Guest Post: Our Financial World from an Elliott Wave perspective

by chris on January 12, 2012

Douglass Lodmell’s Interview with Robert Prechter was extremely insightful, and I hope it proves useful for all of our readers. It is quite evident we live in precarious times financially and economically, and this interview provides great advice for keeping your money safe during an economic depression. Many people understand we are in a developing depression, and the main fundamental driver of it: there is too much debt in the world. But why is there too much debt in the world? What was the driving force behind the volume of optimism that allowed so much credit inflation over the past 30 years?

The common understanding is that financial markets and economic expansions and contractions are driven by news events in society. However, Robert Prechter begs to differ. The work that Prechter’s firm, Elliott Wave International, the world’s largest market forecasting firm does suggests a causality 180 degrees the opposite of what most people think. EWI is the leading proponent of the Elliott Wave Theory, a theory developed by Ralph Nelson Elliott in the 1930′s. R.N. Elliott was an accountant by trade, and when he fell ill and could no longer work, he decided to start tracking financial markets. R.N. Elliott ended up making an amazing discovery. In studying charts of the Dow Jones Industrial Average on various time frames, from hourly, to daily, to weekly, to monthly,  he found a common pattern in the stock market. He discovered that the stock market progresses in five waves in the direction of the one larger trend, and three waves against. This is based off of the idea that financial markets exhibit fractal patterns. A fractal is a self-repeating pattern. In the context of financial markets, this means that one can find the same patterns whether looking at a chart over one day, or over a period of 100 years.

If the market is indeed a fractal, historical data suggests we may have completed a 200 year pattern in the stock market, and thus an economic expansion of that size as well. After a five wave uptrend is completed, a correction occurs that is larger than any since the uptrend began. In 2007, we completed a clear five wave uptrend from the 1932 low. That meant we were going to get the largest bear market since the great depression. The stock market proceeded to collapse 58 percent, the biggest bear market since the 89% drop from 1929-1932. However, the work of Robert Prechter suggests we have completed a five wave uptrend dating back to 1784 after the bursting of the south sea bubble. If that is indeed the case, we should see the largest bear market since the south sea bubble.

So, the answer to the question of what caused the mania that led up to the 2007 peak, is that it was a fifth wave of a fifth wave, which under the Elliott Wave model of markets, is expected to be a blowoff top, resulting in an unprecedented rise in optimism, to be followed by a collapse below the starting point of the mania. This has happened with all manias in history, including the Tulip Mania, the South Sea Bubble, and now the great asset mania, fueled by the credit bubble. The message from the work of Robert Prechter and Elliott Wave International is exactly along the lines of Douglass Lodmell: Get safe, and when the bear market is over it will bring the greatest buying opportunity of all time for those who elect safety now and stay in the safest cash equivalents possible.

 

To Watch Douglass Lodmell’s interview with Bob Prechter, please click here

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