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Robert 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.

No one has tried harder to legitimize technical analysis than Robert Prechter, and over the years he hasn't wavered one iota from his steadfast belief in its predictive power. Launching his career in the early 1970s at the outset of the EMH/Random Walk dynasty and academic-imposed dark ages of technical analysis, he was eager to fight fire with fire and apply scientific methodology to his work.

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.

In addition to the wave pattern Elliott Wave Principle identified up from 1932, which Prechter called the Super Cycle, it identified two larger patterns that it fit into like Russian nesting dolls called the Grand Super Cycle and the Millennium Cycle. Together they represented the three largest Elliott wave structures dating back to the dark ages.

The original version of the book called for the impulse portion (five advancing waves) of the three largest cycles to end in the late 1980s, but when the market recovered from 1987, an alternate count was introduced in 1995, which included a revision stating that the Grand Super Cycle was likely the largest pattern in the confluence of terminating impulse waves, and it was likely to peak that year. Well, that didn't happen, and Prechter called the top again for 1996, and then in 1996 revised it to 2000.

You can imagine the fun critics of the Elliott wave principle had with all the bad calls. Prechter's days as a market caller, as far as the general population and critics were concerned, were over.

However, a funny thing happened; all those Whos down in Whoville kept singing. Prechter's personal newsletter and publishing house, Elliott Wave International (abbreviated EWI), continued to do well through the 1990s right up through today. In a mostly cottage industry where individuals or a handful of employees run market newsletters, Elliott Wave International has 90 employees. While EWI won't reveal its actual number of subscribers, it will say it has subscribers in more than 100 countries.

The bottom line is that serious Elliott wave watchers, though disappointed, weren't dissuaded by the failed projections in the 1990s. Although the five-wave impulse portion of these large-degree cycles extended beyond the ideal Fibonacci targets based on the historical norms of smaller wave sets, the failures were within the rules and guidelines of the wave principle and continued to adhere to Fibonacci proportion.

A clear five-wave impulse structure rising through time from 1784 to 2000 (Grand Super Cycle), encompassing another clear five-wave structure up from 1932 (Super Cycle), which nested yet another structure up from 1974 (Cycle), continued to present within acceptable ranges.

In the graphic above, the Grand SuperCycle count is (I), (II), (III), (IV), (V). The higher degree shown is Millennium Cycle.

But the most compelling evidence is the extremely well-documented Super Cycle run up from 1932 for which key pivots and waves were successfully identified in advance by R.N. Elliott from 1938-1942, Hamilton Bolton in 1960, Charles Collins in 1966, A.J. Frost in 1974, and Robert Prechter in 1982.

Imagine for a moment if these Elliotticians were geologists who predicted earthquakes instead of market pivots with the same accuracy.

However, there's that elusive impulse wave endgame that terminates the advancing portion of the three large cycles that Prechter has been calling for since 1987. One could point out that a lost decade in projecting the termination of a Grand Super Cycle wave (and all nested structures) up from 1784 is still accurate within 95% if it truly ended in 2000. But most people roll their eyes at Chicken Little Prechter's latest and most dire warning published in a New York Times interview last month.

I think it's more illuminating to ask a question. What impact do the failed projections in the 1990s have on the current interpretation of these large Elliott wave cycles today? The answer is very intriguing. Remember how I explained that sometimes an Elliott wave interpretation can be fine-tuned to one theoretical outcome, or several outcomes that point in the same direction? Well, the answer to my question is that theoretically there are absolutely no Elliott wave options left for price to go higher than the 2007 high at every Elliott cycle level of degree from Grand Super Cycle (1784) to Cycle (1974) without experiencing a decline in magnitude described by Robert Prechter in the New York Times interview.

In other words, Robert Prechter's lifelong pursuit to prove the validity of the Elliott wave principle is all in, right here, right now.

Oh, did I mention that he's the author of 14 books on the subject containing thousands of explicit examples of eight-wave cycle structures and Fibonacci proportion in the markets? What is that you say, why didn't you learn about the Elliott wave principle in college? Good question. I'll just say that I'm pretty sure your grandchildren will.

In March 2008 I expressed my belief in the Elliott wave principle but stopped short of conviction. In 2010, I'm right there with you Robert Prechter. All In Baby.

No positions in stocks mentioned.

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