Disastrous Economic Fallacies - Terror as Stimulus?

Bastiat's instruction on the famous Broken Window Fallacy is always worth a mention.

Pay attention to what is not seen.

Intermediate-term trend and support in the S&P 500, 3/29/10

The S&P 500 is trending up while currently ebbing and flowing within a trend channel drawn across previous lows and highs.  

A break out of the channel would indicate either pause or end to the current intermediate term uptrend from the Feb 5th low.  Additional defensive levels are, moving down from the top of the chart: 1)  Area of what appears to likely be a previous fourth wave of lower degree.  This is marked by the dotted lines. 2) Fibonacci support levels as measured from the inter-trend low on Feb 25th.  You can see these on the chart below.  3) The inter-trend high on Feb 19th, as marked by the thick red line on the chart below.  These are some of the intermediate and shorter-term levels and action I am watching in this market right now.   

Depending on your own broader outlook and risk management, these levels might be useful defensive areas for stop-loss and / or taking profits in any long positions should the trend change.

(chart expandable)

Fibonacci Techniques for Math Geeks - and Everyone Else, Too

 By EWI Editorial Staff

The word Fibonacci (pronounced fib-oh-notch-ee) can draw either blank stares or an enthusiastic response. There's hardly any in-between ground. But for those who ask how an esoteric mathematical relationship can apply to price charts and trading, here's a quick lesson. Everyone who uses Elliott wave analysis will sooner or later want to try using Fibo techniques, and Elliott Wave International's Jeff Kennedy has written about five of them in a Trader's Classroom column. For an example of why people are so fascinated by Fibonacci, read part of Kennedy's article here:

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How to Apply Fibonacci Math to Real-World Trading
Have you ever given an expensive toy to a small child and watched while the child had less fun playing with the toy than with the box that it came in? In fact, I can remember some of the boxes I played with as a child that became spaceships, time machines or vehicles to use on dinosaur safaris.

In many ways, Fibonacci math is just like the box kids enjoy playing with imaginatively for hours on end. It's hard to imagine a wrong way to apply Fibonacci ratios or multiples to financial markets, and new ways are being tested every day. Let's look at just some of the ways I apply Fibonacci math in my own analysis.

Fibonacci Retracements
Financial markets demonstrate an uncanny propensity to reverse at certain Fibonacci levels. The most common Fibonacci ratios I use to forecast retracements are .382, .500 and .618. On occasion, I find .236 and .786 useful, but I prefer to stick with the big three. You can imagine how helpful these can be: Knowing where a corrective move is likely to end often identifies high-probability trade setups (Figures 7-1 and 7-2).

Kennedy then goes on to explain Fibonacci extensions, circles, fans and time, using 11 charts to show what he means. Whether or not you are a math geek, you can learn a lot from this six-page introduction to Fibonacci math. 

Get Your Fibonacci Techniques Right Here. Jeffrey Kennedy has been using and teaching these techniques for years, and he has written a quick description of five Fibonacci techniques in his Trader's Classroom column -- now available to you for free by signing up as a Club EWI member. Read more about the 6-page report here.

Elliott Wave International (EWI) is the worlds largest market forecasting firm. EWIs 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWIs educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internets richest free content programs, Club EWI.

Social Security Going Into Deficit This Year

So says Mary Williams Walsh at the NY Times.

Ron Paul asks Bernanke about price fixing

The whole piece is good, but at about 6 minutes in Dr. Paul starts a line of questioning about price fixing that I found interesting. 

Bernanke basically said that we don't believe in price fixing unless we are the ones doing it.

Chandeliers are tactically useful in battle (for traders)

Recently we talked about how trading is typically a tactical battle rather than some type of clairvoyant market insight.  Believe it or not, chandeliers can be very useful in this type of battle. 

Chandelier stops are just a form of volatility based trailing stop.  They are called chandeliers because they are hung from the most recent high in the same way that a chandelier would be hung from the ceiling.  I don't really know what you would call the reverse side in downtrends, but i was trying to provide an easy to remember name and concept.  Typically I just refer to this tool as trailing volatility based stops.  Clearly a phrase that is not as fun as "chandelier stops"  

Here is how it works.  Find the true range (TR) for the latest price bar.  TR is the difference between the high and the low of the price bar.   If there is a gap between bars, that should be accounted for in the calculation rather than ignored.  In other words, we are looking at how much the price moved during the period measured by the price bar.  A measurement between open and close would not give you the full picture of the volatility, so we are looking at the distance between the high and low.   

Now find the TR for the last 14 price bars.  Or pick another number.  Fourteen is just a commonly used number by traders for this tool.  We are going to be averaging these.  To get the average true range (ATR), divide the last 14 TR measurements.  This tells us the average amount of movement in your market for each price bar during the averaged period.  If you are using a weekly chart, as we will be doing below, then you have just determined the weekly ATR.  If a daily bar chart, then it is the daily ATR you have just figured out.  Many charting services and websites already have the ATR as an indicator you can select from. 

For the purpose of demonstration, I am going to show how the ATR trailing stop works in an upwards trending market.  It can be applied equally well in a downwards trending market.  

