Prechter on The Wave Principle: This is an explanation of the Wave Principle by Robert Prechter. This text is excerpted from one of EWI’s most popular titles, Prechter’s Perspective.
What is the Wave Principle?
The Wave Principle is, first and foremost, a detailed description of how markets behave. Now, there’s probably more that is not in that sentence than is in that sentence. For instance, a detailed description of how markets behave does not refer to what outside events are occurring, such as in the fields of economics, politics, or social trends. It’s strictly a study of how human beings behave collectively in the trading arena.
What specifically did Elliott discover?
Elliott’s most important discovery was that the patterns that develop in the stock market occur at all degrees of trend. The larger patterns are made up of components that are themselves composed of smaller ones. The same patterns on a smaller scale combine to create any one of those patterns on a larger scale. The larger pattern will combine with several others of the same degree to create an even larger pattern and so on. He described in detail exactly what those patterns look like. He identified 13 of them. Only recently has data been available for general stock prices back to the late 1700s, and the patterns are there as well.
How did he label the “degrees” of trend?
Elliott began by naming a particular structure with an arbitrary label, Primary degree, a term borrowed from Dow Theory. The next larger degree he called Cycle, and the next larger Supercycle. The lower degrees he named Intermediate, Minor, and so on. We therefore have a way to refer to the degrees of trend that we are talking about.
What was the biggest degree trend he talked about?
Grand Supercycle, which he guessed dated back to the founding of the United States. Since then, more detailed stock market data has confirmed that he was right. That’s not the biggest degree, though, as all waves are components of larger ones.
You once referred to the Wave Principle as the “purest form of technical analysis.” Why?
For a hundred years, investors have noticed that events external to the market often seem to have no effect on the market’s progress. With the knowledge that the market continuously unfolds in waves that are related to each other through form and ratio, we can see why there is little connection. The market has a life of its own. It is mass psychology that is registering. Changes in feelings show up directly as price changes in the barometer known as the DJIA, or the S&P 500, or any other index. The Wave Principle is a catalog of the ways that the crowd goes from the extreme point of pessimism at the bottom to the extreme point of optimism at the top. It is a description of the steps human beings go through when they are part of the investment crowd, to change their psychological orientation from bullish to bearish and back again. That description fits the movement of any market, as long as human beings are involved, rather than Martians, who may have a differently operating unconscious mind. Since people don’t change much, the path they follow in moving from extreme pessimism to extreme optimism and back again tends to be the same over and over and over, regardless of news and extraneous events.
What is the basic path?
Very simply, Elliott recognized that movement in the direction of the one larger trend subdivides into five waves. Movement against the trend subdivides into a three-wave pattern or some variation involving several three-wave patterns. In rising markets, true bull markets, the subdivisions occur in five waves up, an up-down-up-down-up sequence. Bear markets tend to occur in three wave sequences, down-up-down. Each one of those movements has a shape and a personality. As long as you can recognize the shapes that are occurring, you have a handle on what might happen next.
But the five-wave form does occur on the downside.
Yes, but only as a component of a larger three-wave pattern. The essence of the Wave Principle is that the moves in the direction of the one larger trend are five-wave structures, while moves against the one larger trend are three-wave structures. From that, you can tell what the underlying trend is and invest accordingly.
You just go on Elliott’s description alone. Does that mean you must act without knowing what’s causing the pattern?
On the contrary, I know what is causing the patterns: human nature as it relates to a person interacting with his fellows. When you ask what outside force is “causing” the patterns, you are asking the wrong question, so you are already on the wrong path. Elliott’s description of how markets behave forces you to a conclusion about cause and effect in social events. All of the causes most people assume to be operative are not, such as the latest political speeches or the latest numbers on the economy. They are simply results of the patterns of mass human psychology.
Is Elliott’s a mechanical system?
Not really. What we’re dealing with here is the behavior of people. If the tools you work with measure something other than the behavior of people, you’ll be removed from the reality of what’s going on. One of the biggest failures, in terms of approaching the stock market, is to assume that the market is mechanical in the sense that outside action causes market reaction, such as the idea that the market “responds” to Fed policy or the trade balance or political decisions. Others have tried to reduce it to a sum of periodic sine waves, but always find that it cannot be done, because the market is not a time-repetitive machine in its essence.
From the standpoint of theory, market behavior is tied to a mathematical law, but it is just not the same type of law found in the physical sciences. From the standpoint of practical application, the Wave Principle is tracking a living system, which is allowed variation in its forms, in fact, infinite variation, but limited by an essential form. Whereas a rigid system with numbers, strict mechanical numbers, never works.
