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Eliot Wave’s Grim Message

May 24, 2011 12:17 AM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Regular readers are well aware that I rely on John Murphy and Arthur Hill at StockCharts .com for top drawer technical analysis of the financial markets. Lately they have been knocking the ball out of the park, pumping out indicators that global markets were topping and that risk was high, almost on a daily basis.

So I wanted to highlight a chart they prepared that applies a traditional Eliot Wave analysis to the S&P 500. Eliot Wave theory was first created by Ralph Nelson Elliot in the 1930’s, and the modern day iteration is propagated by disciple, Robert Prector. In the simplest terms, Eliot Wave theory calls for bull markets with five up waves to be followed by bear markets with three down waves.

That makes the chart below particularly alarming. It shows that the bull market that began in August reached its wave 5 top on April 29 and is now has three down waves ahead of it. That means that the era of buying dips is behind us, and that the prudent thing to do from here is to sell every rally.

If you need more reasons to stay awake at night, then take a look at the next chart of stocks trading above their 50 day and 200 day moving averages. Those have both started to show a sharp decline, presaging a broader fall in the market.

Over the years I have noticed that the people who slavishly follow Eliot Wave, or any other technical program, get slaughtered. None of this takes into consideration the end of QE2, the expiring debt ceiling, or out plummeting economic growth. However, it can be a very useful tool when combined with the dozens of other that I use.

StockCharts.com provides one of the best value for money research products out there. They offer an impressive range of tools to all comer for free. A one year subscription to their “ExtraRT” service products costs only $369 per year. This includes an interactive section where readers are permitted to post their own technical analysis. Some of them have attracted quite massive followings in their own right. You can visit their site at www.StockCharts.com .

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