The following commentary appeared at www.treasurechests.info last week.
"As the crow flies" is defined as the shortest and most direct route. Currently, the major indices are doing anything but the above definition. We started in March 2003 with market indices touching a low and have not looked back since. A quick ride up to 900, then a grinding period to move up the next 140 points. Most people would prefer the markets to just top out already and have the expected occur like people flying on a trip in anticipation of skiing on the mountains. Instead the market is like Mr. Leisure and his family taking their 1970 Malibu on cross-country tour stopping at every roadside attraction. Standing back and looking at the charts can compare to looking at a map. We are going from here to there, and that is that. Getting inside the wave pattern though, you realize there are rivers, valleys, and even mountains in some areas. It takes time to go up and down the terrain as it does the stock market.
Pattern recognition is a very important aspect of technically examining a chart, because post-pattern implications usually follow. A pattern will not always break to the anticipated direction, but patterns in place usually do follow through. One may ask the question: "why do we get all of these different patterns, and why do people sell near the bottom and buy near the top". The answer is simple: HUMAN PSYCHOLOGY. Everyone has a different core within themselves for handling stressful situations. Stress usually brings out irrational behavior, in people thought to be highly intelligent. It brings "deer in the headlights" a new meaning. Someone could be Einstein, yet at that one particular moment when they should be buying, they are selling. Everyone has done this before, and will do it again. The most successful traders in the world are cool as ice having their heart and emotions in the fridge before they go to work. After they slap them back in the body and life goes on. Technical ability is one thing, controlling human emotion is the most important factor, and goes with the horse and carriage scenario. You need both before you are going anywhere, but it will drive your success at trading and investing. Human psychology is the foundation of Elliott Wave (people are probably saying, OK Petch, here you go again with the Elliott wave stuff). If it did not work I would not use it as the foundation of market analysis.
The inventor was a man named R.N. Elliott who was an accountant. In the early 1930s, he developed an illness and was bed-ridden for two years. He loved to look at charts and was a very astute observer of trends. He established a foundation of rules and principles in his stock patterns, which has since been further developed and refined by Glenn Neely into a more quantifiable science. Glenn Neely's book is probably one of the most important texts one could own if they wish to become proficient at Elliott wave. There are many many talented people around the world who practice Elliott wave and try very hard to spread the word and teach it. There is a web forum for Elliott wave at www.elliott-wave-analysis.com that Alex Bezrodny runs. He is has a PHD in Physics who is a money manager in Russia. He is an extremely talented EW practitioner, as is a participant who works at Karoll in Belgium (Alexander Nikolov). There are many more at the site, and I would highly recommend people check it out for further enhancing their knowledge.
The basis of Elliott wave is that certain patterns occur during the process of a stock advance (an impulse pattern for bullish moves). There is certain metrics to define whether an impulse is an impulse. The ratios between the waves, price action, time action angle of ascent etc. etc. have implications as to how the indice/stock under study will perform. With 70% of the NYSE being traded by mutual funds one could wonder if the theory is applicable&..short-term may get skewed, but longer term the principle is sound as stone. Mass psychology is involved in Elliott Wave, and requires liquid markets for it to have validity. Some big board stocks that trade millions of shares per day could be considered eligible candidates for accurately applying Elliott wave. Different dimensions of time should be explored when working with counts (month, week, day), pending the time frame under study. Day to day news and global events can bounce intraday counts around, which makes their accuracy hard to follow unless one is in front of a computer screen. Daily charts generally quench the fluctuations and present a more accurate picture of the longer-term trend.
Trying to apply Elliott wave to a thinly traded stock (100,000 shares /day or less) is futile. There is too much margin of error due to lack of a "mass psychological representation" within the stock. Manipulations can occur more easily, so it is difficult. Currencies tend to follow Elliott wave patterns the best as trillions of dollars are traded daily. Governments can interfere all they want, but will be a minority in the flow of monetary funds as months turn to years. No government can effectively control their currency IF it is freely floating, unlike the Chinese renminbi. Their currency is fixed to the US dollar, so any decreases in the US currency has the renminbi having even greater advantages over other nations (other nations currencies will rise against the Chinese, making their currency even cheaper for imports in relation to them). This is why there is talk of placing huge tariffs on China. Will this have any effect??
I do not think tariffs will accomplish anything. The US is in a dire situation where it will lose out no matter which path it decides to take. China is a communist country on the verge of becoming democratic, while the US is heading the path of socialism. Right now it is fascism in disguise, but the government will require intervention to monetize company debt and take it over to prevent an outright nightmare from occurring economically. There has been talk of China and other countries repatriating to their currencies when the US dollar dropped to the current low levels, but it really is not in those countries interests. Only at the darkest hour would such and event occur. The Asian countries purchase the US treasury notes to take them out of circulation so not too much money would return back to the US where inflation would occur and prevent imports (i.e. Asian products). Even though they are losing money relative to other currencies or gold, it is a small price for sustaining their own economies. It will take a mighty blow for this trend to stop, and when it does, look out.
To prepare for the possible tidal wave of US dollars returning to the US, new colored currency is being issued to supposedly try and deter counterfeiting activities. An article on Gold Eagle summarized this nicely, and would recommend people read up on it. Basically, in a few years, the old green money can be circulated globally, but not returned to the shores of the US. This would negate any high interest rates coming down the pipe. There could actually be relative deflation in such an event if the local US currency reserve shrinks from bankruptcies, decreasing house and stock market values etc. On the other hand, oil, and gold, commodities stand to absolutely fly due to impending shortages. Money could be made out of nothing by high bidding on stocks etc. So a balance could be achieved from deflationary forces if the bull market in commodities runs hard. When the US catches the bubonic plague, the rest of the world will also. China will have its manufacturing come to a grinding halt, and things will slow down all over. The advantage China has with their huge sum of cash is that they could basically pick up 25% of the gold ever mined. A sudden change in sentiment could send the precious metals flying in price. Again, it is known this will occur, and most people would like to think OK, lets hit bottom and get the worst behind us. Instead we have central governments fighting the current impending economic collapse (2005-2010) tooth and nail.
The outcome will be far worse than if it was allowed to just happen, but that is not human nature. Instead of "as the crow flies", we chose as humans to carve our way across the country, in this instance preventing, buying time for the inevitable. This is human nature, and this pattern of behavior is what allows the patterns formed in the stock market to be quantifiable, and predict future prices. Elliott wave is most accurate with regard to price projections etc. The time function works best with Gann, something I have yet to delve into. Elliott is a marriage between trend lines, Fibonacci, pattern recognition, and the rules that govern the structural assembly of the Elliott waves. The markets will always move on their own course irrespective of intervention. The inevitable will always occur in a freely traded system due to the emotional content present, which makes it impossible for a stock market to travel "as the crow flies".
