photo credit: Scoobymoo

By Robert Folsom

Editor’s Note: The following article discusses Robert Prechter’s view of the Efficient Market Hypothesis. For more information, download this free 10-page issue of Prechter’s Elliott Wave Theorist.

When a maverick idea becomes vindicated, there’s a good story to tell. It usually involves a person (or small group of people) who courageously challenge the orthodoxy of the day — and, over time, the unorthodox yet better idea prevails.

A “good story” of this sort has surfaced during the current financial crisis. A chapter of the story appeared in a recent New York Times article, “Poking Holes in a Theory on Markets.” The theory in question is the efficient market hypothesis (EMH), which the article suggested is so hazardous that it “is more or less responsible for the financial crisis.” This quote tells you most of what you need to know:

“In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.”

In case your Latin is rusty, Quod erat demonstrandum means “which was to be demonstrated.” Its abbreviation (QED) appears at the conclusion of a mathematical proof. In this case, the massive financial bubbles of recent years are the proof that refutes the efficient market hypothesis, which argues that markets move in a “random walk” and are not patterned.

Similar articles in the financial press have reported the demise of the EMH. Just this week an Economist magazine blog included this bold declaration:

“No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable.”

QED, indeed — I agreed years ago that the random walk was implausible. But I didn’t come to this view because of behavioral economists, although their work over the past decade has certainly been valuable. Instead, I was persuaded by the work of someone who first challenged the financial orthodoxy more than three decades ago, specifically April 1977. As a young technical analyst at Merrill Lynch in New York, his research circulated among several of Merrill’s clients. His name for these studies was the Elliott Wave Theorist: the April ‘77 study was a detailed analysis of the 1975-76 stock market, which offered this comment on the random walk model:

“If market moves are arbitrary (as the random walk proponents suggest), then internal components would rarely ‘make sense’ mathematically, and then only by statistically insignificant fluke occurrences. However, there seems to be enough evidence that mass psychology, as recorded in the Dow Jones Industrials, form patterns that are uncannily interrelated….At least this much can be fairly reliably stated as a result of this work: This idea that the market is a ‘random walk’ is probably false.”

Robert Prechter left Merrill soon after; he has published the Elliott Wave Theorist in every month since. Every issue has, in one way or another, “convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices.”

So while there may be a good story to tell about behavioral economists, I trust you see why I believe there is a vastly better one to tell.

The “enormous effect” of “mass psychology” and “herd behavior” is exactly what explains the financial downturn that began in late 2007. Prechter’s Elliott Wave Theorist anticipated the crisis and warned subscribers beforehand. Likewise, he alerted them to the bear market rally that began last March.

For more information from Robert Prechter, download a FREE 10-page issue of The Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

Robert Folsom is a financial writer and editor for Elliott Wave International. He has covered politics, popular culture, economics and the financial markets for two decades, via print, radio and the Internet. Robert earned his degree in political science from Columbia University in 1985.

photo credit: Hamed Saber

Imagine not having access to any financial news stories. The only information you have about the market is the market itself.

Would you be a better trader or a less successful trader?

I think you would be a better trader. I have often said that the market is the best news provider in the world. It’s up the minute and it reflects both domestic and international issues. The success of our “Trade Triangle” technology is based upon market action.

In my new short video, I’ll take a big look at the S&P 500 market and where I expect it will head in the months to come.

Watch the video here.

We all need to be prepared for what lies ahead, and this video is worth watching for that very reason.

There is no need to register for this video and you can watch it with my compliments.

All the best,

Adam Hewison
President, INO.com
Co-Creator, MarketClub

Since the beginning of July, the most prominent feature of the market has been the divergence in volume between financials and “all other” stocks. While overall stock market volume has been flat if not down over the past two months, and a continuation of a long-term downward trend since the March ramp up, the volume in financial stocks has staged an unprecedented pick up.

A summation of the individual volumes since March reveals an unprecedented dominance of the total market volume represented by just these five stocks (Citi, AIG, CIT, Fannie Mae and Freddie Mac), hitting nearly 2 billion shares on Friday, August 21.

Note that the hand of Government is firmly around all these financial stocks. Does that give you any confidence in a continuation of the March rally?

Source: ZeroHedge

Part 1 of our video tutorial series on Reversal Bars is up on YouTube and can be viewed from the link below. We anticipate there will be a total of 3 parts. Parts 1 and 2 will cover Reversal, Key Reversal, Outside Key Reversal, Signal, Gap Signal, Snap Back and Confirmation bars. Part 3 will cover some reversal bar patterns we learned from Jeffrey Kennedy.

Reversal Bar Video

photo credit: Robbie Howell

They Say That Timing In Life Is Everything

Well here I am at my vacation home in Maine watching the markets go crazy. Yes, we are so lucky to have access to the Internet and to the markets themselves no matter where we are in the world.

I didn’t plan on doing a video today, but the market action left me no choice. Today we witnessed an important “Trade Triangle” signal in this major index that should not be ignored.

In my new video, I share with you this same signal that thousands of MarketClub members witnessed and will discuss some of the potential downside targets for this index.

