by Bob Stokes
Updated: March 09, 2017
[Editor's Note: The text version of the story is below.]
The Elliott Wave Principle tracks more than just the waves of collective psychology in the financial markets. In the broadest terms, it tracks the record of humankind's progress and regress.
Using the stock market as a gauge, when you reflect on humankind's progress during the past 35 years, the advance has been nothing short of remarkable.
On Aug. 13, 1982, the DJIA jumped 11.13 points to 788.05 -- and today, the index is trading around 21,000. What a climb!
As you know, there have been major retrenchments along the way - but still, here we stand near record-high territory.
And, as the latest rally marks its eighth anniversary on March 9 of this year, financial advisors' optimism has reached an extreme:
At 63.8% bulls, the most recent Investors Intelligence Advisors’ Survey is higher than every weekly reading since January 1987. We find it striking that advisory sentiment and the 12-session closing-higher streak both take us back to the same month 30 years ago, when the market was seven months away from a peak that resolved in a crash.
Most market participants extrapolate present financial trends into the future. But, of course, trends change – and usually, when the least number of people expect it. (Just think back to the start of this stock market rally in March 2009, when almost everyone was pessimistic about the future.)
This gets us back to the idea of progress and regress. Let's turn to Frost & Prechter's Wall Street classic, Elliott Wave Principle:
The Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.
As the book also notes, the stock market's essential form is five waves to progress and three waves to regress – both in bull and bear markets, as "progress" goes both ways, in terms of trend.
Does the essential form have to be five waves and three waves? Think about it and you will realize that this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear movement. One wave does not allow fluctuation. The fewest subdivisions to create fluctuation is three waves. Three waves (of unqualified size) in both directions would not allow progress. To progress in one direction despite periods of regress, movements in that direction must be at least five waves, simply to cover more ground than the intervening three waves. 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.
Right now, with the aid of the Wave Principle, we are telling our subscribers when to anticipate the market's next major trend change – and what stocks should do before it occurs.