The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Waving at the Future

02/20/2020

In the early mists of time, high priests could predict the future by reading the entrails of a chicken, lamb, or goat.  From a mess of goat guts, they could see the future.

“Technical” analysts look at price movements of stocks to rationalize the buy-and-sell decisions of investors.  Sometimes called “chartists”, they don’t even need to know the name of the stock or the business it is in.  They can see the future by looking at share prices in the past.

Ralph Elliott was an accountant when he wrote “The Wave Priniciple” in 1938.  He argued that investor motivations are synthesized in per-share price movements and that changes in direction could be gleaned from that.  During a bullish market, there are five legs – three up and two down.  During a bearish market, there are three legs — two down and one up.  Once you identify the fifth up-leg, which is usually the longest, you know you’re approaching a peak.  There are some other rules, such as when each succeeding low is higher than the last low on the upswing and the opposite on the downswing.  (Its not as confusing as that sounds, I promise!)

The “buy-and-hold” philosophy is very conventional these days, but some investors don’t have the stomach for that.  One technique for measuring the severity of expected downturns is called the Fibonacci Retracement, which finds magic in nautilus shells and in the number of exactly 61.8 — go figure!  To complicate it even more (if that’s possible), Elliott Waves often occur within bigger Elliott Waves.  Finding those mini-waves is indeed like reading goat guts!

Enthusiasts debate whether Elliott Waves are more reliable for individual stocks or the market at large.  For what’s its worth, it currently indicates the S&P should continue upwards to the 3,600 point, compared to about 3,385 now.  In other words, the bulls are still running . . .

The Elliott Wave is interesting to me, only because it colors investment decisions of others.  I haven’t found mechanistic price movements tell me much about “black swans” or elections.

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