Elliott Wave analysis paints big pictures that often give traders and investors the information they need to benefit from contrarian positions. Anyone who followed EWI's forecasts for the U.S. dollar at the end of 2004 learned a lot about what can happen when the world is unanimous about the trend, and you have the discipline to disagree. Bob Prechter describes what it's like to stand strong against bullish sentiment for stocks in this excerpt about stocks and currencies from his most recent Elliott Wave Theorist.
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Stocks: One-Sided Bullishness Pushes Optimism to the Max
We have been living through the longest period of one-sided bullish conviction ever, yet the Dow today is no higher than it was 18 months ago, in January 2004. (For that matter, it is no higher than it was six years ago.) Optimistic conviction has been unrelenting for seven years, pinned to the max like the needle on a tape deck with the input volume turned all the way up. Yet all that energy raging into the stock market is barely keeping it even.Pushing more energy through the system is out of the question. If the flow backs off, prices will cave in. The recent peaks of December 2004 and March 2005 exhibited as much optimism as there has been at every top since 2000, and we have it again here in mid-July….
Out-of-Control Bullishness Forcing Bears To Cave In
The sharpness of the latest rally has apparently been convincing. It has prompted long time bears to cave in publicly and friends to email us with long-term bullish wave counts. Financial television is running “bull vs. bull” debates to argue just how far up stock prices will go. At the major market top of January 1973 appeared a famous headline in Barron’s: “Not a Bear Among Them.” According to a headline in the July 8 USA Today, “Investors Have Learned Not To Panic.” This is temporarily true, and it is a highly bearish condition. This very headline suggests that a panic is coming, probably soon. Fundamentally, of course, it is false. It may as well read, “Humans Evolve into New Species.”
Stocks Acting Like a Runner Persevering in 95-Degree Heat
Admittedly, it is awe-inspiring that an exhaustion of optimism has yet to occur. The stock market has been like a long-distance runner who has vowed to continue running in circles in 95-degree heat until he dies. The Dow is at the same level it was in June and below its high of March, so the main thing working on investors’ psyches has been time. As with the dollar last year, all we can do is point out the historically one-sided technical condition and wait. Having the courage of our convictions is one thing you pay us for, and in this case there is no other option. In any meaningful sense, stocks have nowhere to go but down. The dollar resolved nicely, and so will the stock market….
Picture for the U.S. Dollar? Apply Picture of Stocks in Reverse
Speaking of the dollar, remember what happened there and apply it in reverse to stocks today. No service was more bullish than ours at the U.S. dollar’s two lows in 2004. The Elliott Wave Theorist was bullish at the January low, and The Elliott Wave Financial Forecast published a special section the month of the final bottom in December. The consensus among investors and economists was bearish to the point that nearly every commentator took further dollar collapse for granted, as if it were a fact of nature. Never have so many among the U.S. public placed so many aggressive bets against the dollar.
Did the Greenback Actually Have Nowhere To Go but Down?
After the fact, everyone seems to forget the intensity of the erroneous general conviction at the turn. Bearish sentiment toward the dollar was so entrenched that on April 5, four months after the bottom and a few weeks after the test of the low in March, The New York Times ran an unsigned editorial — meaning that it was the opinion of the newspaper’s board — saying, “The recent rally of the United States dollar notwithstanding, the greenback has nowhere to go but down. The dollar’s current uptick is just a breather in its overall downward trajectory. The dollar is heading down, no matter what.”
Forget Stocks, Think Currencies
Even we, who have spent professional lifetimes studying market timing, rarely publish language so emphatic. This type of extreme commentary was all over magazines, newspapers, the Internet and even letters from new subscribers. What happened? The dollar rose strongly for six months up to last week. Going against the crowd despite overwhelming pressure is another thing you pay us for. Let other people own stocks. The only correct investment on the buy side these days is to move safely from one currency to another.
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