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[Frost
& Prechter] Elliott's observations led him to believe that markets
move in waves of progress and regress (motive and corrective). He
further stated that periods of progress ultimately take the form
of five waves with periods of regress taking the form of three waves:
"...this is the minimum requirement for, and therefore the
most efficient method of, achieving both fluctuation and progress
in linear movement. The fewest subdivisions to create fluctuation
is three waves. Three waves (of unqualified size) in both directions
does not allow progress. To progress in one direction despite periods
of regress, movements in the main trend must be at least five waves,
simply to cover more ground than the three waves and still contain
fluctuation. While there could be more waves than that, the most
efficient form of punctuated progress is 5-3, and nature typically
follows the most efficient path". |
A
Capsule Summary Of The Wave Principle, Prechter
"The Wave Principle is Ralph Nelson Elliott's discovery that
social, or crowd, behavior trends and reverses in recognizable patterns.
Using stock market data as his main research tool, Elliott isolated
thirteen patterns of movement, or "waves", that recur
in market price data. He named, defined and illustrated those patterns.
He then described how these structures link together to form larger
versions of those same patterns, how those in turn link to form
identical patterns of the next larger size, and so on. In a nutshell,
then, the Wave Principle is a catalog of price patterns and an explanation
of where these forms are likely to occur in the overall path of
market development". |
Elliott
Waves and Social Reality, Prechter, 2001
"The primary thesis of this book is that changes in social
mood cause and therefore precede
changes in the character of social events. In contrast to this
idea, most people erroneously try to devine the implications of
event in attempts to forecast financial markets and people's collevtive
feelings. This appraoch cannot work because markets
are driven by natural trends in mass psychology, and events
resulting from those psychological trends come afterward.
It is the changes in such trends, as indicated by turns in the stock
market, that signal a coming change in the tenor of social events". |
Cultural
Trends - Manifestation of a Bear Market Mood in Europe, Elliott
Wave International's, 2004
"Major bear markets are accompanied by a reduction in the size
of people's unit of allegiance, the group that they consider to
be like themselves. At the peak, it's all 'we'; everyone is a potential
friend. At a bottom it's all 'they'; everyone is a potential enemy.
When times are good, tolerance is greater and boundaries weaker.
When times are bad, intolerance for differences grows, and people
build walls and fences to shut out those perceived to be different.
Ultimately, persecution and war result. Let's look at four examples
of xenophobia and exclusionism going on in Europe now: Anti-immigration
behavior, Extreme right-wing political victories, Anti-Americanism,
Anti-Semitism. All these "anti-isms" spring from the same
source: the emerging bear market in social mood. As Europe heads
lower, the urge to close ranks and close out others will metamorphose
into open conflict and escapist activities. The decline has a long
way to go, so the likelihood is that the national boundaries separating
EU members will regain much of their historic significance". |
[Yamada]
"Dow theory suggests that if the companies
that make the goods and those that transport the goods move up in
tandem, therein lies an economic message". |
The
Dow Theory: William Peter Hamilton's Track Record Re-considered,
Brown, Goetzmann and Kumar, 1998
Alfred Cowles' (1934) test of the Dow Theory apparently provided
strong evidence against the ability of Wall Street's most famous
chartist to forecast the stock market. In this paper, we review
Cowles' evidence and find that it supports the contrary conclusion
- that the Dow Theory, as applied by its major practitioner, William
Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted
returns. A re-analysis of the Hamilton editorials suggests that
his timing strategies yield high Sharpe ratios and positive alphas.
The contribution of this paper is not simply to show that Hamilton
was a successful market timer. Alfred Cowles' (1934) analysis of
the Hamilton record is a watershed study which led to the random
walk hypothesis, and thus played a key rule in the development of
the efficient market theory. Ever since Cowles' article, "chartists"
in general, and Dow theorists in particular, have been regarded
by financial economists with skepticism. Our replication of Cowles'
analysis yields results contrary to Cowles' conclusions. At the
very least, it suggests that more detailed analysis of the Hamilton
version of the Dow Theory is warranted. In broader terms it also
suggests that the empirical foundations of the efficient market
theory may not be as firm as long believed". |
Time
Cycles - A Short Primer, Yamada, 2004
Time is usually the stepchild to price and volume in the realm of
technical analysis. In fact, too often we want to know where
the market is going, while when it may get to our
target becomes a secondary consideration. Technicians are loath
to judge both where and when. The study of time cycles is another
dimension to the investment strategy picture that may help with
this dilemma. |
The
Halloween Indicator, 'Sell in May and Go Away', Jacobsen and
Bouman, 2001
"We document the existence of a strong seasonal effect in stock
returns based on the popular market saying 'Sell in May and go away',
also known as the 'Halloween indicator'. According to these words
of market wisdom, stock market returns should be higher in the November-April
period than those in the May-October period. Surprisingly, we find
this inherited wisdom to be true in 36 of the 37 developed and emerging
markets studied in our sample". |
Years
ending in "5", Hussman, 2005
It's unfortunate that serious investors would even entertain superstitions
of this type, but with valuations higher than they were at the 1929,
1972 and 1987 market peaks, I suppose that investors have to reach
for something. In this case, bullish arguments have increasingly
included the observation that there have been no down-years ending
in 5 over the past century. Now, stare at that for a second. Historically,
the market has advanced some 70% of the time, declining the other
30%. Over the past century, a year ending in any particular number
has had 10 times to show its stuff. So the probability of getting
an advancing year 10 times in a row for a year ending in any particular
number is just (0.7)^10 = 2.82%. Of course, there are 10 digits
that you could end with, so the probability that you would have
seen all-advances in at least one of those ending-digits is 1 minus
(1 minus .0282)^10 = 24.9%, which is relatively low, but not strikingly
mysterious. Of course, if you mine the historical data a dozen independent
ways for patterns like this, each having only a 24.9% chance of
showing up, the probability that at least one such pattern will
emerge is 1 minus (1 minus .249)^12 = 96.8%. In short, if you give
me a dozen opportunities to mine the data in ways that have even
modest probability of coming up with an interesting superstition,
it's almost certain that I'll come up with an interesting superstition.
Notice that this is why you should always be aware of the sample
size and the number of groups included in a particular analysis.
For example, if every year ending in an even number had been an
advancing year over the past century, there would be 50 such events,
and the probability of all being advances would be (0.7)^50 = 0.000000018.
Even allowing 2 groups (even/odd), and the opportunity to mine the
data for thousands of similar relationships, the likelihood of this
being a chance outcome would still be nearly zero. As for years
ending in "5", the statistics are completely unimpressive. |
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