The president of Elliott Wave International, Prechter may not be a household name on Main Street, but he’s widely known on Wall Street as the foremost authority on the Elliott Wave principle, a forecasting methodology used by generations of technical analysts that is based on the belief that financial markets trend in five waves, and retrace in three waves.
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Prechter is also the executive director of the Socionomics Institute, founded to study how those same wave patterns define changes in social mood and govern social events.
If the cycle is still operating, the stock market is at high risk of a sharp collapse. Near term, we’re prepared to see the Dow make one more high. But it doesn’t have to happen.’ Robert Prechter, Elliott Wave International
Elliott Wave analysis, which was devised by Ralph Nelson Elliott in the 1930s, is much more than a bunch of numbers and letters placed on a chart to denote which wave, or degree of waves, the market is traversing. Those who fully embrace it say it is the only form of technical analysis that can incorporate and explain all the other techniques used by chart watchers.
Walter Zimmerman, chief technical analyst at energy research firm United-ICAP, calls it the “grand unified field theory of chart pattern analysis.” Head-and-shoulders reversals, technical divergences, candlestick charts — they can all be explained within the framework of the Elliott Wave principle, Zimmerman said.
Based on Prechter’s analysis of where the stock market is positioned within its wave structure, he believes the bull market is in a “precarious position.”
For one, he said the sentiment indicators he follows have reflected extreme optimism for over two years. That is often viewed as a contrarian signal, because it suggests those looking to buy have already done so, leaving fewer buyers to step in if the market starts slipping.
Plus: Read more about bullish exuberance.
In addition, Prechter said a number of momentum indicators have been revealing a “dramatic lessening” in the number of stocks and indexes that have participated in the rally in recent months.
For example, when the Dow Jones Industrial Average DJIA, +1.33% reached a record closing high on Feb. 27, there were 172 NYSE-listed stocks that achieved new 52-week highs, and 31 stocks that hit 52-week lows. But when the Dow rose to it is latest record on May 19, the number of new highs had fallen to 118, while new lows rose to 38.
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Prechter’s path to analyzing financial markets started where you might least expect but in hindsight it makes perfect sense. He got his bachelor's degree in psychology from Yale University in 1971, then became a professional musician for four years, in which time his band News recorded an album, “Hot off the Press,” which was re-released on CD a few years ago.
He was already intrigued by technical analysis during that time, because his father had a subscription to Elliott Wave enthusiast Richard Russell’s “Dow Theory Letters,” and he would occasionally read them.
“I felt the way John Lennon did after he saw Elvis on screen and thought: ‘That’s a good job,’ ” Prechter recalled.
Once the music career played itself out, he started working in Merrill Lynch’s market-analysis department. By April 1976, he was writing Elliott Wave reports.
Around that time, it hit him that the waves weren’t confined to the stock market.
“Something was coordinating the tone of all kinds of social activities, including trends in pop music, movie themes, the economy, and the timing of peace and war,” Prechter said. “I figured out that waves of unconscious social mood would account for the correlation.”
The way United-ICAP’s Zimmerman describes it, Elliott Wave helps you find order in chaos. That’s because the mathematical ratio known as the Fibonacci ratio is embedded in Elliott Wave theory, which means it can be applied to any market, across any time scale.
Fibonacci is also known as the divine, or golden ratio, as it has been found to exist throughout nature, and even in outer space. Zimmerman reckons it even helps explain moods on personal and collective levels. And that’s coming from a man who started graduate school studying chaos theory and complex patterns.
Some technicians will brush off Prechter’s current bearish view on stocks, because he has had similar views during the 6.25 years that the market has been climbing. MarketWatch’s Mark Hulbert, editor of the Hulbert Financial Digest, said that over the last 35 years, a conservative portfolio that goes to cash when Prechter’s market-timing service flashed a sell signal, has produced an annualized return of 7%, compared with an annualized return of 11.5% for buying and holding.
But strategists often say that sell warnings are like yellow lights at a traffic stop—the driver still has the choice to either speed up or slow down, depending on whether he believes he can beat the red light or not. An investor that doesn’t have the luxury of long-term smoothing might be more inclined to slow down at any sign of weakness than someone with much more leeway.
Prechter said he had similar trouble with stocks in the late 1990s. Although he had predicted in the early 1980s that stocks were beginning an advance that would eventually become a bigger mania than that of 1929, the market’s bubble had inflated much more than he thought.
“Today, the stock market is in its third mania in 15 years,” Prechter said. “The historic overvaluation of 2000 has never been properly corrected. But it will be.”
Prechter has made some major calls that have ensured interest in his Elliott Wave International (EWI) analytical service has continued to grow. Examples include the call for a bear market in gold and silver in the early 1980s, and a warning just before the oil price peak in 2008 that “one of the greatest commodity tops of all time” was looming.
What started 36 years ago as a husband-and-wife operation on the kitchen table with an electric typewriter and paste-on lettering has grown into a company that employs 80 people, including 20 market analysts, covering virtually every major market worldwide, 24 hours a day. The most popular premium service is the coverage of currency markets.
EWI has published more than a dozen books, many DVDs and online videos, and offers a program from those who want to earn the designation of Certified Elliott Wave Analyst.
What pleases him most isn’t just the success EWI has had over the years, or when a market call he makes plays out.
“Our first two employees joined us 33 years ago, and are still here,” Prechter said. “That makes me happy.”
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