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business newsRobert Prechter Goes All In and I'm Right Behind Him
The master of the Elliott wave theory has proven himself time and time again. This time he warns of a massive decline.
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He slammed a home run in 1978 with his book Elliott Wave Principle that he wrote with A.J. Frost. The book outlined a theory of stock market behavior replete with compelling historical evidence and a bold future forecast based on patterns originating in the past.
Against a rising tide of doom and gloom, Prechter called for a powerful 1980s bull market due to resumption of a wave pattern that started in 1932. This pattern, originally identified by Ralph Nelson Elliott, had been tracked and used to make extremely accurate market predictions in the 1960s by obscure market newsletter writer Hamilton Bolton and Elliott Wave Principle co-author A.J. Frost. Prechter was convinced of the accuracy of the wave principle, and wanted to reveal it to the general public.
He virtually stood alone as a stock market bull in 1982. The Dow was at 800 and he was calling for a rise to 3500-4000 and proclaiming the greatest bull market in history was coming. When the rise got underway, the bull market became synonymous with Robert Prechter. He enjoyed celebrity stock market guru status and was a frequent talking head on TV. At least one market pundit even referred to it as Prechter’s bull market. His celebrity status surged even more when he won the US Trading Championship in 1984.
Fame is fleeting however; or, as Robert Prechter believes, it comes in waves. Since he'd plotted his subscription numbers in terms of the same wave pattern that he'd used for his bull market prediction and identified a subscriber peak in late 1987, he was expecting a fall from grace.
He was correct. His stock market guru status was obliterated in the October 1987 stock market crash along with the investing public’s newfound fortunes. Even though he told his newsletter subscribers to get out of the market a few weeks before the 1987 crash, the investing public at large had embraced his higher price targets and the pundits who promoted him as a guru now turned on him.
If there's anything that Paul, the 2010 World Cup octopus oracle, taught us, it's that most people don’t care about the source of good fortune as long as it keeps coming. While Prechter’s goal was to spotlight the methodology behind his accomplishments, few outside of technical analysis professionals and Wall Street firms paid attention or even cared. Main Street was engorged and engaged as the baby boomer generation entered into peak earning years heralding in an era of bigger and better everything, and academia was busy bowing to the golden calf of random price structure.
But the methodology was fascinating. Elliott Wave Principle identified and named 13 patterns that recurred in the financial markets. These patterns connected and combined in a limited number of possibilities to form larger versions of the same patterns, and conversely, could be deconstructed (in a smaller time frame) to reveal smaller versions.
What was even more remarkable about the fractal structure of the Elliott wave principle was that the number of waves in a completed pattern and the proportional relationship between the waves were governed by Fibonacci mathematics. This same symmetry was found in spiraling galaxies, pine cones, sea shells, tree branches, hurricanes, and virtually all of nature.
These 13 patterns repeat with variation in time and amplitude during an eight-wave cycle that consists of five waves progressing in the direction of the trend, with waves two and four being counter-trend reactions, followed by three counter-trend waves, with wave two reacting in the direction of the trend.
Elliott 8 Wave Cycle
Elliott 8 Wave Cycle Deconstructed
While the eight-wave cycle seems simple enough, the 13 pattern combinations making up the eight-wave cycle can become very complex, especially the corrective wave structures. Nevertheless, by using the scientific approach meticulously detailed in the text and through the studious application of the principle, the serious student can learn to identify the patterns, map the location of price in an eight-wave cycle, and forecast probable future price structure. Most often there are several alternatives, but sometimes it can be fine-tuned to one theoretical outcome, or several outcomes that point in the same direction.
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