Decide on a multiple of the ATR where you want to have your stop.  In the example below, I use a 3ATR, but have played around with larger and smaller multiples.  A larger ATR multiple will keep you in the trend longer, but will leave more profit on the table when the trend finally ends.  A smaller ATR multiple will take you out of a trend or bad signal faster, but will result in more whipsaws (example below).  Your decided upon ATR multiple is gong to be where you place your stop against the latest trend extreme.  The logic behind this is simple.  You are making a tactical statement that if price goes against trend X-number of ATRs, then the trend is most likely not still intact.  Using an ATR trailing stop is both a process for cutting losses due to a bad trend signal, and for taking profits from a successful trend that is ending.  

Using the ATR multiple you decided on, hang it from the most recent high (in an uptrend).  This is where the name chandelier comes from.  Now keep repeating this process every time a new trend high is registered.  

Below is a weekly chart of my favorite market -the S&P 500 on which I have marked the levels where a 3ATR stop would have followed the most recent trend.  Take note of the whipsaw example.  Just like the big wins, the whipsaw losses are part of the business.      

(charts expandable by clicking on them)

As you can see in the chart, the ATR stop is an extremely useful tool.  You can also see that it does not keep you from taking losses in the market due to whipsawing signals.  Rather than pick a wide ATR multiple that would have stayed in the current trend, I wanted you to also see this aspect.  You will never be able to perfectly fit mathematical rules to previous price behavior and have it continue to work perfectly into the future.  Remember that using proper risk management through position sizing will keep the inevitable losses linear while letting profits become exponential. Tactically very useful, but not bulletproof, the trailing ATR stop is something I recommend adding to your trading quiver. 

Bob Prechter Reveals the Most Dangerous Gold & Silver Myths

A FREE report keeps you on the right side of precious metals

By Nico Isaac

Right now, the gold BULL-ion bandwagon is more crowded than a New York subway train during rush hour. But before you squeeze your way into the crowd of passengers, you should know one thing: Those steering the course are using outdated maps based on ill-conceived notions and illusory hopes. 

Where can you get better information about gold and silver? Take a look at the latest FREE resource from Club EWI, the Gold and Silver eBook. This riveting, 40-page eBook pools the recent and archived writings on the precious metals by EWI president Bob Prechter himself. The result is a comprehensive collection that spans the last four decades of gold and silver history to expose the most dangerous market myths. Off the top is this familiar bit of "wisdom" from the school of Alan Greenspan: 

It is impossible to foresee the end of major trends in precious metals 

BEFORE they occur. Hindsight is foresight.

NOT SO, says Prechter. Since gold and silver established their all-time record peaks in 1979-80, he has stayed one step ahead of the metals' history-making turns. Here, Chapters 2 and 3 of the Gold & Silver eBook offer up the following excerpts from Bob's earliest writings: 

Silver

• November 18, 1979, Elliott Wave Theorist (EWT): With silver prices hovering near $20/ounce, Bob wrote: “If my wave count is valid, silver can be expected to drop back down to between $4 and $6, $3.20-$3.49 some time in the next decade.”

What actually happened: From there, silver prices embarked on a 13-year bear market that saw prices plunge into the $3.50-per-ounce area.

• March 26, 1993, EWT: “Silver is approaching a major bottom" of its decades-plus long downtrend.

What actually happened: Silver found its low in 1993.

Gold

• December 9, 1979, EWT: "After 13 years of rise, Elliott counts now suggest an important top is near in gold. The downside target is at least $282.50."

What actually happened: While the price projection for gold's peak was far off the mark (the Theorist cited the upper $480/ounce range), the time target of early 1980 was met with accuracy. From its 1980 peak, gold prices plummeted nearly 70% before hitting bottom in 2001.

• At the Crest of the Tidal Wave, 1995: “One attractive termination date for the gold bottom is New Year’s Day of 2001 (plus/minus a month). That way, it will have lasted a ... a lean 21 years from the 1980 peak."

What actually happened: Gold registered its low at $255 on February 20, 2001.

Now that we can see that it is possible to benefit from foresight about the end of major trends in precious metals, what about these other popular notions --

• Gold always goes up in recession and depressions.
• Gold always performs better than stocks in economic downturns.
• Gold and Silver are just beginning (as in the year 2010) their biggest bull market runs ever.

Download Robert Prechter's FREE 40-Page Gold and Silver eBook. Is gold a simple buy-and-hold at today's prices? The independent insights in this valuable ebook deliver Prechter's complete analysis and help you decide how to – and how not to – incorporate gold and silver successfully into your own investment strategy. Learn more, and download your Gold and Silver eBook here.

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Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Take Time from March Madness for 2010's Most Important Investment Report

By EWI Editorial Staff

You got your brackets filled out before the NCAA Men's Basketball Tournament's opening game on Thursday afternoon. Good -- now sit back and enjoy the games. But if you're looking for a good read during the numerous and lengthy time outs, we've got just the thing. It's the most important investment report you will read in 2010. Forget the theoretical and hypothetical sorts of analysis that occupy so much space online. Bob Prechter gives 22 real-life examples of how deflation is beginning to spread in the U.S. economy -- along with 13 charts that make the examples even clearer.

You want to know whether to prepare for inflation or deflation? This report will answer your questions. Read this excerpt to see what we mean. Oh, and try to forget that a No. 2 seed (Villanova) almost got upset in the first round and that Georgetown, a No. 3 seed, got beat by Ohio University, a 14 seed.

