How Elliott Wave Analysis Helps and Harms Investors

iSPYETF

The right dose is important, because it’s possible to have too much of a good thing. 

Take for example mold. Mold can be dangerous so we try to stay away from it. In small doses though, mold can be all right, even tasty. 

If you like Gorgonzola, Blue Cheese, or Roquefort cheese you are basically eating moldy cheese that contains Roquefortine, a mold dangerous in large quantities.

Like Gorgonzola, Blue Cheese or Roquefort, Elliott Wave analysis can be healthy (for your portfolio) in controlled quantities. Like moldy cheese, Elliott Wave analysis may also be an acquired taste.

The Technical Analysis Oddball

Elliott Wave Theory (EWT or Elliott Wave analysis) is the oddball of technical indicators and technical analysis. Some love it, others hate it. 

But investing is supposed to be about results not emotions. So regardless of emotional bias, serious investors should take an objective look at EWT.

EWT – The Good, The Bad and The Ugly

I’ve been exposed to EWT for about 10 years and have seen EWT at its best and worst. Here are the top 4 most important facts you should know about EWT:

1) EWT is interpretative. Five different Elliotticians (that’s how followers of EWT call themselves) may have 5 different interpretations of the market's current whereabouts and next move. Some Elliotticians (example below) know just enough to be dangerous, literally.

2) At certain inflection points the correct interpretation of EWT can be invaluable. It will provide insight no other form of analysis can (see example below). 

3) Never use EWT as a stand-alone indicator. I always use EWT (when I use it) in combination with technical support/resistance levels, sentiment and seasonality.

4) EWT has been effective in spotting major market bottoms (with the help of EWT I’ve been able to get my subscribers back into the market in March 2009, October 2011, and June 2012), but rather ineffective in spotting tops.

EWT – The Good

As mentioned above, there’s a time to use EWT and there’s a time to ignore EWT.

One of the more recent times I referred to EWT was via the August 18 Profit Radar Report, which featured the S&P 500 chart below. At the time, EWT strongly suggested that with or without a minor new low, stocks are gearing up for a large rally with a target at 1,685 - 1,706 (open chart gaps) or higher.

Trend lines suggested that the S&P 500 will run out of gas (at least temporarily) at 1,735 (September 18 Profit Radar Report).

View photo

.

Partially based on EWT, subscribers to the Profit Radar Report were advised to go long on August 29 when the S&P 500 (^GSPC) triggered a buy signal at 1,642.

EWT – The Bad and The Ugly

EWT is largely based on crowd behavior and social mood, which in turn affects the money flow. However, in recent years the Federal Reserve decided to ‘spike’ the money flow and throw EWT a curveball.

We’ll never know how much the Fed’s easy money policy affects EWT, but we know that since late 2009 some Elliotticians have stubbornly predicted a market crash.

Among them is the world’s largest (according to their claim) independent financial market forecasting firm, Elliott Wave International (EWI). EWI’s message has been the same for years. Below are just a few of EWI's market crash calls:

August 2010: “Stocks are ready to resume the ongoing bear market. The next phase of selling should be broad-based.”

November 2011: “Short-term positive seasonal biases are now dissipating and an across-the-board decline should draw financial markets lower.”

September 2012: “The stock market’s countertrend rally from June stretched to an extreme. This weak technical condition should lead to an accelerated decline.”

July 2013: “U.S. stock indexes are in the very early stages of a multi-year decline.”

Interpretation Spoils Profits

As mentioned earlier, EWT is subject to interpretation. Just because one Elliottician’s (or company’s) interpretation is wrong doesn’t mean EWT is useless. 

The last time the Profit Radar Report looked at EWT was on September 8. At the time the S&P 500 (SPY) was trading at 1,655 and many Elliotticians thought that the market had topped for good. 

In contrast, the Profit Radar Report (on September 8) focused attention on a bullish EWT option: “There is one (normally) rare exception that allows for new highs even after a completed 5-wave reversal. In fact, the 5-wave reversals in 2010, 2011, and 2012 all led to new highs. Bullish seasonality starting in October supports this outcome.”

Some Elliotticians are still fishing for a major market top and they may well be right.

However, the S&P 500 (IVV), Dow Jones (^DJI), and Nasdaq (^IXIC) erased their bearish divergences visible a few weeks ago and seasonality and various breadth measures suggest higher prices later on this year.

The odds of a major market top have dropped a bit, but there will no doubt be time when EWT will provide valuable clues. 

Regardless of the next EWT signal, I’ll continue to evaluate the dozens of indicators that make up my forecasting dashboard and share my most valuable findings via the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @iSPYETF 

 



More From iSPYETF

Rates

View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

    Bloomberg
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • Wondering How You Could Save on Home Insurance?

    Get a quote from Farmers Insurance and discover how you could save. Speak with an agent to get the knowledge you need to make an informed decision.

    AdChoicesFarmers InsuranceSponsored
  • Don't care about Alibaba? Here's why it may matter

    When the Alibaba Group Holding prices its initial public offering Thursday, small businesses in particular will be watching. Founder Jack Ma -the former English-teacher-turned-dot-com billionaire-has touted his e-commerce platform as a way for smaller merchants to expand their international…

    CNBC
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • Don't buy Alibaba stock: 'Dean of Valuation'

    Investors should steer clear of Alibaba , valuation expert Aswath Damodaran said Wednesday. On CNBC's " Fast Money ," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a…

    CNBC
  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

    AdChoicesBellaLabs.comSponsored
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider