Validating
the Wave Principle
by its Own Operation
As L.F. Richardson pointed out, the length of a seacost is dependent upon your method of measuring and your scale. A ruler placed on a globe will give one answer, the same ruler applied to every indentation as one traverses the coast itself will give a vastly different one. Similarly, when people ask me where the stock market is going or even what its trend has been, I have to ask, "What degree are you talking about?" There can be multiple answers, as in, "The Minor trend is down within a sideways Intermediate trend within a rising Primary trend."
One important test of scientific hypothesis is its ability to predict outcomes. Although the Wave Principle hypothesis is difficult to quantify on the basis of predictability because it forecasts only probabilistically, there is nevertheless substantial evidence of its unique value. While reviewing the following excerpts, it is important that you honestly consider the utter uncertainty that exists in real-time forecasting. Psychological experiments show that most people who review events in retrospect consider them to have been obviously implied at the time.
As Lee Simpson once said, "Any event, once it has occurred, can be made to appear inevitable by a competent historian." That goes for all of us. "Fine," I always reply to protestations that previous trends were easy to predict, "then how do you forecast the next ten years?" Usually I do not get much of an answer. I think that after you read these statements and consider them in the proper light, you will agree that the authors' accuracy in describing the future is due to their knowing something useful.
[The Wave Principle of Human Social Behavior, 1999, Robert R.Prechter]
Special Report
...When Time Meets Price
S&P 500 Index (SPX)
© ELLIOTT today, June 9, 2007
Last week I presented a Special Report on the Dow Jones Industrial Average entitled
"A Confluence of Fives". The report was posted online Saturday, June 2, 2007. The following Monday, June 4, 2007, the SPX hit high at 1540.53. On June 1,2007 the SPX hit 1540.56. Sunday afternoon I presented a chart of the SPX on my website SPTD-07 with that headline: "Fasten Your Seatbelt". What's going on?The daily chart of the S&P 500 Index presented a classic five-wave advance according to the Wave Principle with a special pattern in wave (v) called an expanding diagonal triangle. Those familiar with the Wave Principle will note the overlapping within wave (v) of waves 4 and 1 and the expanding upper and lower boundary lines. As the chart reveals we see a completed textbook formation from beginnung to end. It is a five-wave pattern. Wave (iv) holds above the price territory
of wave (i). Wave (iii) is the extended wave, as is most commonly the case. Wave (iv) traced out a zigzag alternating with the double zigzag in wave (ii).A parallel trend channel drawn according to guidelines in Elliott Wave Principle touches the peak of wave (iii) but not of wave (v). However, the meeting of the upper resistance line at Intermediate degree coincides precisely with the meeting of the upper resistance, in fact, the fifth wave produced what Elliott called a "throw over". The even finer feature of this wave [B] , however, is its mathematics. Starting in October 2002, the printing low in the SPX was 769. 769 x 0.618 = 475.24 and when added to 769 the result is 1244.24, a hairsbreath from the August 3,2005 high of 1245.86.
The overlapping wave structures in 2004 and 2005, I think, cannot be labeled as a series of first and second waves, as some Elliotter do, since especially the second wave up (wave 3 of the diagonal) clearly counts as a three-wave structure in real time. Although, wave (b) is extremely short relative to the preceding wave (a) but a classic example existed in 1990-1991 when a similar formation lead to the great upwave of the 1990s. In 2002- 2005 however, the length of wave (a) nevertheless is
in classic proportion to wave (c), as the length of wave (c) is 0.786 times the length of wave (a). The length of wave (c) is 374 points which is equal of the advance from March 2003 to March 2004, 789-1163. The most striking feature however is the equality of time and price of the advance from July 18,2006 to June 4,2007.Gann, in his work said, "You can look for top on the 90th to 99th day".
(Source: Gann Made Easy, William McLaren).That's exactly what happened: The former high occurred on February 22,2007, which is exactly 99 days to June 1,2007, the first high print at 1540. Interestingly, the high of March 2004 (1163) divides the entire advance from March 2003 at 789 in half: 789-1163 = +374 points. 1163-1540=377 (Fibonacci-points).
Validating The Wave Principle
by its Own Operation
Live Exampel #1:
S&P 500 Index (SPX)SPX daily, Aug 2,2007
Chart #2
... from the Weekly Update, July 13,2007
"1555"
Chart #1
ELLIOTT today, July 13,2007
Weekly Update:
Special Report-S&P 500 IndexFriday, July 13,2007 the S&P 500 Index finally reached the high of March 2000. It is interesting to observe that Intermediate wave (c) at 1555 equals the length of Intermediate wave (a). Based on this wave structure, the S&P 500 should have achieved its top.
