elliott himself, and before that to Charles Dow of Dow Theory. Prechter and a remarkable group formed the Foundation for the Study of Cycles, and in the early '80s made great strides in revitalizing a school of technical analysis that now pervades Wall Street. You can see discussions of ABC waves and trendlines and other Elliott Wave concepts in a wider variety of analysts than follow Elliott Wave per se. It has become part of the toolkit. Prechter has done this, and no one else has pre-empted his leadership.

There are others to pay close mind to beyond Prechter. Many have been discussed in this blog, and more are listed in the blogrolls. Some I have undoubtedly missed. The leaders, like Neely, Zoran, Fibonacciman, The Elliottician, and McHugh, and I know I left out a few, have important perspectives and seem to be calling recent events more accurately than Prechter. As we all know, however, no analyst is right all the time; indeed, being right 55% of the time is enough to beat the market over long periods. Anyone can have a streak; sustainable success is very hard. Neely has the longest record, and has a strong following, but hasn't supplanted Prechter.

Prechter still reigns, yet he seems to be peculiarly off on many calls right now. Check out the course of the Wolf posts, and you see he has continued to cry wolf (meaning a big drop) over and over while the market has meandered and even climbed. Why is this? Prechter seems to have gotten off track not on his Elliott Wave analysis, which remains quite rigorous, but on his big picture view:

• His first mistake is to conclude that the Wave IV correction that began in 1929 ended abruptly in 1932. This is simply ahistorical. We did not come out of the Depression until after WWII. Elliott himself before his death in the mid-'40s saw us in a triangle that seemed to have ended in 1942. Later analysis pegs the end as 1949. By sticking to 1932, Prechter is off in his big picture count. Way off, actually. What he calls today the end of the Grand Supercycle is instead the end of a wave 3 with more upside to come. And again, he is being ahistorical. What he means by jargon like 'Grand Supercycle' is that he believes 2000 was the end of the Industrial Revolution, and that we are entering a 100+ year Dark Age. Nonsense.

• His second mistake is to base his big picture on the nominal Dow, instead of the inflation-adjusted Constant Dollar Dow.  The heights of the 2000 peak do not look so high when adjusted for inflation.  Before we had the Federal Reserve in 1913, a nickel cigar was a nickel for 100 years. After the Fed, we have had a 25x cheapening of the Dollar, and a nickel cigar is well more than a buck. The Dow had been in a long trading range around 100 when the Fed got going; in today's Dollars that is the same as Dow2500. When adjusted for the cheapening of the Dollar, the 2000 peak is only ~5x higher than the 1913 trading range. That does not look so stratospheric.  Indeed, in Constant-Dollar terms we hadn't exceeded the 1929 peak until around 1994, when the so-called mania began. Maybe it wasn't so manic after all, but a long-delayed catching up with a little froth at the end?

The big picture view is critical, as it provides the context for interpretation of wave alternatives.   

Let's run a thought experiment. What if Prechter were to apply all his analytical rigor, but modify his big picture view? Would he have been so strident about the End of Days since 1995, and maybe as far back as 1987? Would he have been as inclined to keep crying Wolf! Wolf! at every possible top? Not if he thought we were in a wave 3, and had a wave 5 to follow to even higher heights. While it is commendable for an analyst to stick to his guns despite the hootin' and hollerin' of critics, it is distressing for an analyst to stubbornly reject new information.

As the story goes, when Churchill was accused of a flip flop, he replied: "When confronted with new information, I change my mind; what do you do?"

More on the big picture in a subsequent post. Suffice to say we are still in the Greenspan Indian Summer and that needs to play out before the wolf will be at the door.

So, where are we? My take is that the most likely count is what Prechter now sees as his alternative count. Check out the attached chart. We are still in the correction that began Mar03. We had an [A] wave down from the peak in 2000 to Mar03, and are still in the corrective [B] wave. Since Mar03, the [B] wave has subdivided as an A wave to Jan04, a B wave to Aug04, and then the Bush Re-election Rally C wave that we are still in. Bush's popularity has crashed, but the C wave continues. If it holds to pattern, we should be heading towards SP1250-1275, where the [B] wave will retrace ~61.8% of the [A] wave. Then we should have the [C] wave down to end the correction off the 2000 peak.

