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How $1-million can disappear
September 19, 2011

By Elliott Wave International

The bursting of the “debt bubble” which started in 2008 is far from over.

It’s the financial story of our age and it’s happening before our eyes. The full scope is hard to keep up with because it’s unfolding at various levels.

The top level is the sovereign debt crisis:

• National governments: Several in Europe and even the U.S.

• State and local governments: services slashed; vendors waiting to get paid.

• Corporations: financial institutions at home and abroad remain in questionable health. PIMCO Chief tells Bloomberg (9/13) “We’re getting close to a full-blown banking crisis in Europe.” And CNBC reports (9/14) “Moody’s Investors Service said…it downgraded the credit ratings of Societe Generale and Credit Agricole.”

• Individual Households: “under-water” mortgages; “new conservatism” toward spending.

As the credit bubble continues to deflate, the evaporation of vast wealth may follow on a historic scale. Please read this excerpt from the second edition of Conquer the Crash (pp. 94-95):

“…a lender starts with a million dollars and the borrower starts with zero. Upon extending the loan, the borrower possesses the million dollars, yet the lender feels that he still owns the million dollars that he lent out. If anyone asks the lender what he is worth, he says, ‘a million dollars,’ and shows the note to prove it. Because of this conviction, there is, in the minds of the debtor and the creditor combined, two million dollars worth of value where before there was only one. When the lender calls in the debt and the borrower pays it, he gets back his million dollars. If the borrower can’t pay it, the value of the note goes to zero. Either way, the extra value disappears…

“The dynamics of value expansion and contraction explain why a bear market can bankrupt millions of people. At the peak of a credit expansion or a bull market, assets have been valued upward, and all participants are wealthy — both the people who sold the assets and the people who hold the assets. The latter group is far larger than the former, because the total supply of money has been relatively stable while the total value of financial assets has ballooned. When the market turns down, the dynamic goes into reverse. Only a very few owners of a collapsing financial asset trade it for money at 90 percent of peak value. Some others may get out at 80 percent, 50 percent or 30 percent of peak value. In each case, sellers are simply transforming the remaining future value losses to someone else. In a bear market, the vast, vast majority does nothing and gets stuck holding assets with low or non-existent valuations. The ‘million dollars’ that a wealthy investor might have thought he had in his bond portfolio or at a stock’s peak value can quite rapidly become $50,000 or $5000 or $50. The rest of it just disappears. You see, he never really had a million dollars; all he had was IOUs or stock certificates. The idea that it had a certain financial value was in his head and the heads of others who agreed. When the point of agreement changed, so did the value. Poof! Gone in a flash of aggregated neurons. This is exactly what happens to most investment assets in a period of deflation.”

Now is the time to prepare for a deflationary depression by reading the 90-page Free Report titled Deflation Survival Guide. This eBook is now updated with Robert Prechter’s most important analysis and forecasts regarding deflation. You can read this free financial guide right away as a Club EWI Member (membership is free). Joining Club EWI is easy and just takes moments. See the Deflation Survival Guide on your screen by following this link>>

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Will diversifying your investments help you now?
September 16, 2011

By Elliott Wave International

So what is this popular investment approach?

You’ve heard the answer before: Diversification.

You probably know that the purpose of diversification is to spread risk across asset classes. The assumption is that if one asset goes down, the others will be stable or perhaps even move up.

But what if we’re in a time when an “all the same market” scenario is unfolding in the financial world? What if the following description proves accurate:

“In recent years the financial markets have turned roughly together. Although to date they have not topped and bottomed on precisely the same day or even the same month (that would be too easy), their correspondence is getting tighter and tighter.”

Elliott Wave Theorist, May 2011

Please take a look at the chart below.

As noted in the quote above, not all financial markets are trending together exactly. Yet the chart speaks for itself: the correlation is becoming increasingly visible.

In the stocks category alone, diversifying between sectors can leave your portfolio beaten and tattered:

“More than ever on record, individual stocks in the Standard & Poor’s 500 Index are moving in unison…

“‘It’s not just stocks. It’s actually all asset classes,’ said [Andrew] Lo, who is…the chairman and chief investment strategist of a hedge fund. ‘The U.S. dollar relative to other currencies, gold, oil and hedge fund returns have now all become very highly correlated.’”

Huffingtonpost, (8/24)

No other investment approach has been more widely preached than “diversification.” It’s important to dispel the myth of diversification — especially now.