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States Are Broke and Approaching Insolvency
While state “regulators” clamp down on profligate banks, the same states’ legislatures continue to blow money. For years, state governments have been spending every dime they could squeeze out of taxpayers plus all they could borrow. (The lone exception is Nebraska, which prohibits state indebtedness over $100k. Whatever Nebraska’s official position on any other issue, by this action alone it is the most enlightened state government in the union.)

But now even states’ borrowing ability has run into a brick wall, because the basis of their ability to pay interest—namely, tax receipts—is evaporating. The goose—the poor, overdriven taxpayer—is dying, and the production of golden eggs, which allowed state governments to binge for the past 40 years, is falling. The only reason that states did not either default on their loans or drastically cut their spending over the past year is that the federal government sucked a trillion dollars out of the loan market and handed it to countless undeserving entities, including state governments.

“It’s hard to imagine what happens when stimulus money runs out,” says a budget expert. (USA, 10/29/09) But it is not at all hard to imagine what will happen. Conquer the Crash imagined state insolvency seven years ago. The breezy transfer of money from innocent savers to state spenders is going to end, and when it does, states will cut spending and “services” drastically. They will also default on their debts, which will be deflationary.

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

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Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Congressman Paul Questions Bernanke on Monetary Policy

Paul focuses on the Fed's artificially low interest rates.




This is a debate between a defender of the true free market (we don't live in one) and a proponent of the centrally managed and manipulated semi-free market (that's what we have -a mix of socialism, fascism, and a little capitalism).  Bernanke, like all central bankers, believes that government empowered technocrats can pull macro levers in order to get certain results out of the economic activity (human action) of individuals.  They don't really see individuals, but rather see the collective.  They sacrifice the liberty of individuals to this collective.  Most interesting is the fact that every time the markets implode over the many decades, the technocrats never claim to have a flawed premise -that they can successfully manage and manipulate the economy, but rather claim that they just don't have enough power to further manipulate the human action individuals and markets.  

Money is important.  When the Fed increases the money supply via artificially low interest rates and other methods, the saver is being attacked.  When markets are manipulated by technocrats, the information flow of value and time preference that free markets provide to traders, entrepreneurs, investors, savers, buyers, and sellers is disrupted.  Money should be like any other commodity.  The markets should decide.  

Currently, legal tender laws protect the Federal Reserve's paper currency against constitutionally lawful money -gold and silver.  Legal tender laws should be repealed.  Let the market decide what money it wants to use.        

What To Do With Your Pension Plan

Enjoy your 8 free chapters from Prechter's Conquer the Crash -- the book that foresaw what others have missed.

By EWI Editorial Staff

There is no question that Robert Prechter’s Conquer the Crash foresaw and explained nearly every chapter of today's financial crisis, years before it happened. Enjoy your 8 free chapters from the book with this free Club EWI report; here's a quick excerpt from chapter 23, "What To Do With Your Pension Plan." Note especially the last two paragraphs.

Make sure you fully understand all aspects of your government’s individual retirement plans. In the U.S., this includes such structures as IRAs, 401Ks and Keoghs. If you anticipate severe system-wide financial and political stresses, you may decide to liquidate any such plans and pay whatever penalty is required. Why?

Because there are strings attached to the perk of having your money sheltered from taxes. You may do only what the government allows you to do with the money. It restricts certain investments and can change the list at any time. It charges a penalty for early withdrawal and can change the amount of the penalty at any time.

What is the worst that could happen? In Argentina, the government continued to spend more than it took in until it went broke trying to pay the interest on its debt. In December 2001, it seized $2.3 billion dollars worth of deposits in private pension funds to pay its bills.

In the 1930s, the world heard a lot of populist rhetoric about why “rich” people should be plundered for the public good. It is easy to imagine such talk in the next crisis, directed at requiring wealthy people to forfeit their retirement savings for the good of the nation.

With the retirement setup in the U.S., the government need not be as direct as Argentina’s. It need merely assert, after a stock market fall decimates many people’s savings, that stocks are too risky to hold for retirement purposes. Under the guise of protecting you, it could ban stocks and perhaps other investments in tax-exempt pension plans and restrict assets to one category: “safe” long-term U.S. Treasury bonds.

Then it could raise the penalty of early withdrawal to 100 percent. Bingo. The government will have seized the entire $2 trillion -- or what’s left of it given a crash -- that today is held in government-sponsored, tax-deferred 401K private pension plans. I’m not saying it will happen, but it could, and wouldn’t you rather have your money safely under your own discretion?

Read the rest of Conquer the Crash Chapter 23, "What To Do With Your Pension Plan," online now, free!  Right now, you can download the 8-chapter Conquer the Crash Collection, free. It includes: Chapter 10: Money, Credit And The Federal Reserve Banking System
Chapter 13: Can The Fed Stop Deflation?
Chapter 23: What To do With Your Pension Plan
Chapter 28: How To Identify A Safe Haven
Chapter 29: Calling In Loans & Paying Off Debt
Chapter 30: What You Should Do If You Run A Business
Chapter 32: Should You Rely On The Government To Protect You?
Chapter 33: Short List of Imperative 'Do's' & 'Don'ts"
Visit Elliott Wave International to learn more about the free Conquer the Crash Collection.

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Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

What Can Movies Tell You About the Stock Market?

By EWI Editorial Staff

The following article is adapted from a special report on "Popular Culture and the Stock Market" published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. Although originally published in 1985, "Popular Culture and the Stock Market" is so timeless and relevant that USA Today covered its insights in a recent Nov. 2009 article. For the rest of this revealing 50-page report, download it for free here. 