Doesn’t infinite variation imply that anything goes?
Not at all. Trees vary infinitely, but they all look like trees, don’t they? And you can tell them apart from clouds, which also vary infinitely, and buildings as well. In fact, despite infinite variability, they are amazingly similar. The same is true of market patterns.
Does knowing Elliott guarantee profits?
Only the most trained and experienced market participants can act contrarily to their natural tendencies. I have yet to meet a man who invested or traded with a completely rational program based on reasonable probabilities without allowing his greed, his fear, his extraneous opinions or his irrelevant judgments to interfere. It is man’s emotional side, particularly his social dependency, that makes him think the way his fellows do, and when he does that, he loses money in the markets. At least using Elliott, you have a basis that makes winning possible.
Most people are more interested in how the Wave Principle works than why it works. Is there any one thing people need to remember to make it work for them?
The key to Elliott Wave patterns is that the market goes three steps forward for every two steps back. If you do not get scared by the two steps back, and if you are not euphorically confident after the third step forward, you’re light-years ahead of the pack. Even then, I would add that it is one easy thing to recognize that the Wave Principle governs stock prices, while it is quite another to predict the next wave, and still another to profit from the exercise. There is no substitute for experience, so that you can learn what you feel and when you feel it, with respect to market behavior.
Jack Frost has described the Wave Principle as something that has to be seen to be believed. What does he mean by that?
The principle is complicated to express in words. With the Wave Principle, you are dealing with a phenomenon that reveals itself visually. Try describing the concept and variations of “tree” in detail to someone who’s never seen one and you’ll see that it can be a complex task. Saying, “Look! There’s one,” is a lot easier. The human brain is very good at recognizing a pattern visually. If a computer must be programmed to recognize shapes in the sky, it would be difficult to teach it the difference between a cloud and bird and an airplane. Once you have that programmed, of course, a blimp floats by and the computer is in trouble. The human brain works differently, however, and is extremely efficient at pattern recognition. If you draw out the Principle, it is much more quickly grasped. Then when you compare actual market pictures with the model, you can accept the truth more readily. It is at the perceptual level that it is best presented, then, not the conceptual.
Can you really teach it?
Sure. Video is an excellent approach, for instance. A lot of people have learned how to apply it that way. Some have trouble at first, but then say “Once I saw your video tape, I understood it all.”
What are the Wave Principle’s key strengths?
Frost liked to say, “Its most striking characteristics are its generality and its accuracy.” Its generality gives market perspective most of the time, and its accuracy in pointing out changes in direction is almost unbelievable at times.
Why does the Wave Principle work so well?
Because it is 100% technical. No armchair theorizing from economics and politics is required.
What are its biggest shortcomings?
There is one main weakness, and this accounts for just about all the problems. There are eleven different patterns for corrections. When a correction starts, it is impossible to tell in advance which pattern has begun, so you do not know how it is going to unfold. Therefore, the best that you can do is apply some of Elliott’s observations as guidelines in making an intelligent guess as to what it is. Another problem is that corrections can do what Elliott called “double” or “triple” — that is, repeat several times. Triple corrections are the largest formations possible, so at least there is a limit. These repetitions can be frustrating because they can last decades. For example, we had a 16-year sideways correction in the Dow Jones Industrial Average from 1966 to 1982. A.J. Frost and I thought it was over in 1974, and the market was ready for another bull wave. To be sure, most stocks rose from that point forward, but the Dow went sideways for another eight years in a doubling of the time element, which caused some frustrations before the next bull wave finally began on August 12, 1982.
It sounds like a chess game. The number of possibilities, and therefore the probabilities of success, vary at certain junctures.
Chess provides an excellent analogy. The market can do whatever it wants, except that it will always do it in an Elliott Wave structure. Similarly, your opponent can move chess pieces wherever he wants, except that he must follow basic rules. On the other side of the board, you still have a lot of hard thinking to do despite your absolute knowledge that pieces must move according to those rules.
Are there situations where the Wave Principle does not hold true?
No, it always holds true. But of course, it is one thing to say the markets will follow the Wave Principle and another thing entirely to forecast the future based on that knowledge. It is always a question of probabilities. Once you have hands-on experience with it, once you understand all the rules and guidelines, it is a lot like becoming Sherlock Holmes. There are many possible outcomes, but guidelines force you along certain paths of thinking. You finally reach a point where the evidence becomes overwhelming for a certain conclusion.