Let me introduce you to a free report called “Death to Diversification: What It Means to Your Investment Strategy.” This publication’s ten sections are packed with uncommon analysis which tells the truth about the too-common advice to diversify your investments. Moreover, the written analysis is accompanied by 18 fact-based charts. You can instantly access your free report after joining Club EWI. Club EWI is the world’s largest Elliott Wave Community with more than 325,000 members. It’s free to join with no strings attached We look forward to welcoming you as a Club EWI member. “Death to Diversification: What It Means to Your Investment Strategy” can be on your computer screen in moments as you follow this link >>

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Learn more about using Momentum analysis to make Elliott wave trading decisions in this video by EWI European Interest Rate Analyst Bill Fox. Find more lessons on technical indicators in EWI’s newest free report. See the information below.

Learn the Best Technical Indicators for Successful Trading

In this free report, you will learn the tools of the trade directly from the analysts at Elliott Wave International. This free report uses both video lessons and reports to teach you how to incorporate technical indicators into your analysis to improve your trading decisions. Get your technical indicators report now.

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Learn the Best Technical Indicators For Successful Trading. This free report from Elliott Wave International will teach you how to incorporate technical indicators into your analysis to improve your trading decisions. Get your free technical indicators report now.

Dear Trader,

Successful trading doesn’t happen by accident. And it doesn’t happen by watching news headlines and reading company earnings reports. When the markets get volatile and the fundamentals don’t seem to work, it’s time to turn to technical analysis.

Our friends at Elliott Wave International employ the largest team of technical analysts in the world. They have just released a new report to help you better understand technical analysis: Learn the Best Technical Indicators For Successful Trading.

This report will help you understand which technical indicators are best for analyzing chart patterns, which are best for anticipating price action, even which are best for spotting high-confidence trade setups. You’ll also learn how technical indicators can be used to complement Elliott wave and other technical methods.

You get both video lessons and reports from EWI’s expert analysts that will teach you how you can use technical indicators such as MACD, the advance-decline line, trendlines, and Fibonacci retracements. You’ll learn how these technical indicators are so critical to helping you make successful trading decisions.

EWI’s expert analysts incorporate these indicators into their market analysis on a daily basis and they share their methods with you in this report.

Get your FREE report, Learn the Best Technical Indicators For Successful Trading, Now.

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Free Report Available Now
August 26, 2011

By Elliott Wave International

During the past few years, The Federal Reserve has engaged in a “deliberate inflating policy.”

This policy earned disfavor, both at home and abroad.

Robert Prechter said this in the July Elliott Wave Theorist:

“Foreign powers have been irate over the Fed’s deliberate inflating policy. At its outset, QE2 generated ‘a chorus of criticism’ from China, Russia, Japan, Brazil and Germany. It prompted one of China’s three credit rating services to lower its rating on U.S. debt from AA to A+, on the basis that QE2 is a scheme to defraud the Treasury’s creditors.

(Inflation is a scheme to rob everyone.) Whether or not that rating decision was politically motivated, it represents foreign resistance to the Fed’s machinations.”

[Note: The credit rating service in China is not alone in downgrading U.S. debt. History was made August 5 when Standard & Poor's downgraded the United States' credit rating from AAA to AA+.]

External resistance to the Fed’s policies is one thing. But the machinations of America’s central bank are also encountering resistance from within the Fed itself, albeit “behind closed doors.” Let’s return to the July Theorist:

It is not just outsiders who criticize the Fed’s policies. Kansas City Federal Reserve Bank President Thomas Hoenig voted against all seven of the Fed’s policy decisions in 2010. He disagreed with QE2 on the basis that it would generate inflation. He went public with his views at a Republican meeting in Washington on December 2. Richmond Fed President Jeffrey Lacker and Philadelphia Fed President Charles Plosser have also expressed concerns. Even Kevin Warsh, at that time a Fed governor-at-large who had never failed to support Bernanke, in a New York speech “warned of ‘significant risks’ associated with the program” (AP, 11/9) and expressed doubt that it would help the economy at all. His op-ed piece for The New York Times “expressed deep skepticism” of the plan. Richard Fisher, president of the Dallas Fed, in a San Antonio speech called QE2 the “wrong medicine” for the economy.

The “wrong medicine” indeed! If anything, the economy seems as unhealthy now as it was before QE2.

