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Elliott Wave International Chief Market Analyst Steve Hochberg Sheds Light on a Feared Technical Indicator
August 24, 2010

By Elliott Wave International

On Aug. 12, volatile market action coincided with a technical signal called the Hindenburg Omen, whereby a relatively high number of new highs and lows in individual stocks occur at the same time.

This indicator instantly gained an enormous amount of media attention. So we sat down with Steve Hochberg, EWI’s chief market analyst and close colleague of Robert Prechter, to ask him about the now-infamous Hindenburg Omen.

EWI: Steve, recently a market indicator called the Hindenburg Omen has been in the news, what is going on?

Steve Hochberg: Discussion of this indicator certainly has been everywhere. Someone emailed us and said they even saw it mentioned on the front page of the Drudge Report! Look, headline-grabbing names grab headlines. Essentially it measures the fractured nature of market action. Over the years, we’ve discussed numerous times in our publications how a fractured market is oftentimes an unhealthy market. The multiple non-confirmations registered at the recent August 9 stock high, which we talked about in the Short Term Update, are another manifestation of this bearish behavior. The message is consistent with how we view the Elliott wave structure.

EWI: Why are people interested in this particular indicator?

SH: That’s a good question, and it speaks to a broader issue, viz., the “re-emergence” of technical analysis into the mainstream consciousness of market participants. In Prechter’s Perspective, Robert Prechter discusses the timing of the popularity of technical analysis, of which Elliott waves, or pattern recognition, is the highest form:

“In long term bull markets, no one really needs market timing because the market is always going up. This was true during the 1950s and 1960s, a period of market strength. And it has been mostly true since 1982. From 1966 to 1982, though, the market was very cyclic, so investors couldn’t sleep like babies with a buy-and-hold blanket like they do today.”

The S&P 500 has a negative return over at least the past 12 years, so investors are naturally questioning the “broadly diversified, buy and hold” stance advocated by 90%+ of investment advisors. EWI subscribers are way ahead of the mass of investors because as the bear market progresses, the media should show increased focus on technical analysis, including patterns such as head-and-shoulders as well as trendlines, moving averages and, yes, even Elliott waves, just as they did during the last great bear market from 1966 to 1982. It will be an exciting time for those with even a cursory knowledge of the technicals.

EWI: So, what are you seeing now?

SH: Obviously we cannot give away our analysis, but the wave structure is clear, the myriad indicators we keep offer compelling confirmation and the market is accommodating our forecast. If readers have any interest in what this means for not only the stock market, but also all other markets, please give us a read to see if our work might be useful in helping to formulate your investment portfolio. We think it will be a worthwhile endeavor.

Read some of the latest nuggets directly from Elliott Wave International President Robert Prechter’s desk — FREE. Click here to download a free report packed with recent analysis and forecasts from Prechter’s Elliott Wave Theorist.

August 19, 2010

By Elliott Wave International

Of all the belief systems of Wall Street, few can claim the devoted following of the Efficient Market Hypothesis, the idea that stock prices adhere to the same laws of supply-and-demand that govern retail products. Once coined the theoretical “Parthenon” of economics, this notion has consistently endured the test of time —– until now. Academics and advisors across the globe are currently exposing crack after crack in the “Efficient” model so deep as to bring the entire theory crashing to the ground.

“The EMH is not only dead,” writes a July 29, 2010 news source. “It’s really, most sincerely dead.” (Minyanville)

As to what caused the theory’s collapse — one recent business journal offers this insight:

“Financial markets do not operate the same way as those for other goods and services. When the price of a television set or software package goes up, demand for it generally falls. When the prices of a financial asset rises, demand generally rises.” (The Economist)

Here’s the thing. SIX years ago, Elliott Wave International president Bob Prechter pronounced the exact same finding in his April 2004 Elliott Wave Theorist. (Read that full-length publication today, absolutely free by clicking on the hyperlink) In that groundbreaking report, Bob presented the compelling picture below that shows how investors increase their percentage of stock holdings as prices rise, and decrease them as prices fall:

The next question is why? Answer: Motivation: i.e. the purchase of goods and services is about need; while the purchase of stocks is about desire. Here, Bob Prechter’s 2004 Theorist takes the rein:

“The fact is that everyday in finance, investors are uncertain. So they look to the herd for guidance. Because herds are ruled by the majority — financial market trends are based on little more than the shared mood of investors — how they feel — which is the province of the emotional areas of the brain (limbic system), not the rational ones (neocortex)… Buyers, in a rising market appear unconsciously to think, ‘The herd must know where the food is. Run with the herd and you will prosper.’ Sellers in a falling market appear to unconsciously think, ‘The herd must know that there’s a lion racing toward us. Run with the herd or you will die.’”

Prechter and contributor Wayne Parker then expanded on his landmark observation in the 2007 Journal of Behavioral Finance. (Also available, absolutely free by clicking on the hyperlink)

In the end, it’s not enough to just tear down the long-standing EMH. One must build another, more accurate model up in its place. And in the 2004 Theorist, Bob Prechter does just that with the Wave Principle, which reconciles the technical and psychological sides of stock market behavior into this key point: Herding impulses, while not rational, are also NOT random. They unfold in clear and calculable wave patterns as reflected in the price action of financial markets.

