You can point a finger, bet on a point spread for the Saints-Colts Super Bowl, and drive to Point Reyes in California. But the point that might make the most difference in your life as an investor has to do with a mid-point in the progression of the stock market. We call it a third-of-a-third wave in our Elliott wave shorthand, but unless you already know wave analysis, that phrase won't register as a big deal. In this excerpt from his latest Elliott Wave Theorist, Bob Prechter tackles the topic to make a point about why 2010 should be a stand-out year for investors as the market reaches a critical recognition point.
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A “Prechter Point” Should Occur This Year
The very center of the wave structure—the most volatile point in an impulse—should occur in 2010 when the market reaches [a third-of-a-third wave on many levels]. In a bull market, this point in the wave structure marks the time at which investors in the aggregate stop worrying about downside risk and begin projecting ever-higher levels (for example, by writing books about stocks for the long run and Dow 100,000). In a declining impulse wave, such as the market is in now, the same point marks the time at which investors in the aggregate stop focusing on the market’s upside potential and start worrying about how far down it will go. This is a very rare event … and its upcoming occurrence will be stunning enough to set records for [
Editor's note: Please read the
The Elliott Wave Theorist to find out what the third-of-a-third wave will set records for.]
I used to call this spot in the wave structure the “point of recognition,” but the Elliott wave model and socionomic theory make clear that investors in the aggregate never consciously recognize anything. It is more accurately described as the point of change in net social mood and directional rationalization.
That’s a mouthful, so I’m just adopting a vanity short-cut and calling it the “Prechter point.” Here is how it comes about: From the start of a bull market, investors become increasingly less pessimistic and therefore act to make stock prices go higher. The center of the wave is when optimism becomes the dominant expression of social mood. From the start of a bear market, investors become increasingly less optimistic and therefore act to make stock prices go lower. The center of the wave is when pessimism becomes the dominant expression of social mood. Thus, as prices rise in a bull market, most investors still worry about downside price potential until the “third of the third” wave occurs, after which they focus on—and rationalize—upside price potential.
Conversely, as prices fall in a bear market, most investors focus on upside price potential until the “third of the third” wave occurs, after which they focus on—and rationalize—downside price potential.…