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30/07/2012 – The Drop Like A Rock Scenario For U.S. Markets
July 30, 2012 12:11 pmVideo
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Financial markets always have and always will pose two basic questions that investors seek to answer:
Systematic approaches to these questions commonly belong to either
fundamental or technical analysis. Let’s consider
each one briefly.
Fundamental analysis studies how a market behaves in response to external influences such as earnings, sales, competitive outlook, economic outlook and the like.
Technical analysis studies a market’s internal behavior — mainly price, but also internal measures like volume.
Elliott wave analysis is a branch of technical analysis, specifically
pattern recognition.
In a five-wave progression, the third wave is the most powerful.
Third waves unfold in bull and bear markets alike. Elliott
Wave Principle (p. 80) describes a third wave in a bull market:
Third waves can be more powerful during market
declines because fear is a stronger emotion than greed.
Look at the third wave on this S&P 500 chart which published
in the January 2009 Elliott Wave Financial Forecast.
Notice that prices dropped like a rock, plunging well over 600
points in less than a year. (The third wave starts where the chart
shows (2) and ends at (3)):
You can see on the chart that the S&P 500 had rebounded after the third wave had bottomed. Even so, the chart’s title states that there was “Room for a New Low.” Indeed, after the rebound which was wave (4), wave (5) took prices to a March 6, 2009 intraday low of 666.79.
How about now?
That depends on who you ask.
On July 10, CNBC reported on the sentiment of a chief market strategist of a capital management firm:
A principal of a financial advisory firm and guest columnist for Marketwatch wrote a July 10 article titled “Stock charts don’t lie: the trend is up.” The article says:
By contrast, the latest Financial Forecast flat out
says:
Why does the Financial Forecast differ from the two
opinions above?
Because Elliott analysts know that during a market downtrend,
second waves can convince investors that the rally is
a new bull market.
That can be a financially dangerous mind-set.
Optimism precedes third waves lower. Then, seemingly out of nowhere, a third wave can commence with unrelenting violence and speed.
In the chart above, you saw the optimism-driven rebound just
before prices plunged.
Do not expect the financial media to provide you with advance
warning of a third wave. The crowd is almost always on the wrong
side of the market. Third waves arrive unannounced.
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— real charts and strategies for position management,
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