As the mainstream media continues to jump on board Prechter’s Financial/Economic Dichotomy Theory, you can read both of Prechter’s original writings. Enjoy your complimentary access to the 2004 April 2004 Elliott Wave Theorist and the 2007 Journal of Behavioral Finance.

Read some of the latest nuggets directly from Robert Prechter’s desk — FREE. Click here to download a free report packed with recent quotes from Prechter’s Elliott Wave Theorist.

August 17, 2010

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.

Read some of the latest nuggets directly from Robert Prechter’s desk — FREE. Click here to download a free report packed with recent quotes directly from Prechter’s Elliott Wave Theorist.

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.

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.

Read some of the latest nuggets directly from Robert Prechter’s desk — FREE. Click here to download a free report packed with recent quotes from Prechter’s Elliott Wave Theorist.

There is still time to prepare if deflation is indeed in our future.
August 16, 2010

By Elliott Wave International

“Fed’s Bullard Raises Specter of Japanese-Style Deflation,” read a July 29 Washington Post headline.

When the St. Louis Fed Chief speaks, people listen. Now that deflation — something that EWI’s president Robert Prechter has been warning about for several years — is making mainstream news headlines, is it too late to prepare?

It’s not too late.

There are still steps you can take if deflation is indeed in our future. The first step is to understand what it is. So we’ve put together a special, free, 60-page Club EWI resource, “The Guide to Understanding Deflation: Robert Prechter’s most important warnings about deflation.” Enjoy this quick excerpt. (For details on how to read this important report free, look below.)

When Does Deflation Occur?
By Robert Prechter

To understand inflation and deflation, we have to understand the terms money and credit.

Money is a socially accepted medium of exchange, value storage and final payment; credit may be summarized as a right to access money. In today’s economy, most credit is lent, so people often use the terms “credit” and “debt” interchangeably, as money lent by one entity is simultaneously money borrowed by another.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. The psychological aspect of deflation and depression cannot be overstated. …

Q&A with an experienced Elliott wave trader reveals seven common trading mistakes.
August 12, 2010

By Elliott Wave International

To be a successful trader demands knowledge.

If you’d prefer to become an unsuccessful trader, you can start by making the following common trading mistakes, detailed by a professional who spent 25 years in portfolio management, trading and forecasting in the financial capital of the world, New York City.

In 2002, Wayne Gorman, long-time Elliott wave trader and current head of trader education at Elliott Wave International, left his 35th floor Manhattan apartment and moved to the quiet of North Georgia. He’s been sharing his knowledge and skills with aspiring traders ever since — in both online seminars and before live audiences around the world.

Wayne graciously agreed to a Q&A about trading mistakes. In his interview, Wayne reveals seven common mistakes traders make.

——–

EWI: Could you name two mistakes frequently made by stock traders?

Wayne Gorman: (mistake 1) The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an “event” comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.

(mistake 2) The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.

EWI: What are two common mistakes among options traders?

WG: (mistake 3) One common mistake is to buy puts or calls that are way “out of the money,” with no other transactions to compliment them. Unless your timing is absolutely perfect — and who has perfect timing? — your chance of success is low. It’s like buying a lottery ticket.

(mistake 4) Another common mistake is to buy options with too little time left to expiration. With less than one month to expiration, the time decay begins to accelerate and the chances of success diminish.

EWI: Please name a frequent mistake among traders who aim to catch the beginning of a particular Elliott wave.

WG: (mistake 5) In the middle of a corrective pattern, it’s common to run out of patience while waiting for confirmation of a trend change. You have to give corrective patterns time to unfold before you jump in. This requires discipline, and a solid understanding of the many ways corrective patterns can unfold.

EWI: What’s the biggest misconception among traders about using Elliott waves?

WG: (mistake 6) Too many traders think Elliott wave is a trading system that tells you exactly where to enter and exit a particular market. That’s the biggest misconception. The reality is that it’s an analytical and forecasting tool, which helps you develop and use your own trading system, based on your own personal risk tolerance.

EWI: What technical indicators do you believe traders over-rely on, and why?

WG: (mistake 7) Traders tend to over-rely on momentum indicators such as RSI, Stochastics and MACD to precisely spot turning points. But to paraphrase Mark Twain, markets can stay overbought or oversold a lot longer than either you or I can remain solvent.

EWI: How would you characterize today’s market action, and do you teach courses that address this environment?

WG: This is a difficult stock market in the near term. Prices haven’t strayed far from where they began in January. The action has yet to break out significantly to the downside or upside. This situation may not last much longer. I can suggest these online courses to deal with the current situation, and to prepare for the next big move:

• How to Spot Trading Opportunities, Parts 1 and 2
• How to Trade Choppy, Sideways Markets
• 5 Options Strategies Every Elliott Wave Trader Should Know
• Trading the Line – How to Use Trendlines to Spot Reversals and Ride Trends

—————————————
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Greetings,

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• How to Integrate Technical Analysis into an Elliott Wave Forecast
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Regards,
Aidil Azhar

CyberMoneyInfo

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private around the world.

