Here's my advice: View the Elliott Wave Principle as your road map to the market -- and your investment idea as a trip.
You start the trip with a specific plan in mind, but conditions along the way may force you to alter course. As I mentioned earlier, alternate Elliott wave counts are simply side roads that sometimes end up being the best path.
Elliott's highly specific rules keep the number of valid wave-pattern interpretations to a minimum. Usually, you would consider the "preferred count" to be the one that satisfies all three of Elliott's rules and the largest number of guidelines. Your top "alternate" is the one that satisfies the next largest number of guidelines, and so on.
Some of the best stories about global positioning systems (GPS) are the weird detours they sometimes recommend.
A while back, while on a family trip through Great Smoky Mountains National Park, I decided to use my GPS to drive around the park's western boundary to see the wildlife. My old-fashioned map made it look like it would take the better part of the day. But my GPS said the trip would only be about 20 miles long. Little did I know -- until I got there -- that the road from the GPS was only the remnant of an old wagon trail. I had to backtrack and take the path my paper map had originally suggested.
Sometimes, the old-fashioned way of doing things is still the best way.
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.
The "personality" of a third wave shows itself in recent market action
By Elliott Wave International
A classic issue of The Elliott Wave Theorist published this exchange:
Q. Do you believe that the Wave Principle provides for an objective form of analysis? ... There are market watchers who say that applying wave theory is very subjective.
Prechter: I always ask, "compared to what?" There is no group more subjective than conventional analysts who look at the same "fundamental" news event ... and come up with countless opposing conclusions. ... The Wave Principle is an excellent basis for assessing probabilities regarding future market movement. Probabilities are by nature different from certainties. Some people misinterpret this aspect of analysis as subjectivity, but all probabilities may be put in order objectively according to the rules and guidelines of wave formation.
So: While no one can "see" the future, you can use the Wave Principle to assess probabilities.
Think the current conditions in the stock market are normal? Think again. Here are 3 characteristics you should expect to see in wave b.
By Elliott Wave International
Editor's Note: Below you will find a sneak peek from the just-published issue of Robert Prechter's Theorist. It provides you an opportunity to see some of the research, analysis and forecasts that Elliott Wave International's subscribers are enjoying inside their latest issue.
Figure 4 (below) is a diagram from Chapter 2 of Elliott Wave Principle. It displays a typical progression of prices and psychology in a bear market. We can apply this picture to the stock market since 2000. The real-life pattern is a bit more complex than this picture, because wave a itself was a flat correction, which ended in 2009. The dashed line in Figure 4 represents what the market has been doing since then: rallying to a new high in a b-wave. The entire formation has been tracing out an "expanded flat" correction (see text, p.47) of Supercycle degree.
Per Figure 4, among the characteristics we should expect to see in wave b are: "Technically weak," "Aggressive euphoria and denial" and "Fundamentals weaken subtly." The volume contraction in the stock market has now lasted over five years, which is extreme technical weakness, albeit only in that indicator. The 30+ charts we have shown of market sentiment reveal historically high levels of optimism regarding stocks. No doubt bulls would dismiss the idea that investors today exhibit "aggressive euphoria and denial." But look at Figure 5. Continue reading "Inside Look: Check out this Unprecedented Bear Market Formation Since 2000"→