This year's Academy Awards gave us movies about war (The Hurt Locker), football (The Blind Side), country music (Crazy Heart) and going native (Avatar), but nowhere did we see a horror movie nominated. In fact, it looks like Sweeney Todd, The Demon Barber of Fleet Street was the most recent to be nominated in 2008, for art direction (which it won), costume design and best actor, although the last one to win major awards for Best Picture, Director, Actor and Actress was The Silence of the Lambs in 1991.

Whether horror films win Academy Awards or not, they tell an interesting story about mass psychology. Research here at Elliott Wave International shows that horror films proliferate during bear markets, whereas upbeat, sweet-natured Disney movies show up during bull markets. Since the Dow has been in a bear-market rally for a year, now is not the time for horror films to dominate the movie theaters. But their time will come again.

In the meantime, to catch up on why all kinds of pop culture -- including fashion, art, movies and music -- can help to explain the markets, take a few minutes to read a piece called Popular Culture and the Stock Market, which Bob Prechter wrote in 1985. Here's an excerpt about horror movies as a sample.

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From Popular Culture and the Stock Market by Bob Prechter

While musicals, adventures, and comedies weave into the pattern, one particularly clear example of correlation with the stock market is provided by horror movies. Horror movies descended upon the American scene in 1930-1933, the years the Dow Jones Industrials collapsed. Five classic horror films were all produced in less than three short years. Frankenstein and Dracula premiered in 1931, in the middle of the great bear market. Dr. Jekyll and Mr. Hyde played in 1932, the bear market bottom year and the only year that a horror film actor was ever granted an Oscar. The Mummy and King Kong hit the screen in 1933, on the double bottom. These are the classic horror films of all time, along with the new breed in the 1970s, and they all sold big. The message appeared to be that people had an inhuman, horrible side to them. Just to prove the vision correct, Hitler was placed in power in 1933 (an expression of the darkest public mood in decades) and fulfilled it. For thirteen years, lasting only slightly past the stock market bottom of 1942, films continued to feature Frankenstein monsters, vampires, werewolves and undead mummies. Ironically, Hollywood tried to introduce a new monster in 1935 during a bull market, but Werewolf of London was a flop. When film makers tried again in 1941, in the depths of a bear market, The Wolf Man was a smash hit.

Shortly after the bull market in stocks resumed in 1942, films abandoned dark, foreboding horror in the most sure-fire way: by laughing at it. When Abbott and Costello met Frankenstein, horror had no power. That decade treated moviegoers to patriotic war films and love themes. The 1950s gave us sci-fi adventures in a celebration of man’s abilities; all the while, the bull market in stocks raged on. The early 1960s introduced exciting James Bond adventures and happy musicals. The milder horror styles of the bull market years and the limited extent of their popularity stand in stark contrast to those of the bear market years.

Then a change hit. Just about the time the stock market was peaking, film makers became introspective, doubting and cynical. How far the change in cinematic mood had carried didn’t become fully clear until 1969-1970, when Night of the Living Dead and The Texas Chainsaw Massacre debuted. Just look at the chart of the Dow [not shown], and you’ll see the crash in mood that inspired those movies. The trend was set for the 1970s, as slice-and-dice horror hit the screen. There also appeared a rash of re-makes of the old Dracula and Frankenstein stories, but as a dominant theme, Frankenstein couldn’t cut it; we weren’t afraid of him any more.

Hollywood had to horrify us to satisfy us, and it did. The bloody slasher-on-the-loose movies were shocking versions of the ’30s’ monster shows, while the equally gory zombie films had a modern twist. In the 1930s, Dracula was a fitting allegory for the perceived fear of the day, that the aristocrat was sucking the blood of the common people. In the 1970s, horror was perpetrated by a group eating people alive, not an individual monster. An army of dead-but-moving flesh-eating zombies devouring every living person in sight was a fitting allegory for the new horror of the day, voracious government and the welfare state, and the pressures that most people felt as a result. The nature of late ’70s’ warfare ultimately reflected the mass-devouring visions, with the destruction of internal populations in Cambodia and China.

Learn what's really behind trends in the stock market, music, fashion, movies and more... Read Robert Prechter's Full 50-page Report, "Popular Culture and the Stock Market," FREE

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Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

How Safe Is Your Bank, Really?

Our FREE report reveals why the FDIC guarantee is just an "illusion"

By Nico Issac

• So far in 2010, the number of US bank failures has reached 25, a rate of two per week. This compares to 25 total bank failures for ALL of 2008, and three for 2007.
• The benchmark KBW Bank Index still stands 60% below its 2007 peak, while one-third of all US banks reported a net loss for 2009.
• The FDIC's list of "problem" institutions rose from 552 to 702 from Q3 to Q4 of 2009.
• And each new day could bring a new, personally addressed letter to announce the name change of your financial institution.

Yet -- no matter how grave the data gets, few people imagine the corporate banking crisis trickling down to average Joe or Jane and their lollipop-dispensing drive-through bank tellers.

It's not naive to think that, either. The agreement is understood: Money goes into the bank as liquid capital, and comes out as a loan certificate.  Practically speaking, your account balance is only as secure as the loans the bank makes with its depositors' money. The trust in that exchange reflects two main beliefs: 

1) Banks know best how to allocate their clients' money so as to ensure the greatest risk-to-reward ratio.
2) Banks are guaranteed by the Federal government, via the Federal Deposit Insurance Corporation.

