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Thursday, December 11, 2008


Drowning in Elliot Waves?

Louis Rukeyser, of Wall Street Week fame, used to make fun of technical analysis. He used to call the technicians "elves" and considered their good calls to be a matter of luck more than anything else. However, he used to have elves on the show regularly, both as panelists (famously Bob Nurock until their falling out) and guests. The hot technician back then was Robert Prechter, an advocate of Elliot Wave Theory.

I read a couple of Prechter's books, and must say they were reasonably well written and very entertaining. His theories were attractive, but in reality, he fell out of favor too. The big problem with technical analysis and their advocates is that they want to use it as a predictive tool. Inevitably, they will make what turn out to be foolish predictions, killing their credibility.

My view of technical analysis is that it usefully lends perspective which is important to market followers. Where is the market in a particular move? Is a rally, such as what we have experienced recently, merely a bear market rally, an extended bottoming process, or in fact a reversal to a new bull move? Some technicians will tell you that studying volume statistics can help you figure it out. Elliot Wave advocates will try to tell you what number wave we're in within what cycle within what super cycle. I don't think this information is much use in determining the market's next move or the one after that, but it can provide some context for understanding recent action.

Elliot Wave advocates, and Prechter's books, rest on a belief that human psychology and in fact, much of what we see in nature, can be related to the Fibonacci number series, i.e., 1,2,3,5,8,13, 21,34 etc. where any number is the sum of the two previous. If the number of days in a move turns out to be a Fibonacci number, that lends credibility to the analysis. Rukeyser would say this is hocus pocus and I would agree. But Prechter makes a somewhat more convincing case that dominant moves occur in 5 waves (e.g. up, down, up, down, up), and corrective moves are in three waves, such as down, up, down. A dominant wave can be either up or down, as can a correction.

So to return to the question of the moment, expressed in the vocabulary of Prechter, if we started a secular bear market a year or so ago, we need to figure out whether we've completed 5 waves and have now started either a dominant or corrective bull phase (and are in Wave 1 of 5 or of 3 as the case may be), or whether this is simply wave 2 of a 5 wave bear market. I haven't followed Prechter recently, but based on what he was saying some years ago, I think he is in the latter camp, that is we have entered a long term bear (as we did in 1929) and this is just wave 2 of that supercycle, or more likely, wave 1 of a three wave bear market rally within wave 1 of the longer term bear.

If you are not completely confused by all this, you are really not trying.

The fact is that technical analysis can confirm what you already know from fundamental analysis - that we are in the midst of extremely serious economic troubles. They are not going away quickly, and there are really no reliable safety zones for investors. So we have the phenomenon of people lending money to the Treasury for no interest AT ALL. The fact is that as bad as stocks are, the bond market is worse. The debt markets are still largely frozen - many reasonable credits are being quoted at a dime or two on the dollar.

What's going to happen? I don't know - but I am an optimist, and believe that after a number of false starts, the world will figure out how to restart markets again. So I am still buying, though I might do some last minute tax loss selling here, since the ITWO merger got put off and I have too many realized gains for 2008. I've got lots and lots of losses, but they have not been realized yet, and those are the only ones you get tax credit for.


The Mets got K-Rod - probably the best closer available (OK, maybe Kerry Wood) and still in his 20's. That's what they had to do. Now they need to resign Perez, and look for a little catching help. I think second base will work itself out. The NL East should be a very competitive division next year.


On November 24, I bought 200 shares of Belden (BDC) for the IRA at 11.69. On 12/1, I bought 700 shares of beleaguered Bank of Granite (GRAN) at 3.20. On 12/4, we bought 200 shares of SEIC Investments (SEIC), a zero buy, at 13.8575. And on 12/9, I bought 300 shares of Alcoa (AA) at 9.46.

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