In a June 30 CNBC interview, former Fed Chairman Alan Greenspan himself said, “There is no evidence that [the] huge inflow of money into the system basically worked.”

Prechter has extensively studied and written about the Fed for more than a decade. He has “pulled back the curtain” on the nation’s “lender of last resort” and his findings are more relevant today than ever.Prechter’s research is now available in a Free Report titled: Understanding the Fed: How to Protect Yourself from the Common and Misleading Myths About the U.S. Federal Reserve This special free report is now available for you to read by simply joining Club EWI. Membership is also free, and there are no obligations when you join. When you become a Club EWI member, you gain instant access to a wealth of EWI Educational Resources. Get your Free Report about the U.S. Federal Reserve now by following this link for the quick and easy sign-up!

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The idea that the economy leads the stock market is false
Aug 3, 2011

By Elliott Wave International

As the DJIA fell 2% to close below 12,000 on August 2, one theme rang across major financial websites. This CNN headline summarizes it:

Stocks sink as investors fret over the economy (Aug. 2)

The belief that the economy drives the stock market is common knowledge; it’s Investing 101; the idea gets pounded into investors’ heads, over and over again, by various pundits, daily.

But please allow us to suggest this: Belief that the GDP and other economic measures drive stock market trends is completely and utterly false.

The strength or weakness of the economy does not lead the stock market higher or lower. The economy follows the stock market.

“Stocks lead the economy, normally by months,” writes EWI president Robert Prechter; he has studied this subject in-depth. Here’s an excerpt from our Club EWI resource, the free 50-page 2011 Independent Investor eBook, which quotes one of Prechter’s research papers.

The Independent Investor eBook, 2011 Edition
(excerpt; get full eBook here, free)

Suppose that you had perfect foreknowledge that over the next 3¾ years GDP would be positive every single quarter and that one of those quarters would surprise economists in being the strongest quarterly rise in a half-century span. Would you buy stocks?

If you had acted on such knowledge in March 1976, you would have owned stocks for four years in which the DJIA fell 22%. If at the end of Q1 1980 you figured out that the quarter would be negative and would be followed by yet another negative quarter, you would have sold out at the bottom.

Suppose you were to possess perfect knowledge that next quarter’s GDP will be the strongest rising quarter for a span of 15 years, guaranteed. Would you buy stocks?

Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929. GDP was positive every quarter for 20 straight quarters before the crash and for 10 quarters thereafter.

But the market crashed anyway. Three years after the start of 4Q 1987, stock prices were still below their level of that time despite 30 uninterrupted quarters of rising GDP. Figure 10 shows these two events.

It seems that there is something wrong with the idea that investors rationally value stocks according to growth or contraction in GDP. (…continued)

If you found this insight eye-opening, keep reading the2011 Independent Investor eBook, an educational, powerful and FREE 50-page eBook to help you think independently. Thousands of investors have downloaded the Independent Investor eBook, and it has changed the way they think forever. Now YOU can get this important eBook packed with insightful analysis from 2010 and 2011 Elliott Wave Theorist and Elliott Wave Financial Forecast. — all you need is a free Club EWI password.

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July 29, 2011

By Elliott Wave International

July 28 would have been Ralph N. Elliott’s 140th birthday, so it’s a fitting time to post an excerpt from his essay, “The Basis of the Wave Principle.” There’s nothing like reading for yourself what the discoverer of the Wave Principle wrote about how it works. This essay is taken from the book, R.N. Elliott’s Masterworks. It’s the definitive collection that Robert Prechter collected and published in 1994.

* * * * *
The Basis of the Wave Principle
by R. N. Elliott
First published on October 1, 1940

Civilization rests upon change. This change is cyclical in origin and characteristics. A rhythmic series of extreme changes constitutes a cycle. When a cycle has been completed, another cycle is started. The rhythm of the new cycle will be the same as that of the previous cycle, although the extent and duration may vary. The cycle progresses in accordance with the natural law of movement.

The behavior of cycles has been studied extensively by puzzled economists, bankers and businessmen. In this connection, the conservative London Economist in a recent issue, commenting upon the results of a long study of trade cycles made by Sir William Beveridge, the noted British economist, said:

Sir William’s researches have emphasized once again that the more the trade cycle is studied, the more it seems to follow the pressure of forces which, if they are not wholly beyond the reach of human control, have at least enough of the inexorable in their nature to make the policies of governments resemble the struggles of fish caught in the tides. Sir William pointed out that the trade cycle ignores politics; he might have added that it overrides economic policies.