Well, as the latest report from our complimentary Club EWI service reveals -- neither one is as it seems. This 15-page exclusive compiles the most groundbreaking insights from various collected works of EWI president Bob Prechter himself, including: the best-selling book Conquer the Crash and previous Elliott Wave Theorist publications. Off the top are these riveting thought-burners:

How are banks using your money? Not wisely. "At latest count, US banks report $6.942 Trillion in deposits, and $6.945 Trillion in loans. In other words, the average bank in the US has lent out 100% of its deposits."

Where is your money going? For the most part, it's tied up in mortgage-backed securities. Last count: One in every 418 U.S. homes have filed for foreclosure, while the rate of default on commercial mortgages doubled in Q4 of 2009. See the problem?

What about the trusted sticker in the front window of US banks assuring that the FDIC guarantees to refund depositor's losses of up to $100,000? Well, as the Club EWI report reveals, this sticker is merely a "symbol of confidence," NOT a certainty of it. The piece goes on to add:

"Did you know that most of the FDIC's money comes from other banks? When the FDIC rescues weak banks by charging healthier ones higher 'premiums,' overall bank deposits are depleted, causing the net loan-to-deposit ratio to rise. Ultimately the federal government backs the FDIC, which sounds like a sure thing. But if tax receipts fall, the government will be hard pressed to save a large number of banks with its own diminishing supply of capital. Huge illusions can melt away in a flash if the system fails."

Where then is a bank I can trust? Here, the Club EWI report provides a list of the Top 100 highest-rated banks in America by state based on third-quarter 2009 data. The publication also reveals the global jurisdictions that "provide wealth preservation service as opposed to interest income and daily transaction conveniences."

Inside the revealing free report, you'll discover:

• The 100 Safest U.S. Banks (2 for each state)
• Where your money goes after you make a deposit
• How your fractional-reserve bank works
• What risks you might be taking by relying on the FDIC's guarantee

Please protect your money. Download the free 10-page "Safe Banks" report now.
Learn more about the "Safe Banks" report, and download it for free here.

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Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Paper Trading is NOT What Will Teach You To Trade

Paper trading is only useful for the testing of your methodology

By EWI Editorial Staff

This is an excerpt from Elliott Wave International's free Club EWI resource, "What a Trader Really Needs to be Successful" -- a classic Special Report by EWI's president Robert Prechter.

... 3. Experience. Some people advocate "paper trading" as a learning tool. Paper trading is useful for the testing of methodology, but it is of no value in learning about trading. In fact, it can be detrimental, by imbuing the novice with a false sense of security in "knowing" that he has successfully paper traded the past six months, thus believing that the next six months with real money will be no different. In fact, nothing could be further from the truth. Why?

Because the markets are not merely an intellectual exercise. They are an emotional (and in extreme cases, even physical) one as well. If you buy a computer baseball game and become a hitting expert with the joystick while sitting quietly alone on the floor of your living room, you may conclude that you are one talented baseball player. Now let the Mean Green Giant reach in, pick you up, and place you in the batter's box at the bottom of the ninth inning in the final game of the World Series with your team behind by one run, the third base coach flashing signals one after another, a fastball heading toward your face at 90 m.p.h., and sixty beer soaked fans in the front row screaming, "Yer a bum! Yer a bum!" Guess what? You feel different!

To put it mildly, you will find it impossible to approach your task with the same cool detachment you displayed in your living room. This new situation is real, it matters, it is physical, it is dangerous, other people are watching, and you are being bombarded with stimuli. This is what your life is like when you are actually speculating. You know it is real, you know it matters, you must physically place orders, you perform under the scrutiny of your broker or clients, your spouse and business acquaintances, and you must operate while thousands of conflicting messages are thrown at you from the financial media, the brokerage industry, analysts, and the market itself.

In short, you must conquer a host of problems, most of them related to battling powerful human emotions, in order to trade real money successfully. The School of Hard Knocks is the only school that will teach it to you, and the tuition is expensive.

There is only one shortcut to obtaining experience, and that is to find a mentor. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. You will undoubtedly find that he is very friendly since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled. Observe not only what he does, but far more important, what he does not allow himself to do. This person does exist, but it is hard to find him. He will usually welcome the opportunity to tell you what he knows.

Read the rest of this important report, "What a Trader Really Needs to be Successful", now, free! Here's what you'll learn:

4 more items on Prechter's list of requirements for successful trading
Why "You can't go broke taking a profit" is not a universal rule
Why other trading adages are often completely contradictory to each other
More

Learn more, and download this free report here

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Elliott Wave International (EWI) is the world’s largest market forecasting firm. EWI’s 20-plus analysts provide around-the-clock forecasts of every major market in the world via the internet and proprietary web systems like Reuters and Bloomberg. EWI’s educational services include conferences, workshops, webinars, video tapes, special reports, books and one of the internet’s richest free content programs, Club EWI.

Tactical Battle in the S&P 500

It appears to be almost certain that our stop-loss orders for short positions in the S&P are going to be taken out for a loss.  What does this mean? First of all, it means that trading is tough.  Taking losses is part of it.  I'll play a little song later in the post to show you what a veteran trader thinks about this.  Second of all, it means we have to think about what we are going to do next.  