The timing of this? We have entered a seasonal rally period that normally runs November to March. In 2006 we are in the bottoming part of the four year cycle. Hence a prediction that matches historic patterns is the C wave goes into 1Q06, we have a topping period, and then a hard slide into 4Q06 in the first part of this [C] wave, which Prechter calls his 3 or 3 of 3. Staying afloat through 1Q06 also matches the coming of Greenspan's retirement and the likely end of the Greenspan Indian Summer. How long it takes this [C] wave to bottom is unclear: it may end in 2006-7; or it may subdivide into a 2008 election rally and then a final drop into 2011; or the whole correction may take an even more complex form and plague us until 2014.

Comments

[Elbarbee Ranch]

If Prechter were only wrong on substance, that would be enough reason to avoid him like coughing Thai chickens. But his style is so sophomoric and cheesy. Have any of you read his publications or seen his website? It's like a junk mailing from a fourth-rate mortgage lender, with cartoony stock photos and 6th grade level angry "essays" posing desperately as insights. It's snake oil, snake oil, the American "service industry" at its worst.

[Dave Lane]

The count makes sense from a orthodox Elliott perspective but the fact that EWI has now adopted it make me a bit nervous. For it seems that every time they get bullish the market falls hard. I will stick with the Neely count unless the October 3, 2005, highs are surpassed.

[Plain Ewaver]

"The big picture view is critical, as it provides the context for interpretation of wave alternatives."

Could not agree more. Actually, Prechter himself said that much too. You might be interested to see what happens to the wave count in the price of gold if constant-dollar prices are used. Such an analysis is in:

http://www.gold-eagle.com/editorials_05/ewaver103005.html

A useful chart to follow the count is the first in
http://www.gold-eagle.com/gold_digest_05/hamilton081905.html
ignoring the numbers in circles, which have nothing to do with the wave count.

[EN]

This is interesting. . . In the space of only a week, the bears on safehaven have stopped the weekly crash reports and EWI is turning short-term bullish. Everybody knows that the Santa rally is coming. I am bullish and feel we are headed to new yearly highs so I am going short on Monday because this is classic B wave psychology. If a flat started at the October 3 highs, it makes sense that wave B is taking so long to complete. Wave A was 8 days down and went from 1239 ES to 1171.75 ES and it has been THREE ENTIRE WEEKS just to retrace .80% of the A wave early October sell-off. Better get ready for wave C down; it should last about a week and turn the whole lot into crash warners yet again.

[tony caldaro]

IMHO I beg to differ with all of you. This is not a C wave, nor a counter trend rally in a continuation of the 2000 bear market. The NAZ/NDX/SPX/DOW have been impulsing up since 2002. This is Cycle Wave One, and we're in iii of 3 of V from the 2002 bottom.

Look at stock market history (1885-2005) and explain to yourself, when was the last time an index dropped 89% and it didn't end a bear market supercycle wave? Then look at the DJIA 1929-1932, and the Nasdaq 2000-2002. That's was it, Bear Market over!

As EW technicians, we're supposed to be reading the waves, from a historical perspective, not creating scenarios that have never happened before.

The NAZ/NDX are the new millenium DJIA. Those who continue to view the EW in DJIA terms are not in sync with Wall Street. The value days are over: it's growth, growth and more growth. The Nasdaq is the market!

Please, stop looking at the DOW, thank you. Tony

[Michael Hodgkiss]

Prechter cares about mainly one thing as far as making the big picture wave calls. That one thing is called DEBT. This country has exceeded the debt levels that all countries in the past have regretted if they even came close to the levels we have today.
Can Elliott waves predict where the market will go, or where we're at? From my experience that would be a big no. Is Prechter probably right that our economy is on a road to disaster. Absolutely. It doesn't take an Elliott wave expert to tell you that $6 of debt to create $1 of GDP is an economy headed for disaster. Once this biggest credit of all time pops, Prechter will look like an expert again. But all one needed to do was to look back at history to come to the same conclusions.

In my best guesstimate of when this will all end, probably depends on when the Asians quit financing our ability to go further into debt. When the Asians take away the "punch bowl", that's when Prechter's wave 3 begins. Prechter doesn't seem to understand this, and should refrain from making these calls as long as someone keeps financing our ever growing debt.

