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Why Elliott Wave Counters Can't Stop the Stocks Bull Market

Stock-Markets / Elliott Wave Theory Aug 24, 2009 - 10:46 AM GMT

By: Michael_Swanson


Best Financial Markets Analysis ArticleBefore I get into what we need to think about this week for the stock market I want you to go back to last weekend and imagine what you heard people saying on television about the stock market. Did you hear negative talk or positive talk?

What I heard was a lot of people talking about a big correction coming. People saying the economy is going to continue to slide, the stock market has gone up too much, and even some Elliott Wavers calling for a Fall stock market crash.

The market had pulled back off of its high the week before and fell hard on Monday and that seemed to confirm everyone's worries. Most people either are worried about losing the big gains they've seen the market make since March or are just too afraid to get back into the stock market after last year's big collapse. Data from the largest online brokers shows that the average investor is trading less since the March lows. That means that many people with online accounts must have sold out at some point after the March bottom.

If you don't believe people have been worried about the market then consider these stories I just collected after a Internet search:

CNN - Beware the Double Dip

CNBC - Fast Money Last Monday - Is This Market Heading For A Serious Correction?

Bloomberg - China Slump Signals S&P 500 To Fall

CNBC Last Wednesday - Art Cashin Expects Huge Drop Because the market is "going into Ramadan on the 22nd."

What I want you to realize is that despite all of this bearish talk, the stock market - well - it went up anyway.

Ultimately the only thing that matters is the simple fact that the stock market is in a cyclical bull market right now. It is trading above its long-term moving averages and those moving averages are now pointing up while sector after sector in the market is going from a stage one base into a stage two bull market. Almost everything is making higher highs and higher lows now.

It is the complete opposite to what we saw happen last year. To me it became clear that we were entering a confirmed bear market in December 2007. Last month confirmed the new bull market.

You make money by staying aligned with the dominant market trend and paying attention to people who are doing that too. Now it is very tough to pick exact tops and bottoms, but to make a lot of money in the stock market you don't have to do that. Nor do you have to be right all of the time. You just have to adjust at some point when things change and stay with the trend as long as you can when you are right.

Anything else that prevents you from doing this is simply a money costing distraction. And that is what I want you take from these headlines and the stuff you may have seen last week on CNBC.

Odds are that you are very anxious about the stock market right now. It has gone up a lot.

But take a look at this chart.

This is a chart of the stock market at the start of its last cyclical bull market in 2003. Look how quickly it went up from April to the middle of September. Clearly it was dangerous to buy and was completely overbought then.

Well in fact it did dip for a few weeks right at that moment - which I'm sure scared a lot of people at the time and confirmed their fears just as we saw happen last week - but the market ended up going up for the rest of the year and then for four more years!

The lesson is in cyclical bull markets you shouldn't be afraid of the bull market until there are real signs that the bull market is over. And there isn't a single sign I can point out to you that says this right now. In bear markets you shouldn't be trying to guess bottoms and in bull markets you shouldn't obsess over tops.

The only real argument I'm hearing is that we are in wave count six so it must be over. But I don't believe wave counts are real, because no one has ever been able to explain to me what causes them and why the market trades in an exact mathematical fibonacci sequence like these people claim it does.

This is more a religion than science. The presuppositions that lay behind wave counts is the claim that all of nature is based on fibonacci numbers. If that were true then it would mean that all of human history - and the future is predetermined by some math sequence. It would mean you have no free will, because your own behavior must match these numbers. Of course that is ludicrous. I know that the next time I eat, sleep, or go to the bathroom is not predetermined by a fibonacci sequence so I put zero stock in those theories and many of the people espousing them.

But the belief in fixed price targets is why so many Elliott Wave believers were saying that this rally has to end right here - because we have retraced 1/3 of the entire bear market losses. They believe the March low CANNOT be the bottom, because the market didn't fall enough to fit into their wave count fibonacci models and therefore it must be topping right here.

Don't listen to people who say stuff like this. Back in 2002 the Elliott Wave believers were saying the same thing about gold. They said that gold wasn't starting a bull market, because gold didn't fall to their target level. As a result they just sat in disbelief as gold rallied higher and higher and failed at calling multiple tops. History is going to repeat again on them.