Have you ever had a case where you thought the probability of a certain outcome was high, say 90%, but the market went otherwise from your expectation? What did you do then?
Of course it happens. But you should never be wrong for long relative to the degree that you are trying to assess. One of the terrific things about the approach is that it’s price that tips you off. With other approaches, price can go a long way before the reason behind your opinion changes, if it ever does. No matter how difficult the pattern is to read sometimes, it always resolves satisfactorily into a classic pattern.
Can you illustrate how knowledge of “wave structure” comes into play when trading?
For instance, the bottom of the fourth wave, which is a pullback, cannot overlap the peak of the first rally. If it does, then it’s not a fourth wave. The fourth wave is still ahead of you, and the third wave is subdividing. Knowing this tenet can keep you out of a lot of trouble that an armchair wave counter would encounter. Another very basic tenet is that wave three is never the shortest. It is usually the longest. Wave three is the recognition stage when most people get aboard.
But if there is always a correct pattern, and it is only a matter of seeing it, why aren’t accuracy levels higher than the 40%, 50%, 60% or even the 80% ratios of hits to misses?
First, just because R.N. Elliott discerned that the market follows rules as in a chess game doesn’t mean you can predict the market’s next move. All you can give are probabilities. But the psychological difficulties are at least an equal impediment. Hamilton Bolton once said that the hardest thing he had to learn when using Elliott was to believe what he saw. Despite all I know, I have fallen prey to that problem more than once. The fact that even perfect analysis only results in the best probability provides the uncertainty that feeds the psychological unease. As Frost is fond of saying, “The market always leaves its options open.” So when you combine human weakness with a game of probability, the result is many errors in judgment. Nevertheless, I must stress that the ratio of success with Elliott is better than that with other approaches, and that is the only rational basis for judging its value. Besides, the inestimable value of the Wave Principle is not so much that it provides a high percentage of correct “calls” on the market, but that it always gives the investor a sense of perspective.
Is it possible that the system merely takes into account every possible pattern and thus allows the practitioner to force things into a satisfactory wave count retrospectively — but not prospectively?
No, for two reasons. First, if that were true, then there would be no record of success such as the Wave Principle has over the decades. There are numerological approaches to the market, ones based on fantasy that may as well be dealing with a random walk, and they produce worthless results, as they should. As Paul Montgomery likes to say, a good test of a theory is whether it can predict. Second, there are many non-Elliott patterns that the market could trace out if it were a random walk; but it has never done it. I have never seen a market unfold in other than an Elliott Wave pattern.
Have you ever had a sure thing — a case where the market absolutely had to go up or down?
All Elliott can do is order the probabilities, and they are never 100%. But there have definitely been times when my own mind felt that the probability was 100%. I get so excited I can barely contain myself when that happens. I’m usually right then, but not always!
Keep in mind that while one can never say that a certain event must happen, there are times when one can say that a particular market event is impossible. There’s always an alternate count, but there are certain things that can’t happen under Elliott. And that is a very useful fact.
The calls you made on stocks, bonds and gold helped you to establish yourself as a media presence in the 1980s. But one response to the record is to say that the Wave Principle is not behind your success. Some say it is gut feel or instinct, rather than the method. In other words, it’s not the theory, it’s the theorist.
You’ve always insisted that it is the Wave Principle. How can you be sure it’s giving you the edge and not the other way around?
Gut feel and instinct will get you clobbered in the market. The market is the collective gut, which means you have to be counter-instinctual to beat it. The only way to do that is with a method that takes that reality into account.
Looking in more detail at an Elliott wave, what is the progression that takes place over the course of an "impulse," which is Elliott’s term for the classic five-wave pattern?
If you watch any of these wave structures, whether over the last 40 weeks, 40 years or 40 minutes, you see the same progression recurring. After a market reaches its low, so-called strong hands — people who have been around a long time, do some buying. Psychology has passed its low point. News remains scary because it is the tangible result of the prior downtrend in psychology. That is the first wave up. Then the second wave, the correction of the first move, takes place. The vast majority of investors are convinced that wave 1 was merely a bounce in the previous bear market and that wave 2 is the beginning of the next phase of decline. Usually, the fears that were around at the actual bottom recur at the bottom of wave 2. Again, news is very dark, but the prices are ahead of news. They do not fall to a new low. From that base, wave 3 begins, which is the middle portion of the larger advance, and that third wave is almost always accompanied by increasingly positive news and "fundamentals." Those better fundamentals are the result of the increase in optimism, and they reinforce the psychological upturn. That is why wave 3, as Elliott noted, is most often the longest, strongest and broadest in the sequence. Every day, there is reason to be optimistic. All of those people who thought during waves 1 and 2 that the long-term trend was down finally become convinced that the long-term trend is up.