[Scooter]

Debt is not that big of an issue if you consider it as a percentage of GDP. As long as americans have jobs that pay well they will continue to successfully service their debt. In addition they also have equity in their real estate which they can further use to spend keeping the economy afloat. Of course in the long run this isn't sustainable (a child knows that) but who cares about the long run. What's important is the short run and we can look to confront these problems when they get closer.

As for the crash warners they are a necessary element to move us higher. If they stop warning, now that could be a cause for conern.

[Libby]

I have never been as bullish as I am now, a troubling fact that makes me more than a little bit bearish. Consequently, I have bought several puts that expire in December. Unfortunatly, that sort of desperation is often indicative of a bottom, which makes me inclined to cautious optimism intermingled with a sort of hopeful, panicky skepticism with an overall approach of resolute pessimistic ambivalence. Prechter sells snake oil and anyone who drinks it is a fool or OCD worrier. Everyone is right if you wait long enough and one of these days he'll be right. But it's not nice to sell snake oil. Try making something or helping people instead.

[Jimmy James]

When Saturn's moon aligns with Jupiter the Great Bear of the Northern Celestial Paradise will wreck havoc on the Third Wave from the Sun's event horizon. Then the great plains will burn with fury and the Great DEBT will be purged for 50 Generations. Prechter's hair will turn red and he shall become President of the USA. And so it is written . . . so it shall be done.

[Jamesy Jim]

Prechter's prechter is pointing due east, which usually presages corrections of 99% or more. His "hochberg" is flaccid, a condition known to correlate with limp markets. For these reasons as well as the fact that we are in a diamond with a head and shoulders 3 of IV of THREE of iv of Supercycle Subcycle Tricycle Menstrualcycle III, I would park my money in cash and then turn that cash into gold fillings hidden neatly in the crevices of cavity-ridden molars belonging to Prudential or Fidelity money managers with nothing to do but buy and sell and worry about tomorrow and pretend that gambling and prognosticating and more generally being a moneyman go-between pundit/financial analyst actually helps make the world a better place.

[Zipper]

Yelnick Wrote:

"The reason to follow Prechter is that he is this generation's premier Elliott Wave pundit. . . His analysis sets the standard against which others are compared."

I say the guy has been wrong for 18 years staight so if his analysis sets the standard it makes a joke out of a wave theory. His days of glory have come and gone and it is time to move on to another Guru which a track record better than flipping a quarter.

[Rasberry Snapple]

EWI's 18.2% annualized losses is worse than flipping a quarter.

Warning: STAY AWAY FROM Quackberg and Von Prechter.

[Dan]

I think you're wrong about who has Charles Dow's torch passed to them. Richard Russell holds that honor. Dow Theory says that valuation is the number one concern in identifying the phases of a bull or bear, and Prechter spits on this idea.

Regardless of the justification, the fact remains that Prechter has come out and said in unequivocal terms 'the market topped yesterday'. Anyone who acted on that conclusion promptly had their head handed to them by the market. Prechter and Hochberg did the SAME EXACT THING last year, at about the same time.

Here is a little clue. During the months of July, August, and September odds are the markets will generally decline. I know this for a fact as I've run analysis on the various months since 1985, and in particular August and September are net negative months.

Prechter and Hochberg capitalize on this by calling for a crash every July. Most of the time, the market will decline making people think they know something. This is Prechter's snake oil. The measure of any 'analyst' is their performance, and as Zipper said :

EWI's 18.2% annualized losses is worse than flipping a quarter.

Warning: STAY AWAY FROM Quackberg and Von Prechter.

[Leave Prechter Alone!]

Leave the man alone for god's sake! He's doing his best and he's in a very tough field. I'd love to see some of your track records. Prechter is not clairvoyant. He's got a family to feed. He's got bills to pay same as anyone. What's he supposed to do, leave a lucrative publishing business and become a shoe salesman?? If you don't like him don't subscribe. But get off his crank.