As you can see on the chart, Intermediate wave (b) traced out a contracting triangle ending at 1224. The entire structure since then formed a classic five-wave advance travelling within a parallel trendchannel. The red-dotted line marks the mid-channel though it is not a original Median line, according to Dr.Andrews, but it shows very clear, that the recent high touched that line exactly. A break of 1484 in the S&P will eliminate almost all remaining near-term bullish potential. It may be interesting that in real (gold) terms, both the S&P and the DJIA remain down by well more than half from their July 1999 peaks.
With regard of the EW labeling shown on the chart, the Cycle wave B interpretation remains valid. As far as I know, my interpretation of a leading diagonal triangle for wave 1 or A is the only interpretation among various Elliott wave analysts. Too much company is what I don't like. Though it remains to be seen, if this interpretation proofs right. Despite the bullish alternate version, a much bigger correction even under that scenario is due, since Intermediate wave (4) will be in force, shaking market partcipants even higher up and down.
Live Exampel #2:
NASDAQ Composite IndexNASDAQ Comp., Aug 2,2007
ELLtoday, July 24,2007:
"A drop to 2500 or even 2300 is a conservative statement."
KHL, ELLtoday, July 24,2007
Here is the latest chart of the NASDAQ Composite Index
Aug 2,2007
Chart #3
On August 1,2007 the NASD Comp hit the ML registering a print low of 2515.81
5 Waves UP & Elliott Channel
© ELLIOTT today, July 24, 2007
Chart #2
A picture tells more than a thousand words.............
Related articles: Elliott Wave Principle >>>
EW Specials >>>
SPX Specials >>>
Chart of the Week >>>
The Value of Forecasting with The Wave Principle
With the caveat of immense specific variability within the known aspects of the Wave Principle, it is still the case that the practical value of all we know about it is immense. The first fantastic value that the Wave Principle provides is an amazing perspective. The second value is an occasionally remarkable accuracy, as you can see in Chapter 6. The third great value is that it provides a basis for assessing the past and analyzing the present in a consistent context, to which all the predictive literature on the subject attests. Finally, the Wave Principle indicates in advance the relative magnitude of the next period of social progress or regress.
With all these gifts, we have a basis for informed, truly rational decision-making with regard to anticipating the tenor of future events. Its very nature forces us to look at the big picture, elevating our perceptions above the cacophony of daily news and providing the opportunity to make sense of great social trend changes and the dramatic events that accompany them. As a result, the Wave Principle provides a basis for achieving a great sense of calm about the future, which no longer appears as a black cloud of unknowable chaos (sometimes just a grey cloud of partly knowable chaos). The general results of social mood, i.e., economic trends, political trends, peace and war, etc., are fairly easy to predict, as they follow what has already occurred in social mood. Predicting social mood trends themselves, and their immediate reflectors such as stock index trends, fashion and entertainment trends, etc, is more difficult, but the Wave Principle at least provides a basis for doing so. With knowledge of how the pattern unfold, to the extent of our ability, effort and emotional detachment, we can enjoy success even at that daunting task. Because the Wave Principle describes patterns of collective behavior, the accuracy of any resulting forecast depends upon (1) the reliability of the investing’s crowd behavioral patterns and (2) the ability of an analyst to identify the relevant ones properly.
NASDAQ Composite Index
© ELLIOTT today, July 21, 2007
Chart #1
Missed Opportunity??
Excerpt from my Weekly Update, ELLtoday, July 21,2007:
NASDAQ Composite Index:
High 2724.74 on 7/19/07. Why this date may be very important? Get back one year, on July 18,2006 the NASD hit a new low at 2012,78 and since then only interrupted by a 23-day correction the index rose 34.89%. For example the DJIA rose in the same period 31.25%. From this year's lows the DJIA rose 17.4% but the NASD lagged since it rose 15.9%. This is not a huge divergence but a look at the RSI of both, the DJIA and the NASDAQ clearly bring to light that despite the media's optimism the internal strength of these two markets show really huge divergences between the price advance and the strength of these advance. The RSI shows that from a historical point of view the market will break down. How much is another question. I will discuss highly likely scenarios of a bigger decline when the time, i.e., the Elliott wave structures tell us the time is here.Last week I said, "Here we have a clear five-wave structure and prices traveling within an Elliott parallel trend channel. Wave (iv) slightly penetrated the lower uptrend line, which is allowed under the rules and guidelines of EWP. Wave (v) itself formed a five-wave structure and should be near completion. Wave (i) and (v) are spot equality in length. Wave (i) lasted 8 trading days and wave (v) so far lasted 12 trading days. Monday is trading no.13! Last gasp rally?"