After being stopped out there will be two choices.   We can either take the hit and move to a cash position in terms of this market, or we can take the hit and reverse to a long position in this market.  Those wishing to remain in cash would be doing so because they would have some suspicion that the rally would not be able to go very far before reversing.  There are plenty of arguments for this.  In terms of Elliott, we could be going into a complex correction including a leg that makes a new high, or we could be in a 5th wave that is not expected to travel much further.   In truth, I don't really know what the correct Elliott count would be if the stop is taken out.  I have some ideas, but there is no need to force things right now.  

That leaves those who want to put a new position on with following the basic price trend itself.  The charts below show some tactical levels where the trader can build his or her initial defensive lines in any effort to follow a possibly reemerging trend.  Remember, this is why we always apply strict risk management as has been discussed in other posts.  We can take a string of losses if we have to.  If the market does enter some type of choppy sideways mess here, then a string of losses might unfortunately be in store.  Sorry, I don't have a crystal ball to tell for sure.  If I did, we would not need risk management would we.  

Trading opportunities are like phone booths and buses -there is one around every corner (the original saying is a little racier, but I prefer the family friendly version).  This blog has had many months of good trending signals and profitable trading, so we are probably due for a little P/L pull back. 

I hope the tactical levels are useful, and I hope you enjoy Ed Seykota's song about whipsaws.  Listen closely to the song, as there is a lot of wisdom communicated through it. 

     
  

I really love this song! I would have liked to meet Mr. Seykota when I lived in his neck of the woods up in Tahoe. Maybe someday.

Gold: Best Supporting Role In Economic Downturns?

By Nico Isaac

As I sat down to watch the Oscar pre-show on Sunday night, March 7, one word was repeatedly used to describe the celebrity starlets and their designer duds: GOLD. Gold bustiers and gold lame skirts, shiny gun-metal dresses and glittery sequined gowns all basking in the golden shadow of the final golden statue.

Everywhere you look, from the Red Carpet to Wall Street, gold is definitely in "fashion." As for why, one word comes to mind: safe-haven. See, according to the mainstream financial experts, the more unstable the global economy, the greater the appeal for the precious metal. 

And, with a staggering 17% unemployment rate in the United States, alongside slumping real estate sales, Eurozone weakness, the Greece debt debacle, and so on -- the only thing going up is gold's supposed disaster premium. Here, take these recent news items for example:

• "Bullion Sales Hit Record In Stampede To Safety." (Financial Times)
• "Gold Ticks Higher On Safe Haven Buying. The risk trade is resuming." (AP)
•  "Gold Rose to 6 ½ Week Highs as the metal benefits from fears over financial instability in general. The market is looking for some security with gold." (Reuters)
• "Gold Rush: This is a new round of safe haven buying." (Bloomberg)

There's just one problem: The correlation between a falling economy AND rising gold prices is based solely on hype, NOT history.

Download Robert Prechter's FREE 40-Page Gold and Silver eBook. Is gold a simple buy-and-hold at today's prices? The independent insights in this valuable ebook deliver Prechter's complete analysis and help you decide how to – and how not to – incorporate gold and silver successfully into your own investment strategy. Learn more, and download your Gold and Silver eBook here.

Case in point: In the March 2008 Elliott Wave Theorist (republished in his 40-page Gold and Silver eBook), Elliott Wave International President Bob Prechter presents an indisputable case AGAINST the safe-haven status of gold. 

The first piece of evidence: The following table showing gold's performance during the 11 officially recognized recessions beginning in 1945. 

(images are expandable by clicking them)

Prechter also plotted the Dow Jones Industrial Average into the same period and made this startling discovery: The average total return for the Dow during recessions since 1945 is 6.89%. Taking into account modern transaction costs, the Dow actually beats gold with a 6.87% return. 

The most powerful myth-debunking punch of all, though, came via the second chart of gold's performance -- this time during periods of financial growth.

In Prechter's own words:

"All huge gains in gold have come while the economy was expanding… The idea that gold reliably rises during recessions and depressions is wrong. In fact, like most such passionately accepted lore, it's backwards."

Now, this doesn't mean that you shouldn't own gold in a financial crisis. On the contrary: In chapter 22 of his Wall Street Journal business bestseller, Conquer the Crash, Prechter lists 5 reasons why "you should buy gold and silver anyway." Gold is "real money," after all! It's just that, despite widespread beliefs to the contrary, you shouldn't expect "huge gains in gold" when the economy contracts.

Download Robert Prechter's FREE 40-Page Gold and Silver eBook. Is gold a simple buy-and-hold at today's prices? The independent insights in this valuable ebook deliver Prechter's complete analysis and help you decide how to – and how not to – incorporate gold and silver successfully into your own investment strategy. Learn more, and download your Gold and Silver eBook here.

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Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Wave Principle Crash Course: There's No Going Back

By Nico Isaac

For over ten decades, the mainstream financial world has embraced the view that external news events drive trend changes in the markets. In less than ten minutes, EWI's senior tutorial instructor Wayne Gorman shatters that very idea into a fine dust, swept away into thin air. 

In part one of his exclusive, three-part Club EWI video series "Why Use The Wave Principle," Wayne first assesses the pitfalls of relying on macroeconomic models to forecast; namely: "An investor is lured into the market at just the worst time, when it's time to sell, and forced out just at the best time to buy." 