We can all be wrong at times. I stayed bearish on the market after the March low for a few months until I saw the sectors break out into new bull markets all over the place and saw the bull market confirmed. You have to keep an open mind when it comes to the market and let the market tell you what its doing. If you turn wave patterns and sequences into a religion and stay fixated on them then at times you'll miss out on what the market really is doing.

What I do know is that we are in a big uptrend and just about everything is making higher highs and higher lows. And that's all I need to know to make money.

Truth is the real reason people have been anxious about the stock market isn't because they don't know if the market is going up or down, but because they have no game plan at all when it comes to deciding when to enter a position, take a loss, and book a profit. Their lack of plan is the true source of their anxiety - they just project it on to worries about what the market is going to do and then listen to all of these conflicting viewpoints to confirm them. In the end they just freeze up. Last year that meant doing nothing while stocks sunk and this year it means doing nothing while stocks go up.

If the masses had used stop loss orders and risk managements techniques they wouldn't have lost a lot of money last year nor would they be afraid of trading in the stock market now.

Those that are serious about making money in the stock market will do the work and thinking to come up with a game plan that will do that for them. Most people though are just too lazy to do anything. So they sit there like a knot of nerves and just listen to wild predictions.

And there are plenty of people that cater to this.

There were some great people last year and this year who did make big calls and helped people navigate the wild rides the stock market has taken. These are people with real track records and experience in the stock market and even a few economists that really know what they are talking about and are worth listening too.

But then there are people out there that are trying to make careers out of issuing bold and crazy sounding predictions about the stock market and economy. Some of them have just gotten big in the past year and to me sound like astrologers. I've had enough of it.

I was bearish on the market last year and called for a market crash last summer for the Fall. I made a series of videos about this. But I don't try to make wild predictions just to get attention. Doing so may attract listeners, but it does people a disservice.

I feel compelled to speak out about it. When someone predicts oil going to $10 a barrel based on nothing but "supercycle wave counts" they are probably making up out of thin air enough is enough. Especially when oil is going up!

Last week should have proven to you that it is wrong to get overly worried about this market.

I believe buying individual stocks will continue to be the best way to make money in the market. It won't shock me though if later in the Fall we see the market pullback again five percent or so. It's simply natural to get occasional pullbacks and corrections in a bull market.

So don't be afraid.

I know this post is going to stir up some people. It may shake you up if you have been a believer in Elliott Wave Theory. But if you have been interested in it simply ask yourself why are these wave patterns real. What causes them. Why should the market trade in six waves? Why not five? Why not ten? Why not twelve?

Why six?

Figure out to yourself why these people say six and then ask yourself if the reasons they say six make any sense to you. What is the philosophy behind Elliott Wave theory and do you accept?

The philosophy behind traditional technical analysis - which I obviously believe in - is that the stock market moves by supply and demand and those two forces create patterns on stock charts that are meaningful. They create trends and as long as a trend stays in motion it keeps going. Elliott Wave theory though isn't about trends analysis it is about predicting the future by focusing on price targets based on Wave counts and supposed fixed ratios that the stock market has to move in. You have to ask yourself is that real? If yes than it can be useful to you. If no, than it is a distraction that in the end can make you lose money or miss out on opportunities.

This article is an excerpt of a premium WallStreetWindow members articles. It continues here with a discussion of the stock market and individual stocks.

By Michael Swanson

Mike Swanson is the founder and chief editor of WallStreetWindow. He began investing and trading in 1997 and achieved a return in excess of 800% from 1997 to 2001. In 2002 he won second place in the 2002 Robbins Trading Contest and ran a hedge fund from 2003 to 2006 that generated a return of over 78% for its investors during that time frame. In 2005 out of 3,621 hedge funds tracked by HedgeFund.Net only 35 other funds had a better return that year. Mike holds a Masters Degree in history from the University of Virginia and has a knowledge of the history and political economy of the United States and the world financial markets. Besides writing about financial matters he is also working on a history of the state of Virginia. To subscribe to his free stock market newsletter click here .

Copyright © 2009 Michael Swanson - All Rights Reserved.

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