Indeed, the NASD has reached the upper parallel of an Elliott trend channel. What's exciting, anyway, readers of my SP-Trading DESK know, how many successful calls were based on the technique of Dr.Andrews. The chart displays the NASD from September 2005 to the present. There is little doubt that forecasts based on the Median Line technique has an overwhelming success, rather than listen to the daily financial commentaries made by the media. The three arrows on the chart show, that even when the index overshoot either the ML or the channel lines, it turned to the opposite. Along with five-waves up the index hit the upper parallel of the ML and produced a slight throw-over. It may hold up another two to three weeks in the upper 2600s only to loose more momentum. Even though, the ML channel clearly shows the risk situation.
A drop to 2500 or even 2300 is a conservative statement. The difficult part of this analysis the factor time. I'll check that with a highly likely scenario based on the ML technique next week. Stay tuned. Have a great weekend.
KHL, ELLtoday, July 24,2007
ALCOA [AA]
from the Weekly Update, April 8,2007
From the Weekly Update, April 8,2007:
Over the course of the last four years AA has formed a classic contracting triangle
of Primary degree, labeled a-b-c-d-e. Please note, wave e of the triangle stopped exactly at the Fibonacci 0.618 retracement of wave c which itself retraced 0.786
of the preceding wave b. Arguments still favor an outbreak to higher prices.
I'll go long with a stop at wave e (trendline).
ALCOA [AA]
Outcome as of May 11,2007
The concept of a six-and-a-half year contracting triangle in ALCOA was the correct interpretation of the wave structure. From the end of the triangle wave e, the stock moved up strongly displaying an impulse pattern which is probably in wave 3 of (5).
ALCOA [AA]
Outcome as of July 24, 2007
A picture says more than a thousond words.........
SPX daily
(c) ELLIOTT today, 02/10/2007
This is a graphic representation of what some analysts referred to as
"the psychology of the market." Elliott wave labels are not just random numbers
on the chart – they describe the patterns in which traders' psychology moves from
optimist to pessimism and back again. Each wave on a chart represents the
predominant psychology of the market players.
SPX, daily, 02/22/2007
ML-1 "catched" the high
On February 20, 2007, the DJIA reached 12,795, another new alltime-high. With the index's latest push above the upper line of a wedge-shaped pattern the completion
of that pattern is perfect. The DJIA turned on a dime and lost -167 points in three trading days. The breakdown of momentum is still visible in the structure of the RSI as shown
on the bottom of the chart. Now that wave 5 is mature, we can raise the conservative "bear market resumption signal" to the area of the lows of January 2007. In contrast to
the bullish-divergence in June-July 2006 the market's internal "strength" as revealed
by the 14-day RSI is still worsening.
Weekly Update, February 25,2007
(c) ELLIOTT today, 02/25/2007
Pattern & Outcome
on mouse over see the outcome...
S&P 500 Index (SPX), 02/27/2007
Classic Crash-Pattern (see Elliott Structures>>>)
Dow February 28, 2007
DJIA, December 2006 - February 2007
The pattern is called a "diagonal triangle" (See Elliott Wave Principle>>>)
Figures 1 + 2
Figure 3
Please see analysis & forecast>>>
Robert Schiller polled individual and institutional investors about why they sold stocks on October 19,1987. Most of them admitted candidly that "they sold because others were selling" ,i.e. they were herding. It is welcome to have research telling us that the crash of 1987 was a "psychological event". However, no one ever thinks to poll investors about why they had bought stocks relentlessly throughout the preceding year. If any pollster did ask, the truth would be exactly the same, but he would find little honesty about the fact because in rising markets , people have plenty of time to let their neocortexes formulate all kinds of rationalisations for herding action. Panic is a faster-acting emotion than hope, and the neocortex is often stumped in coming up with an explanation for it.If social mood is patterned, it cannot be the result of random social events, and there is no basis upon which to suggest that it is somehow the result of social events that are themselves perfectly patterned according to the Wave Principle, which would require utter event determinism. Yet chapter 16 shows an intimate connection between social events and mood. Therefore, the only possible direction of causality is the opposite of that popularly assumed. Events do not shape social mood; social mood shapes events. (The Wave Principle Of Human Social Behavior,1999, by Robert R. Prechter)
As market analyst Paul Macrae Montgomery explains, "to the limbic system, the phrase 'net present value of future cash flows' is meaningless because its only sense of time is now and only value is pleasure or relief from stress. "Throughout the herding process, whether the markets are real or simulated, and whether the participants are novices or professionals, the conviction of the rightness of stock valuations at each price level is powerful, emotional and impervious to argument. Gustave Le Bon, a pioneer in the study of crowd psychology, said a century ago, "It were as wise to oppose cyclones with discussion as beliefs of crowds...Time alone can act upon them." (The Wave Principle of Human Social Behavior, 1999 by Robert R. Prechter)
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