My Odd Relationship with EW

By -

I have, over the nearly eleven years (!) this blog has been around, largely avoided the topic of Elliott Waves. There is no shortage of posts here on Slope, largely by others, about the Elliott Wave theory (click here to see the list of them) but for myself, I hardly ever mention it.

One thing to understand how I analyze the markets is that I’m pretty damned lazy about using methods that don’t “sing” to me. That sounds like an odd verb to use, but it’s the one that’s always made the most sense. The things that sing to me – – those which resonate and make sense to me – – tend to be simple tools like horizontal support & resistance levels, trendlines, and, to a lesser degree, Fibonacci retracements.

I don’t go in for stochastics, Bollinger bands, relative strength indicators, moving averages, MACD, or any of that other stuff. I am awfully fond of analogs, as some of you know, but while some border on the magical (like the one I offered on Alcoa this year) others lead to completely erroneous predictions.

I find time cycles to be quite alluring, but I rarely find any that work reliably. However, when I was a bit more naive about this topic, I became rather enchanted with the Elliott Wave theory. I studied it intently for my CMT test, and I become an affiliate of Elliott Wave International down in Gainesville, Georgia (whose recent free report you can get by clicking this link – – c’mon, it’s free, so be a pal and sign up).

What really pushed me into a near-religious fervor with respect to Elliott Wave was how remarkably well it seemed to work during the throes of the financial crisis. I casually read the various publications issued by EWI in 2007, 2008, and into 2009, and I was frankly stunned at its prescience. It was absolutely invaluable, and Slopers seemed to love it too, because the payments I got from EWI from signups grew to some awfully exciting amounts. These guys seemed to have a crystal ball, and to their credit, in February 2009, they called for a big bounce to take place. So they not only accurately predicted the important movements of the financial crisis, they just about exactly nailed the bottom. I was impressed.

And that, my friends, is when things started to go wrong. Even though they (quite accurately) called for a turnaround in the market, they made it clear that the bounce would be countertrend and merely a respite in an unfolding bear market. The S&P, they offered, would get to around 1000 or so (I don’t remember the exact wording, but I do remember that 1000 was seen as pretty much the upper limit) and then, blammo, we’d be off to the bearish races again, taking out the 666 low.

I don’t need to tell you that 1000 was not the stopping point (indeed, I think they were looking at about 900-950 as the target). As we moved through 1100, 1200, 1300, 1400, 1500, and on and on up into the 2000s, the explanations, excuses, and rationales just kept coming, month after month, year after year.

I confess I was angry, and I felt an odd sense of betrayal, because this “thing” I had found turned out to not be so magical after all. I mentioned them less and less, and even when referring to them, I’d simply mention “our friends from Gainesville” through clenched teeth. People point out that Tony Caldaro (another waver) had been accurately bullish, but I wasn’t impressed, not only because a “method” shouldn’t offer two utterly differently conclusions, but also because I distinctly remember Tony turning bullish pretty early on in the financial crisis before Autumn 2008 even started. So I was increasingly convinced that the entire Elliott Wave thing was hogwash, and a lot of Slopers seemed to agree with me (and wondered how I could have been dumb enough to pay attention in the first place).

Once QE ended late last year, however, I began to notice EW (and technical analysis) started working better. I resumed reading the items from Gainesville more carefully. I was also intrigued at the great success “Pug” had his with own very long-term view of the market, which accurately predicted the entire rally and seemed to very accurately predict the turning point. (This view calls for a drop down to as low as 1404 and then – – and here’s the part I have trouble with, but his success demands we at least give it consideration – – – a roaring bull market to well above 3,000!)

Recently, an analog came to me which I think neatly explains my relationship with Elliott Wave, or at least my view of the writings from Gainesville: it’s like I’ve been handed a really cool magnifying glass, and I’ve been told it has the power to light tinder in order to start fires. I was initially given this glass on a bright summer day, and I was astonished at how well it worked. I could focus it on dry pine needles, old dead leaves, or other bits of kindling, and it did an absolutely fantastic job of focusing energy perfectly and working precisely as predicted.

But during the nighttime (which was pretty much March 2009 through December 2014), it didn’t do jack squat. I thought it would, because it had worked so well before, but try as I might, I couldn’t light anything with it. It was just a spiffy little tool that seemed to have utterly lost its efficacy……….that is, until the sun rose once again.

Thus, my conclusion (for myself at least): EW is dynamite during bear markets, and I intend to pay close attention once more. But when it seems to stop working, I can only conclude that, as with the spring of 2009, the sun has dipped once again beneath the horizon, and all I’ve got in my hand is a round piece of glass with a stem attached to it.