As for real world examples of this happening, Wayne spans three hundred years of financial history to reveal how the most pivotal economic, political, and environmental events failed to alter the course of their respective markets. Here, the free video includes groundbreaking charts on these (and more) well known episodes:

• The S&P 500 and Enron from 2000-2002: The stock market ROSE and continued to proceed upward AFTER the largest US corporate scandal and bankruptcy ever (at the time).
• The Dow Industrials and GDP quarterly data from 1970 to early 2000s: After the release of major negative GDP numbers, the market for the most part ROSE, just the opposite of what most market analysts and investors expect.
• The Dow and profound political events over the last 80 years: In the 1930s and 1940s, a series of negative incidents -- i.e. Hitler rising to power, World War II, and the Holocaust -- preceded a powerful uptrend in stocks all the way into the 1960s.
• Stock market charts of the five countries most affected by the 2004 Indian Ocean Tsunami (India, Indonesia, Malaysia, Sri Lanka, and Thailand). Four out of the five ROSE after the natural disaster...

Believe it or not, we've only scratched the surface. In his myth-busting, free video "Why Use the Wave Principle," Wayne Gorman presents a total of 40 charts that capture failed fundamental analysis of the world's leading financial markets. Wayne recalls this expression from a famous, Nobel Prize winning economist: 

"Economic reasoning will be of no value in cases of uncertainty."

 

And he offers this response: 

"But isn't that what we have in financial markets: cases of uncertainty? We need a different type of reasoning, one that will help us to avoid the pitfalls shown on the previous charts. That's why the Wave Principle is so important. It offers a unique perspective and a market discipline of rules and guidelines that help investors avoid buying at tops and liquidating at bottoms. It helps to explain and understand trends before they happen." 

 

The flaw in Economic 101, cause-and-effect theory is one of the easiest things to prove. But it's also one of the hardest things for many investors to accept. Now is the time to do so. Watch the free "Why Use the Wave Principle" video in its entirety today at absolutely no cost. Simply sign on to join the rapidly expanding Club EWI and take advantage of the amazing educational benefits membership has to offer.

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Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Is the S&P 500 vulnerable? -what Japanese techniques have to say about it

Last night we talked about a shooting star pattern in the S&P 500.  In that post, I said among other things I would be looking to see if prices could rally above yesterday's intraday high and then sustain that rally to close nearer to the high.  What I meant by that is that such behavior would reduce or eliminate the significance of the shooting star pattern.  That did not happen, and indeed the significance of the failure of buyers to sustain intraday highs has been increased by the same type of behavior in today's pattern.  Today, a doji pattern has appeared on the scene.

No, I am not switching from trend following and Elliott Wave to candlesticks for my primary tools.  There just happens to be some interesting candlestick patterns appearing that are relevant to the action we have already been watching as we wait to see which way this market is going to break -for profit or loss.

Once again, turning to Nison's book Japanese Candlestick Charting Techniques, we find that a doji candle is one where the opening and closing prices are the same.  Although the exact same price is preferable, Nison gives a little room for interpretation.  Today the S&P opened at 1119.36 and closed at 1118.79.  I would say that is essentially the same price, especially since the 14 day average true range was at 13 yesterday.  The chart included in this post visually argues the same point.  

(charts are always expandable by clicking on them) 

Nison says that the doji is "a distinct trend change signal, especially during rallies".  He adds "the doji shows us the market is vulnerable, and may be at a transition point".

Why, you ask, is something called a doji or a shooting star important?  As described yesterday, these are just terms used to describe short term market behavior.  What is being described is the fact the buyers were able to push prices to a new trend high, but then the high was not sustained.  The intraday range produced by the battle between buyers and sellers at this price level is much wider than the difference between the open and close.  In today's case, there is really no difference at all, and so it is given a different name -doji.  Importantly, the action of both yesterday and today closed low in the their intraday range, and that is where the term shooting star comes from.  A gravestone doji would be the same type of behavior as today, but with a close at the low.  We did not quite close at the low, so I am not using the term gravestone.  Also important are where these patterns manifest themselves.  They are occurring at the current high of a price rally, so they are important warning signs.  You see, we are just labeling market behavior, that's all.  It just happens to the the Japanese that came up with this type of labeling.   

If you've followed this blog for a while, you know where I am positioned in this market. If you are just coming here, you can see many months of my S&P 500 trading and analysis by clicking here.  If I had not learned to properly manage risk and to detach my emotions from the market, the last few weeks would have been tough.  In reality, they have not been tough at all.    The next few sessions will be interesting as they relate to the warnings of vulnerability given by the Japanese candlestick techniques.  Then maybe we can get back to just following the trend that emerges.   

Shooting star seen over the S&P 500 tonight

AT today's close, a shooting star pattern appeared on the S&P 500's daily chart.  Shooting star?  Its a candlestick pattern.  Candlestick?  Following are the basics.

Japanese candlestick charts use the same information -open, high, low, close- as do the bar charts you most often see on these pages.  The only difference is that they visually provide a little more information to the trader.  The thick part of the candle is called the real body, and is the most important part.  Real bodies are the area between the open and close.  The thinner line is called the shadow, or sometimes called the wick.  The shadow represents the intraday high and low.

Candlestick charts help the trader see the battle between buyers and sellers in the short term and therefore help in the identification of results of that battle before they show up as a price trend.  Therefore, candle stick charts are useful for helping to warn of possible turning points in the market.  Like any other market analysis technique, they are not infallible.  They are just a tool in the quiver to be used when the trader or analyst thinks they might be useful.  Some use them as an early warning system of a potential turn, and that is how I am using them today.  Please take note of the use of the term "potential".  If you have been following this blog for a while, you will know that my style is that of a trend follower.  I typically let the market take me in and out of positions as the trend begins and ends.  Please view my other S&P posts if you want more clarification on the style in which I use technical analysis tools.