The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.

This law of natural change is inevitable, and applies to the seasons and the movements of the tides and planets. It has truly been said that change is the only “immutable thing in life.” Being a natural phenomenon, it necessarily governs all human activities, even the relatively static sciences of biology and botany. Even time and mathematics appear to be amenable to the application of this law of rhythm from the small unit of hours to the great intervals of decades, centuries and millennia. Measuring the behavior of cycles should therefore offer a reliable means of forecasting changes, regardless of the cause, and thus yield handsome profits.

In an independent study of the available data, extending over a period of many years, the writer has observed certain recurring behavior of change in movement. Apparently these changes follow a natural law that inevitably influences the mass. Finally there evolved certain principles, which were carefully tested back over a long period of years.

By 1934, I was able to resolve the various trends of changes in stock prices to a rhythmic series of component waves, which I called a “cycle.” This cyclical rhythm has occurred regularly and repeatedly not only in the available records of the various stock exchanges, but also in commodities, industrial production, temperature, music, variation in color, electric output, population movements to and from cities, etc. In fact, it is manifest so widely, not only in human activities but also in the working of nature itself, that I have termed this discovery “The Wave Principle.”

Understanding of this law enables the close student to forecast the terminations of cycles by means of the market itself. The Wave Principle is not a “market” system or theory. The forecasting principle involved goes far beyond the concept of any known formula….

Learn more about the Elliott Wave Principle and how applying it to your market analysis can improve your investing and trading. Take the entire online course — The Elliott Wave Tutorial: 10 Lessons on the Wave Principle — FREE! Click here to access the 10 Lessons

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July 19, 2011

By Elliott Wave International

The European Banking Authority announced Friday that 8 banks had failed their stress tests and 16 more had narrowly passed. But the results drew much criticism from analysts, who said that the stress test is not strict enough.

Indeed, this is something that European Financial Forecast readers have known since the first stress test last summer.

For a unique perspective on Europe’s sovereign debt crisis, we invite you to read a free 6-page report by Elliott Wave International’s European Financial Forecast editor Brian Whitmer, “Credit Crisis in Europe.” Brian has been anticipating and tracking the credit contagion across Greece, Ireland, Spain, Portugal and other EU nations for months.

Below is a quick excerpt from this report, written just after the first stress test. For details on how to read it in full now, look below.
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Credit Crisis in Europe: How the Stability of an Entire Region is Teetering on the Edge of a Major Collapse

By EWI’s European Financial Forecast editor Brian Whitmer (excerpt)

Panic Now and Avoid the Rush — July 30, 2010
The market’s collective sigh of relief is also reflected in authorities’ stress testing of 91 European banks. In case you missed last Friday’s results, their message is clear: relax. The Committee of European Banking Supervisors (CEBS) gave passing grades to nearly every bank on its list. The group, for example, passed both Irish banks and all four UK banks that it evaluated. The CEBS gave clean bills of health to all four Portuguese banks, all five Italian banks, and five out of six Greek banks that it analyzed. Even with share prices that sit 29%-66% beneath their 2009 countertrend highs, the CEBS says that the Bank of Ireland, Piraeus Bank, Banco Popolare, and Banco Santander are all in good shape. In fact, just seven of the 91 banks failed to make the grade. Five were in Spain, one in Greece, and one, Germany’s Hypo Real Estate, is entirely owned by the German government anyway. Everyone else — 84 institutions in all — are supposed to be strong enough to withstand another economic shock.

It’s not so much the stellar results that expose the optimism of a Primary degree rally, but rather the Banking Committee’s stress tests themselves. They are notable primarily because they failed to test for any real stress in the first place. As the chart shows, the Committee’s “adverse scenario” regarding economic performance assumed a mere 3% deviation from the European Commission’s GDP forecast. Another test looked at banks’ resilience to a sovereign risk shock, yet the analysis merely used conditions similar to those of May 2010. In other words, just like the UK budget office, the CEBS is utilizing a woefully diluted version of the economic deterioration that is about to grip the continent.
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FREE REPORT: Discover what Europe’s debt crisis means for the future of the continent and your investments. Get your FREE 6-page report filled with unique analysis on Europe, the PIIGS and the sovereign debt crisis.EWI’s European Financial Forecast editor Brian Whitmer gives you the context for what’s happening in Europe and gets you up to speed on the reality of the situation. Download your free report now.