[Bippy]

Yelnick's posts focus on the market(s) and his and others views on where they are and where we may be going based on elliott wave theory and other technical information. It is fasciniating and potentially valuable information with lots of meat and much room for different perspectives and new ideas and perceptions. And if we focus there and try to gain knowledge from our collective insights and perspectives this blog may be more than entertainment. I wish we could focus less on the people and more on their analysis of the markets. We all need to express ourselves, but how many hundreds of times do we need to discuss Prechter and his record?

I want to know your views and rationals on This Week At The NDX.

[responder 2177]

Agree with Bippy. Anyway, Prechter is certainly not the only letter-writer without integrity. It should come as no surprise that most gladly trade integrity for money. The doom and gloom pundits get lots of money from a perpetually pessimistic base looking for validation and looking to have their emotional chains yanked. Doomster gurus have carved out a nice niche and would lose a lot of money if they abandoned the very views (deflation, crashes, etc) that most of their subscribers crave.

[MHD]

responder2177

You are absolutely right about all this doom and gloom. I myself, like you, will continue to keep the rose colored glasses on and ignore all this talk about too much debt. Most of the people I know are in debt to their ears, and do nothing but complain about living paycheck to paycheck. I tell them that a simple solution that most Americans have discovered is to borrow more. Uncle Sam does it all the time, so why can't you. And whatever you do , don't read about history and debt levels, for this is a new and different time. Yeah, that's right, "it's different this time".
I'm so glad that their are smart people like you and I to warn other ignorant investors about the doom and gloomers.
So lets you and I party like it's 1999, and let the bull times roll.

P.S. I just put a small fortune in Google, but have decided to wait to invest 75% of my other funds until the PE gets to around 1000. What do you think?

[Greg]

Debt levels dont predict the market. Only the "Chicken Littles" focus on Debt levels.

Debt levels were also high in the 1980's. S&L debacles, equity crashes and Junk bond collapses didnt stop the stock market from gaining another 500%.

Stocks of good companies will continue to prosper. Those who see the negative trees and not the abundant forest will continue to miss opportunity after opportunity after opportunity.

[debt]

MHD I know it can be frustrating to see these historically high debt levels and low savings rates and a) not be able to use that info to make money for oneself b) not be a part of the blissfully ignorant crowd, many of whom have gotten rich by borrowing or investing in frothy investments and/or c) worry about the future, when there might come a time that panic brings deflation or inflation in spades.

There are many people like yourself, some of them angry, some puzzled, some just depressed about an unpleasant future they see (not to categorize you because you may be none of the above). But I think the thing to remember is to try not to get too hung up on one's predictions (because the future is hard to predict) and try to live one's life as gratefully and reasonably as one can --bearing in mind that we all have to make implicit or explicit predictions about the future and thus we are all susceptible to the whims of fate.

The pundits and newsletter writers are snake oil salesmen claiming to have crystal balls, but they are trying to make a living and, hey, lots of people need validation or scapegoats for their investment behavior or simply ideas to feed their emotions and moods the way some people like going to horror movies or riding rollercoasters. ALL pundits will be right if you give them enough time.

[Brian]

Still looks like that wave 2 posted above is still in play, as the Dow hasn't taken out the Oct 3 high. It's also making a diagnal 5 waves as it approaches the Oct 3 high. It'll be interesting to see if the index starts to break down. CCI's 5, 10 and 20 have all turned down from overbought territory and they are diverging with price.

[Virchull]

In the Elliott Wave Analysis section of the November issue of the Financial Forecast, Hochberg and Kendall say, "The alternate potential in the S&P is . . . the fourth wave of an ending diagonal pattern that started at the August 2004 low." They show a chart with the "ending diagonal" labelled ABCDE, instead of 12345, and get this, the "ending diagonal" is in the 4 wave position of a larger impulse. It is not in the ending 5 position.

I said some time ago that Hochberg and Kendall are exiting the Elliott wave business. This is another example. They can't follow the instructions on page 36 of Prechter's EWP book. I wonder if Hochberg and Kendall could find their way to the bathroom by themselves, without a step by step map from Prechter. Bob has his problems with his macro-level calls, but at least he can do some Elliott counts correctly.