Steve Nison is the known authority on candlestick techniques, and his book Japanese Candlestick Charting Techniques, says a shooting star is "A bearish candle with a long upper shadow, little to no lower shadow, and a small real body near the lows of the session that arises after an uptrend".  That is exactly what was left on the screen by the time the S&P session closed today.

Simply looking at a bar chart would initially have us thinking the uptrend was strong since price made a new trend / sub trend high, but the candlestick chart more clearly reveals the truth of today's action.  Buyers were definitely able to push prices up higher intraday, but they were not able to sustain the highs.  Either their buying enthusiasm expired, or sellers began to overwhelm them, or a little of both.

This shooting star pattern alone does not necessarily mark a major reversal signal, but it does indicate, as Nison puts it possible "trouble overhead".  Today's intraday rally could not be sustained, so that is a warning and alert that we should be looking for either the buyers to come back with more guts, or for the sellers to dominate.  For me, I will be looking at a few clues as they relate to this formation.  I will be looking to see if tomorrow's session opens lower than today's close and then moves to close lower than the open.  Such action would put a three candle pattern on the table called an evening star and would increase the intensity of the warning signal.  I will also be looking to see if prices can rally above the intraday high, and if so if they can sustain the rally and close nearer to their high.  I will also be watching the zone marked by the dashed red lines in the chart above.  That zone has been both support and resistance at different times since November of 2009.  In other words, there is a battle that has been going on around those price levels, therefore I want to see if that zone can hold prices up or not.      

Gold and the S&P 500 look like the same market right now

Has anyone else noticed how closely Gold and the S&P 500 are tracking?  For me, it has definitely been interesting to watch.  Whether they will continue to track this way is a question that will have to be answered by the markets, but they sure are not offering any real diversification in terms of correlation of market trend right now.  

Below are 60-min charts of both markets so you can see what I am talking about.

 

 

For either market the current intermediate term set up is simple to play for bulls or bears.  Both markets are in a range and will eventually break out one way or the other.  You either wait for the breakout to enter, or put on trades right here with stops either at the highs or lows of the ranges depending on your intermediate term outlook.  Will they both break in the same direction?  Only time will tell.   

What Does NOT Move Markets? Examining 8 Claims of Market Efficiency

By Susan Walker

If everyone says that shocks from outside the financial system -- so-called exogenous shocks -- can affect it for better or worse, they must be right.

It just sounds so darned logical, right? Economists believe this trope to be true, mainly because they believe that investors are rational thinkers who re-evaluate their positions after every new bit of relevant information turns up.

Beginning to sound slightly impossible? Well, yes.

It turns out that logic is exactly what's missing from this it-feels-so-right idea of rational reaction to exogenous shocks. Read an excerpt from Robert Prechter's February 2010 Elliott Wave Theorist to see how Prechter deals with this widely held belief.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

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Excerpted from Prechter's February 2010 Elliott Wave Theorist, published Feb. 19, 2010                            

The Efficient Market Hypothesis (EMH) argues that as new information enters the marketplace, investors revalue stocks accordingly. … In such a world, the market would fluctuate narrowly around equilibrium as minor bits of news about individual companies mostly canceled each other out. Then important events, which would affect the valuation of the market as a whole, would serve as “shocks” causing investors to adjust prices to a new level, reflecting that new information. One would see these reactions in real time, and investigators of market history would face no difficulties in identifying precisely what new information caused the change in prices. …

This is a simple idea and simple to test. But almost no one ever bothers to test it. According to the mindset of conventional economists, no one needs to test it; it just feels right; it must be right. It’s the only model anyone can think of. But socionomists [those who use the Wave Principle to make social predictions] have tested this idea multiple ways. And the result is not pretty for the theories that rely upon it.

The tests that we will examine are not rigorous or statistical. Our time and resources are limited. But in refuting a theory, extreme rigor is unnecessary. If someone says, “All leaves are green,” all one need do is show him a red one to refute the claim. I hope when we are done with our brief survey, you will see that the ubiquitous claim we challenge is more akin to economists saying “All leaves are made of iron.” We will be unable to find a single example from nature that fits.

* * *

In his February 2010 Elliott Wave Theorist, Prechter then goes on to show charts that examine each of these claims that encompass both economic and political events:

Claim #1: “Interest rates drive stock prices.”
Claim #2: “Rising oil prices are bearish for stocks.”
Claim #3: “An expanding trade deficit is bad for a nation’s economy and therefore bearish for stock prices.”
Claim #4: “Earnings drive stock prices.”
Claim #5: “GDP drives stock prices.”
Claim #6: “Wars are bullish/bearish for stock prices.”
Claim #7: “Peace is bullish for stocks.”
Claim #8: “Terrorist attacks would cause the stock market to drop.”

To protect your personal finances, it's important to think independently from the crowd, particularly when the crowd buys into what economists say.

Find out what really moves markets -- download the free 118-page Independent Investor eBook. The Independent Investor eBook shows you exactly what moves markets and what doesn't. You might be surprised to discover it's not the Fed or "surprise" news events. Learn more, and download your free ebook here.

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Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company.