That change persists all the way to the top of wave 3. Then comes wave 4, which is a correction of that long third. Most people have finally become convinced by the top of wave 3 that the long-term trend is up. Wave 4 is a surprising disappointment. From the fourth wave correction low, the market stages the final wave up. The fifth wave is generally easy to recognize because the psychology tends to be more speculative and euphoric, while at the same time, the internal strength, or momentum, of the market is not as strong as it was during wave 3. The psychology goes through its final binge in the fifth wave. That’s when, figuratively speaking, the last guy puts his last nickel in, and that’s the end of the sequence.
Let’s examine one of these waves — the fifth wave — since, by your wave count, the Dow Jones Industrial Average has been in a fifth wave of Grand Supercycle, Supercycle and Cycle degree for the better part of many people’s lives. What is the profile?
The market is usually quite selective and rotational in a fifth, creating a weak upward trend or even a sideways trend in the advance-decline line. You will often see huge rises in certain individual issues, while many lag significantly. Usually in fifth waves, the general speculation is concentrated most heavily in the blue chip sector. You also generally see the market attracting new players, unsophisticated players who have been watching the bull market year after year and finally became convinced that they should be involved.
That is one reason why the market, or at least large segments of the market, become extremely overvalued. It is attracting new players who have no concept of value and are just willing to buy because they think someone else will be buying from them tomorrow. In other words, it’s an engine that is running on increasingly available fuel — which is more people with money — with its forward movement as its own end. The situation creates a speculative bubble, a chasing of paper value for quick profit. Often it is a craze that sinks very deeply into the society. We had this style of advance in the 1920s, for instance.
In this most recent fifth wave, mechanisms were put in place that fostered terrific speculation. There was the development of the stock index futures market and the very intricate options markets, with options on stocks, options on futures indexes, and so forth. There has been increased media coverage as well. In fact, it’s an incalculable increase. Television, for instance, didn’t report on business or markets prior to the 1981 launch of Financial News Network, which is now CNBC. It has been so successful that more all-business news networks are about to be launched. It’s a great major top signal.
In following in Elliott’s footsteps, you moved out onto some relatively unexplored intellectual terrain. Your idea that history reflects the Wave Principle is one of them. Your identification of cultural trends as reflective of the overall mood is another. Regardless of the subfield you discuss, though, you reiterate that "mass psychology is structured," and that Elliott identified the structure. After witnessing this movement in the stock market data and its apparent constancy, both you and Elliott have concluded that collective human sociology is not random, but travels a path as if following a law of nature, like gravity or thermodynamics. If this is true, then science, the study of nature, should supply some corroborating testimony. Is there anything going on in science to support you on this?
During the past 20 years, several scientists have reintroduced the idea of the fractal geometry of nature. The recent work has been pioneered by Benoit Mandelbrot. His computer studies revealed that many processes in nature, while at first appearing chaotic, are actually very structured, but in ways most people have never considered. The component structures are not simple geometric forms like circles and squares; they may be very jagged constructs. But the components of the jagged pattern are jagged to the same degree as the larger pattern itself. If you take a stalk of broccoli as a common example, and you break off a piece near the top, the piece you break off looks exactly like a stalk of broccoli. If you break off a smaller piece from it, it also looks exactly like a stalk of broccoli — just smaller. The components take the shape of the whole. What’s exciting to me is that Elliott noticed the same thing about stock market prices half a century before Mandelbrot.
From an Elliott wave perspective, there are also differences within the same market. Advances and declines, bull and bear markets, take different shapes. Is this also true of the psychology in bull and bear markets?
The problem with declines is that they can follow a lot more paths, because there are numerous corrective patterns. At the start of a bear market, all you have are hints. You have little certainty about which one of the shapes is going to take place. All you can say is it is going to be rough for a while. Bob Farrell says that a bear market goes from caution to concern to capitulation. In most patterns, that’s true, but in contracting triangles, it goes the opposite way: capitulation, concern, then caution, or at least complete disregard.