This is a video that is worth watching as I think we should all be prepared for what lies ahead.

There is no need to register for this video and of course you can watch it with my compliments. Enjoy the video and please give us your feedback on our blog.

All the best,

Adam Hewison
President, INO.com
Co-Creator, MarketClub

photo credit: postaletrice

Today’s short video is something quite special.

In many of my previous videos we’ve looked at charts using Japanese candlestick charts. While this is interesting, I’ve never quite explained to you some of the powers behind using Japanese candlestick charts.

So here’s what we are going to do; watch the video, and I will point out to you some powerful Japanese candlestick formations on Google, Gold and Crude Oil.

MarketClub is making available to you with just a phone call a very special PDF booklet on Japanese candlestick charting. The title of the booklet is “17 Moneymaking Candlestick Formations You Can Use Today”.

So enjoy the video.

Thanks.
Adam Hewison

Why are the truly big economic catastrophes so “big”? Put simply, it’s that such a small number of people prepare themselves beforehand. Think about 2008 and you’ll realize it’s true. What’s more, once you read Bob Prechter’s recent 10-page Elliott Wave Theorist, you’ll see that even fewer people will be ready for the soon-approaching worst leg down of the unfolding depression.

In this issue, Bob gives a warning he’s never had to include in 30 years of publishing – namely, that the doors to financial safety are closing all over the world. There are but a few opportunities left and little time to take them. Even as this happens, the terrible irony is that so many people believe the conventional wisdom, which claims “the worst is over.”

It’s not too late, but the doors really are closing shut. Learn what you need to know now. You’re a few clicks away from your free 10-page issue of Bob Prechter’s Elliott Wave Theorist.

Go here to download it now.

An interview with a maverick trader and “a true Elliott wave expert.”

By Vadim Pokhlebkin
Elliott Wave International
Tue, 18 Aug 2009 13:30:00 ET

photo credit: Kyle Kesselring
Elliott Wave International is proud to present an interview with Roberto Hernandez, a maverick trader and “a true Elliott wave expert,” as his mentor, Dick Diamond, calls him. Roberto graciously agreed to describe for Elliott Wave International’s readers some of his favorite trading techniques; he spoke with us on the phone from his office in Mexico City.

Q: Roberto, your mentor, Dick Diamond, speaks very highly of your trading skills. Coming from someone like him, a 40-year market veteran, it says a lot. Can you tell us why you find it so helpful?

A: I first heard about the Elliott wave approach back in 2000. I was working at the corporate finance office of Pemex, an oil company, and one of my colleagues who followed crude oil futures told me about it. I was curious, but nothing more: I was a hundred percent “fundamentals” guy back then. I read company statements, balance sheets, spreadsheets, recommendations from investment banks, all that. In 2001, I tried to invest in tech stocks… which was the absolute worst time to do that, as you know. I lost a lot of money.

At that point, I said to myself it’s time to try technical analysis. The first thing I read was John Murphy’s famous book, “Technical Analysis of the Financial Markets.” It had a section on Elliott wave analysis — that was my second introduction to the method. Then someone told me that there is this company called Elliott Wave International and gave me your website. So I started reading every free resource I could find there, and later got most of your books and took several of your online trading courses. My first Elliott teachers were Tom Denham, who is now your European stocks analyst, and Wayne Stough. Then I bought more of your books and took more advanced seminars.

Q: Did it help?

A: Well, after a while, I basically became an expert on the theory of Elliott wave. I could spot a wave pattern on a chart in a second, but it was all theoretical knowledge. At that point, I tried to invest money again, now according to my understanding of the Wave Principle. I lost again.

In fact, I was losing so badly that I was getting kind of desperate. I kept looking at charts of the DJIA futures — 1-minute charts, my favorite timeframe — and I was amazed at how well they followed the Elliott wave pattern. Yet here I was, able to see clearly the wave patterns in the markets, and still losing money trading.

That’s when I saw that EWI was advertising Dick Diamond’s seminar. It must have been about seven years ago. I knew Dick was a good trader with a 40-year experience and a good friend of Robert Prechter, so I decided to take the course. To my surprise, it had nothing on the Wave Principle. Instead, it was heavy on the use of oscillators. And at that seminar, I had an epiphany: I realized that, paradoxically, being a good analyst and a good trader are two different things. With Dick’s course, I closed the gap between the two.

If it weren’t for my knowledge of the Wave Principle, I would have never gotten involved with Dick’s organization. He liked me because of the Elliott wave forecasts I kept making at that seminar five years ago. Dick, a 40-year trader, was amazed at how accurately I was able to predict the DJIA’s intraday movements on a 5-minute live chart. So, we started talking, and soon I became a day trader. That’s when my life changed.

Learn how to close the gap between theory and practice at Dick Diamond’s September 13-16 intensive real-time trading course. Learn more about this course.