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A Free Lesson on How to Combine Technical Indicators with Elliott Wave Analysis
July 11, 2011

By Elliott Wave International

Trading using technical indicators — such as the MACD, for example, Moving Average Convergence-Divergence — can do one of two things: help you or hinder you.

Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend.

Technical indicators are meant to do exactly what the name implies: “indicate” that a buy or sell signal may be in place. (Don’t confuse “indicate” with “guarantee”: They are not called “technical guarantors” for a reason.)

Elliott Wave International’s Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook, The Commodity Trader’s Classroom:

“Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.”

Jeffrey goes on to describe his favorite indicator, the MACD:

“Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line.”

Figure 10-1 gives you an example of the MACD indicator in Coffee futures.

One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here’s another quote from the free eBook:

“A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement.”

Figure 10-4 gives you an example of the Hook at work in live cattle futures.

“A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I’m looking for is a heads-up that the larger trend is possibly resuming.”

Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in the FREE 32-page eBook, The Commodity Trader’s Classroom. It is filled with actionable lessons you can apply to your trading strategy. Download it right now, instantly, when you create your free Club EWI profile.

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Two resources from Elliott Wave International can help you get started
July 07, 2011

By Elliott Wave International

When Ralph Nelson Elliott discovered the Wave Principle nearly 70 years ago, he explained how social (or crowd) behavior trends and reverses in recognizable patterns. You can learn to identify these patterns as they unfold in the financial markets, and use them to help anticipate where prices will go next. Elliott Wave International has developed a free comprehensive online course — The Elliott Wave Tutorial: 10 Lessons on the Wave Principle — which describes these patterns and explains how they relate to one another.

To use the Wave Principle as you analyze the markets, you need a basic understanding of the Elliott method — the rules and guidelines, the literal shape of individual waves, even when the larger trend may turn.

To get you started, we’ve included an excerpt from the free Elliott Wave Tutorial, adapted from Elliott Wave Principle by Frost and Prechter, and a short video clip from the live presentation, Tips from a Pro.

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Here is your quick lesson excerpted from The Elliott Wave Tutorial:

In his 1938 book, The Wave Principle, and again in a series of articles published in 1939 by Financial World magazine, R.N. Elliott pointed out that the stock market unfolds according to a basic rhythm or pattern of five waves up and three waves down to form a complete cycle of eight waves. The pattern of five waves up followed by three waves down is depicted in Figure 1-2.

One complete cycle consisting of eight waves, then, is made up of two distinct phases, the motive phase (also called a “five”), whose subwaves are denoted by numbers, and the corrective phase (also called a “three”), whose subwaves are denoted by letters. The sequence a, b, c corrects the sequence 1, 2, 3, 4, 5 in Figure 1-2.

At the terminus of the eight-wave cycle shown in Figure 1-2 begins a second similar cycle of five upward waves followed by three downward waves. A third advance then develops, also consisting of five waves up. This third advance completes a five wave movement of one degree larger than the waves of which it is composed. The result is as shown in Figure 1-3 up to the peak labeled (5).

At the peak of wave (5) begins a down movement of correspondingly larger degree, composed once again of three waves. These three larger waves down “correct” the entire movement of five larger waves up. The result is another complete, yet larger, cycle, as shown in Figure 1-3. As Figure 1-3 illustrates, then, each same-direction component of a motive wave, and each full-cycle component (i.e., waves 1 + 2, or waves 3 + 4) of a cycle, is a smaller version of itself.

Every wave serves one of two functions: action or reaction. Specifically, a wave may either advance the cause of the wave of one larger degree or interrupt it. The function of a wave is determined by its relative direction. An actionary or trend wave is any wave that trends in the same direction as the wave of one larger degree of which it is a part. A reactionary or countertrend wave is any wave that trends in the direction opposite to that of the wave of one larger degree of which it is part. Actionary waves are labeled with odd numbers and letters. Reactionary waves are labeled with even numbers and letters.

Watch this video clip from Tips from a Pro for more on Elliott waves:

EWI’s Chief Currency Strategist Jim Martens explains how learning to use Elliott waves can be as simple as counting to 5 and knowing your A-B-Cs.

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