Enjoy,

[ElliottGuides]

What EWI and many other purported followers of Elliott fail to see is a fourteenth construction I have termed a "truncated crescendo" where each successive ending diagonal decreases roughly proportional to the overarching impulse. This allows for 4th wave positions and helps explain the extension we have experienced since 1979. If you want to make real money, sell options and sit on them. We are going nowhere fast!

[yelnick]

Virchull, I agree, that EWFF was confusing. What they talk about is the S&P count, but what they show is a Dow alt count chart, which has the triangle ending a wave 4, whereas their S&P alt count has the diagonal triangle ending wave C of the move from Mar03. This is clear in the STU but not in the EWFF.

Their Dow count is incoherent. If this is a corrective wave, then it should not break as a 5 wave impulse, which is how they label it. Maybe they were preparing to say that Oct02 was the bottom of 82W4 and we are now in 82W5? Quite a slip. More likely, they made a mistake.

BTW Zoran believes that this is the correct count in the Dow - we are in a 82W5 that will likely truncate below the manic 82W3 top. He sees the Nasdaq and S&P in a different count.

Back to the EWFF, their S&P count is also a bit confusing. It shows the wave up from Mar03 as a three-wave, which means the movement will break either as a flat (3-3-5 waves) or a triangle (3-3-3-3-3 waves), but not as a zigzag (5-3-5). Then it shows an X wave, meaning they see this as a double flat formation. But the recent move up (since Oct13) has blown that count out.

In contrast, in the STU, their S&P count is quite coherent. I posted the chart recently. That alt count has now become their prime count. In order to make it such, they have had to reinterpret the wave up from Mar03 to Jan04 as a 5-wave impulse, making this a zigzag with an ending diagonal triangle. It is in the ending C position of a corrective wave (wave [2] to them), just as the book requires. At the time they wrote the EWFF, we were in the D wave - the fourth wave - of the ABCDE ending diagonal. (They label the waves in a triangle as ABCDE and in an ending diagonal as 12345, at least when the diagonal is in wave 5 of an impulse; in this case it is in wave C of a correction, and hence ABCDE would seem better labelling).

[tony caldaro]

It is unfortunate that the prophetic abilities of Elliott Wave analysis has all but been virtually disregarded, because of a handful of it's more popular analysts having surmised improper conclusions, in both the recent past and the present. It has been my experience that the Elliott Wave never fails to display the path of the stock market, only those reading the waves, so to say, fail in their interpretation.

[Ted Aguhob]

Yelnick..don't avoid me. I'm sure you know who I am. Take a look at my recent calls on my website, and please..keep in mind. Many of my subscribers and media types are calling my analysis "the new standard" in elliott wave.
We're all sick of Prechter giving Elliott Wave of bad name with his blown calls, and his extreme pessimistic views. He keeps scaring people because he wrote all these maniacal books that have thrown himself way off the path..
Please read my "3440" analysis on my site.

[Ted Aguhob gem-x]

I make these bottom calls AND make large profits off of them I've been doing this for 4-5 years straight, with barely a hiccup. The reign of terror by elliottwave.com must end NOW.

[gem-x]

The more people think Prechter is the standard, the more the elliott wave keeps getting a worse name. Elliott wave IS my life, and has made my life, and there has to be a new face on it. It's so misunderstood and dismissed that the more prechter keeps messing up his huge calls, the worse the elliott wave community looks. Just back me here. If a new, optimistic, realistic and "ground breaking" face is put on the elliott wave, the more popular "technical analysis" and "elliott wave" will get. It's so powerful and it needs to be known. It's saved me, it's rescued me, and it's made my life, and if I were to thank R.N. Elliott for all he's done for my life...I would go out of my way to do it.

[gem-x]

The more people think Prechter is the standard, the more the elliott wave keeps getting a worse name. Elliott wave IS my life, and has made my life, and there has to be a new face on it. It's so misunderstood and dismissed that the more prechter keeps messing up his huge calls, the worse the elliott wave community looks. Just back me here. If a new, optimistic, realistic and "ground breaking" face is put on the elliott wave, the more popular "technical analysis" and "elliott wave" will get. It's so powerful and it needs to be known. It's saved me, it's rescued me, and it's made my life, and if I were to thank R.N. Elliott for all he's done for my life...I would go out of my way to do it.