When you visit a store, you want to pay as little as possible. Merchants want to charge as much as they can. At the point of balance, prices are established. If your favorite shirts are on sale for half-price, you may buy a few. If the price jumps by 50%, you'll probably look around for another brand of shirts. That's how it works in the economy.
That's NOT, however, how it works in the financial markets.
When stocks are "on sale," investors shun them. When stocks rise, they are embraced -- and the higher the price, the higher the demand. So it's clear that the traditional supply and demand model DOES NOT work in finance. Elliott Wave International's president Robert Prechter developed this crucially important idea years ago:
"...the law of supply and demand is irrelevant to financial markets. There are no producers and consumers in financial markets, just investors. So there are no balancing forces on price. The law of supply and demand reigns at the shopping mall because consumers are pretty certain of their needs and resources, so they can reason their way through the decision process. But investors are uncertain because they have no basis for deciding a fair price. In the financial context, knowing what you think is not enough; you have to try to guess what everyone else will think. It's not easy to use reason to figure that out. When everyone faces this dilemma, the result is herding."
-- The Elliott Wave Theorist, January 2008
Herding is what drives price trends in the financial markets, not supply and demand. When investors see others buying stocks, they buy too. When others sell, so do they. And the lower the prices, the less they buy. Just compare price and demand in this S&P chart:
This graph tells the story of the millions of investors who hold on to stocks at every top, convinced -- by the behavior of others -- that the rally will continue. Just as ironically, almost no one wants to buy at the bottom.
If the traditional economic model doesn't work in finance, what model does?
"A better model of financial market behavior is the Wave Principle, which appears to be governed by an unconscious herding impulse in human beings...."
-- Bob Prechter, The Elliott Wave Theorist, April 2004.
For the past month or so, fear has struck the investing hearts of millions. When a few flee the market in fear, the others don't wait around to ask questions. That's why stocks have been falling so fast: Fear is stronger than greed.
While 99% of investors take their cues from others, you can use the Elliott Wave Principle to take cues from chart patterns -- and
predict what others are likely to do next. In other words, you
can break away from the crowd. Join the select few who already have --
click here for a risk-free subscription to our crown jewel package:
The Financial Forecast Service. (Timing is important: It doesn't look pretty out there.)