I’ve always said that if you want to become a wolf, you have to run with wolves. Once I started working closer with Dick, I began combining his oscillator-based trading techniques with my own wave analysis, and my trades began to work out. I noticed that oscillators would confirm wave counts! I finally got that key that I needed. When I would track a trading opportunity on my favorite 1-minute DJIA charts, I would wait until the oscillators confirmed the trade, too. If they didn’t, I would not pull the trigger.

Right now I’m still more of an oscillators guy, but I use wave analysis heavily from the market-timing standpoint. Sometimes, the wave count is not clear: too many interpretations. At those moments, you just have to wait. The count always becomes clear after a while, you know? But I find oscillators hugely important. When they become oversold or overbought, you can forget about the wave count: You must go with what the oscillators tell you.

But, I do think the Wave Principle comes in very handy when you need to identify the form of a market move, the price targets and the timing. For example, whenever you have a Fibonacci turn date window in the market and a completed wave pattern, that’s when you have the best calls. Oscillators, however, won’t always be confirming this. That’s why the balance in my use of Elliott and oscillators is always shifting. Sometimes its fifty percent Elliott, fifty percent oscillators, other times is 70/30; it varies.

Q: How often do you trade?

A: I trade every day. And I always come in “flat” — that’s another thing Dick taught me. I always come to the office in the morning having no bullish or bearish bias about the market. I try not to let the market news before the open sway me — instead, I look at what the wave patterns and oscillators are telling me. Usually, I trade 4-5 times a day, but sometimes none at all. You have to pick your moments.

When I see oscillators moving into an extreme territory, for me it’s like a dark cloud on the horizon: I know the “rain” is coming, and I get extra cautious and extra patient. But when oscillator readings are confirmed by the price, I know it’s going to be a good call. And if the wave pattern kicks in, that’s even better. In fact, Dick often calls me and asks for Fibonacci turn windows to time his trades.

When I first started working with Dick, I began making my own market calls and producing my own analysis. That’s when I truly came into my own. That made me even more reliable as a trader. You should never rely on someone else’s work. Make your own mistakes and your own good calls.

Q: You mentioned you trade the DJIA futures. Do you trade anything else? And why the DJIA futures and not the more popular S&P?

A: I follow the S&P, but I prefer to trade the DJIA futures. For me, the S&P’s 1-minute charts just don’t work the same way as the Dow’s. For some reason, the S&P’s 500 stocks move less clearly than the Dow’s 30 — which move with an amazing clarity, from Elliott wave standpoint. In that timeframe, the Dow rarely breaks the rules. I know most people trade S&P and not the DJIA… but for me, it works. As for other markets, commodities, I find, are harder to follow with wave analysis and oscillators. But the euro trades beautifully.

Q: Anyone can have a lucky streak in the market, but statistically, only about 5% of all traders make money consistently. Interestingly, most of those guys say that the way they trade is very simple — what separates them from the pack is the mental toughness to stick with their chosen system, whatever it is. Do you think trading aptitude is something you’re born with, or can you learn it?

A: You can definitely learn trading — if you are born curious. When I was a kid, my uncle told me that in life, you have to find something you love and do your best at it. If you have curiosity, you will find that thing. Elliott wave works for me, and I love it, and I can spend hours looking at wave patterns.

But it’s not all about oscillators and wave counts. If you have no discipline and control over your emotions, forget it. You can have no control over your emotions and be a good analyst, but you’ll never become a good trader until that happens. That, by the way, is also something Dick teaches in his course. He’s done it for 40 years, he should know, right? Even now, I sometimes look at the Dow and get excited, but Dick tells me to stay calm. Wave analysis doesn’t teach you emotional control, but Dick in his course does. But let me tell you, like anyone else, we have bad days and good says, and Dick sometimes has to put me back together at the end of a tough trading session.

Like I said, that’s what his course if good for: to close that gap between your being an analyst and a trader. I know many of your subscribers are already EW experts, they follow the rules and everything, but they haven’t closed that gap.

Q: How many months in a year do you trade? Is your mind on your trading 24 hours a day, or do you purposely take time away from the office to relax?

A: I do try to relax. Since 2001, I’ve taken 1-2 regular vacations per year. But once you learn the waves and find your trading method, following the markets becomes a pleasure. I consider myself the “son” of two guys: Bob Prechter, the grandmaster market analyst, and Dick Diamond, the grandmaster trader. Like I said, if you want to become a wolf, you have to run with wolves. My “wolves” are Dick and Bob.

Your Forex Broker may be screwing you. Your Broker knows where your stop loss orders are set and may be triggering them intentionally (called “running the stops”), or they may be modifying your account to widen your spreads in order to pad their pockets with extra commissions. This doesn’t have to happen! You can stop it now and protect yourself 100% from dishonest Forex Brokers.

All the training videos are now on YouTube. A few had to be edited for time or split into 2 parts because of the YouTube time restriction.

Here is the URL:

Training Videos on YouTube

A few people had reported that they were not able to view the training software videos from the download pages so this should take care of the problem.

If you subscribe to the channel you will get an email notice of new videos when they are posted. I plan on doing a few new videos on reversal bars so it may be worthwhile. The narrator is a stiff but the content is still useful.