Video: The Real-Time Power of Elliott Wave Analysis

Mainstream financial analysts always look for ways to explain market action through news stories and events. Conventional wisdom states that news and inter-market correlations cause market booms and busts, but such explanations rely on selective presentation of the data. In this video, Elliott Wave International’s Asian-Pacific Financial Forecast Editor Mark Galasiewski shows you how Elliott wave analysis was able to predict Hong Kong’s late ’90s mania and its aftermath in real time — without looking at the news or the market’s “fundamentals.”

Watch More about the Power of Elliott Wave Analysis in this FREE Video
Discover how Elliott wave analysis gives you a consistently logical explanation
– and debunk one of the major myths of what caused the Asian Financial Crisis
– in the free video, “The Real-Time Power of Elliott Wave Analysis:
Debunking the Myths of the Asian Financial Crisis.” Access Your FREE Video Now.

Stress Test: How to Find the Safest Banks in the U.S. and Abroad

August 3, 2010

By Elliott Wave International

Stress test results for the biggest European banks were recently released, while the largest U.S. banks took their first stress tests in May 2009. But most people don’t really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression in 2002. This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans). You can also get a list of the Top 100 Safest U.S. Banks — two banks per state — that was just updated in late June with the latest available data by joining Club EWI and receiving EWI’s Safe Banks report.

* * * * *
Excerpted from Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter

Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.

Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.

Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.

Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.

Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.

July 26, 2010

By Elliott Wave International

If “fundamentals” drive trend changes in financial markets, then shouldn’t the same factors have consistent effects on prices?

For example: Positive economic data should ignite a rally, while negative news should initiate decline. In the real world, though, this is hardly the case.

On a regular basis, markets go up on bad news, down on good news, and both directions on the same news — almost as if to say, “Talk to the hand cuz the chart ain’t listening.”

Unable to deny this fly in the fundamental ointment, the mainstream experts often attempt to reconcile the inconsistencies with phrases like “shrugged off,” “defied” or “in spite of.”

That begs the next question: How do you know when a market is going to cooperate with fundamental logic and when it won’t? ANSWER: You don’t.

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Take, for instance, the first three news items below regarding the July 22 performance in crude oil, versus the fourth headline, which occurred on July 23:

1. Crude prices surge nearly 4% in their sharpest one-day percentage gain since May. The rally was “aided by fears that Tropical Storm Bonnie will enter the Gulf of Mexico over the weekend and disrupt oil production.” (Wall Street Journal)
2. “Oil Prices Soar As Gulf Storm Threat Looms” (Associated Press)
3. “The storm should keep oil prices bubbling if it continues to strengthen and remain on track.” (Bloomberg)

vs.

1. “Oil Slips From Surge Despite Storm Threats” (Commodity Online)

Unlike fundamental analysis, technical analysis methods don’t rely on the news to explain or predict market moves. They look at the markets’ internals instead.

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What Will Happen as $1,000,000,000,000,000 in Global Debt Winds Down?
July 22, 2010

By Elliott Wave International

The biggest balloon in the world is deflating.

This balloon had been inflated with a quadrillion (10¹⁵) dollars, which is to say: This balloon was filled not with air but with debt from around the globe.

What will happen as this global debt winds down? In two words: Deflationary Depression — the likes of which could be unprecedented in history.

Want to Know How to Prosper in a Deflationary Depression?
If you haven’t yet given Robert Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter’s 60-Page Guide to Understanding Deflation here.

A thousand trillion in debt can’t be wished away or swept under the rug. No one can “forgive” the debt. The consequences of unwinding this debt could be as massive as the dollar figure itself.

We’ve heard plenty about the debt problems of Greece, Spain, Portugal and Italy.

But how about the world’s second largest economy? Consider this fact reported in the Japan Times (July 8):

“Japan’s government debts are the highest the world has ever seen, at 219 percent of gross domestic product, according to the International Monetary Fund.”

Then there’s the world’s sixth largest national economy. In January 2009,  Robert Prechter wrote this in the Elliott Wave Theorist:

“British banks have amassed $4.4 trillion worth of foreign liabilities, twice Britain’s annual GDP. … England, moreover, ‘has not defaulted since the Middle Ages.’ The possibility that it may do so again is yet another indication that the bear market is of … (larger) degree, exactly as Elliott wave analysts have predicted all along.”

Remember, Japan and Great Britain are major world economies. Imagine what the debt totals would look like in a line-item analysis of other nations, regions, states, provinces and municipalities around the world, including the U.S.

De-leveraging will likely lead to a deflationary crash — a “day of reckoning.”

How can you prepare for a deflationary crash?

To start with, keep your money safe. As Bob Prechter mentions in the June 2010 Elliott Wave Theorist:

“Investors should be primarily in greenback cash and Treasury bills.”

He also describes holdings which should be strictly avoided.

Want to Know How to Prosper in a Deflationary Depression?
If you haven’t yet given Robert Prechter’s deflation argument your full attention, you should know now that yesterday was the best time to do so. Download Prechter’s 60-Page Guide to Understanding Deflation here.