When fear grips the collective mood of investors, market prices can move downward rapidly.
Asked to opine about the market's recent volatility, market observers have repeatedly shaken their heads and said: "This is not rational."
And they're right. Financial markets are not rational.
"It is emotion that creates movement in the market. Of course, few people really want to admit that most of their decisions are emotionally based and emotionally driven rather than rationally based and rationally driven."
Prechter's Perspective
Yet, if investor psychology drives the market, the question becomes: Is there a way to anticipate the direction prices will take?
Yes, that's the very basis of the Elliott Wave Principle:
"...stock market prices trend and reverse in recognizable patterns...Elliott isolated five such patterns, or 'waves,' that recur in market price data. He named, defined and illustrated these patterns and variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle."
Elliott Wave Principle, Frost and Prechter, (p. 19)
So where are we in today's stock market pattern? Do the gains of the past week mean the "Panic Phase" is over -- that it's safe to get back in?
Well, if history shows anything, it's that you should expect counter-trend moves. Consider what occurred in 1929-1932. Look at the wave "b" peak in the chart below. In the time leading up to that peak, investors thought a new bull market was under way after the 1929 crash:
So what about the next leg of the trend today? That's what Robert Prechter was talking about in his latest Elliott Wave Theorist when he said:
"I'm going to have to orient you to the big picture on the Elliott wave form so you'll understand where I've been coming from...A.J. Frost and I...warned that this juncture was coming."
Prechter then describes the market's price form, and how it should unfold in the immediate months and years ahead.
After providing subscribers his thorough analysis, Prechter says, "I hope you can see from this perspective why the forecast that I posted...was so radical."
Just how "radical" is Prechter's forecast?