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Is Elliott Wave All It's Cracked Up To Be?

If you follow some of the big name Elliott Wave analysts out there, you’ve likely noticed that they come off as a bearish group of folks. Every time the market is going up, they’re clamoring for a high. Every time the market is going down, they’re calling for it to continue. They have Elliott Wave counts to back up their contentions, but we both know that, despite the 2000-2003 and 2007-2009 bear markets, the stock market spends the vast majority of its time heading north. In my view, this constant bearishness gives “Elliotticians” a bad name, because we’re not all card-carrying bears. If I had my way, we’d be at the beginning of a fifty-year bull market that will see us all find riches in our trading endeavors. But there is a reason for the bearishness among many of the Elliott Wave analysts. For better or worse, Elliott Wave patterns are cleaner when the market is declining. When we really think about it, there’s a good reason for this. Most often, larger declines are very emotional affairs. It usually seems as if the market was taken by surprise by a recession, or that suddenly, many companies won’t meet the incredibly lofty expectations placed on them during the good times. As a result, traders and investors can’t find the exit quick enough. Such high-emotion action leads to big and sharp trends. And big, sharp trends almost always sport very clear and apparent Elliott Wave patterns. All you have to do is compare the decade’s two bear markets to the decade’s two bull markets to see the truth in this statement. And when we find ourselves in a more grinding advance, it might feel like it’s a corrective, countertrend move. In reality, this is just how advances normally occur – it’s a lot harder for price to go up then it is to go down. To some, this may trivialize the usefulness of the Elliott Wave Theory, especially if they’ve watched some analysts make incorrect bearish call after incorrect bearish call. Don’t let these bears ruin your impression of the Elliott Wave Theory, because if you do, you’ll be missing out on the most accurate forecasting method out there – when applied objectively.

The real key to using Elliott is to understand the rules of the theory, understand how to apply them to a price chart in the most objective way possible, and to understand its limitations. Aside from the fact that up trends are harder to forecast then down trends, it must be understood that, sometimes, the true Elliott Wave count cannot be objectively determined because too many possibilities exist. This is a tough one to come to terms with for many. When you have a theory that is capable of forecasting every last piece of price movement down to the one-minute action, it’s hard not to “abuse” the power. It makes us want to pick one of the possibilities to make bold forecasts that say exactly where a stock or index is headed. When it doesn’t pan out, it can be easy to think that the theory was wrong. This is not the case. As long as we can identify the times when the exact wave count is unknown, we can adjust our approach accordingly. Specifically, we can forget about the longer-term wave patterns, and focus on the near-term wave patterns until the larger picture comes into focus once again. When we do this, we’re free to simply ride a trend, leaving the bold forecasts to other analysts. If we keep it that simple, we can rest assured that the near-term pattern will keep us on the right side of the trend, and will also tell us exactly when things are changing. No other theory can do this in as timely of a fashion as the Elliott Wave Theory, which is why it deserves a spot in your investment toolbox.