Bear markets tend to bring bad news in one form or another, regardless of their shape. Triangles, for instance, are seemingly moderate sideways patterns. Yet there is almost always a scary event or point of focus in wave e, the last wave, that keeps you out of the next advance. In a large bear market, wave e of an upward triangle correction usually features a bullish event that gets you to buy just before the rug is pulled. However, the worst news — the news that turns out making the history books — usually awaits the end of a large bear market. Bull markets do it again, only the other way around. They save the best news for last. Just look at the amazing world news of the past six years: Communists giving up power, old enemies signing peace pacts, the implications of the computer revolution.
In real time, the Wave Principle is a lot more complicated than it sounds when you simply describe the types of waves. Dealing with corrections is particularly difficult. What makes it so much more difficult to pinpoint your position in a corrective wave than an impulse wave?
Five-stage movements are generally uniform, with very few exceptions to the rule. When prices are moving with the trend, they are moving very freely, and you get the full five-wave structure. In that case, analysis is not that much harder than it sounds on paper. But when the short-term trend is fighting the intermediate-term trend, it is going against the tide. Corrective processes by their very nature are fighting the larger flow of price movement. When the market is fighting the flow, it can only go so far. It never develops the five waves. In 10 years of studying the market, I’ve never seen an exception.
Is this also why there are several different ways that corrections can unfold?
Corrections are the point at which the out-flowing river meets the incoming tide. The jumble that results is far less uniform than the river’s flow or the tidal force. As a result, knowing exactly which of the corrective patterns has begun is impossible at the outset. The analyst knows that moves against the larger trend never develop into full five waves, but he does not know precisely which non-five wave structure it will be. Nevertheless, R.N. Elliott’s compilation of the list of countertrend patterns is the product of brilliance. Though there are a number of them, he described them clearly, and that is of substantial value in practical application.
Is there a simple guideline that a novice can follow to help him weather corrective Elliott Wave patterns?
Sure. During these periods in which Elliott Wave analysis is the most difficult, do nothing. It is not necessary to forecast all the time unless you are in the business, like I am. So just wait for the pattern to clear and then take action.
Some analysts get annoyed at this. They say, "That’s the problem with the Wave Principle. It doesn’t work in bear markets."
Well, tough break! Bear markets are what they are. If someone objects to what the market is, then he is arguing with nature and the reality of markets. "Less predictable" does not mean impossible, indecipherable, disorderly or random, either. You can form some useful opinions about corrections. The ultimate price goal of a fourth wave correction, for instance, can be forecast with more accuracy than most impulses. What’s more, it is the Wave Principle that tells the analyst when to expect less predictability. So your overheard "objection" is not a problem with the Wave Principle, much less a revelation of where the Wave Principle cannot be applied. That the Wave Principle recognizes the differences in market behavior is one of its greatest strengths.
What about those who say investing with impulse waves, or in the direction of the trend, isn’t that hard anyway?
Tell that to 83% of the professional money managers who under-performed the Standard & Poor’s or the Dow Jones Industrial Average for three years in the heart of the bull market of the 1980s. Tell it to the 98% of money managers who got killed in the last downward impulse in 1973-1974. Tell that to the 99% of the public who lose money in their investments over the long run. I, for one, recognize the fact that successful investing is extremely difficult. Anyone who tells you it is not is headed for a fall.
Can Elliott save you from a fall?
It can save you from a catastrophic loss. It is one of the few concepts I know that allows the investor to get out of a losing position with a small loss for an objective reason. The alternatives are to ride it out or simply get out because an arbitrary "stop" level has been reached, which nine times out of ten gets you out just before the big gains are due.
Monday, April 22, 2002
Thursday, April 11, 2002
Commanding Heights
If you have a chance, check out the final segment of Commanding Heights on PBS tonight (8 pm). This series is based on Daniel Yergin's latest book, Commanding Heights. Yergin authored The Prize that chronicled the history of the oil patch.
http://www.pbs.org/wgbh/commandingheights/
http://www.pbs.org/wgbh/commandingheights/
Friday, March 22, 2002
The Future of Petroleum
Some positive insite on the future of petroleum....
http://www.financialsense.com/series3/part1.htm
http://www.financialsense.com/series3/part1.htm
Tuesday, March 19, 2002
Black Gold
If you didn't like real gold, check out some
insight on "black gold"!
http://www.financialsense.com/series3/part1.htm
Oil price trends:
http://futures.tradingcharts.com/chart/CO/W
http://www.wtrg.com/prices.htm
Natural Gas price trends:
http://futures.tradingcharts.com/chart/NG/W
insight on "black gold"!
http://www.financialsense.com/series3/part1.htm
Oil price trends:
http://futures.tradingcharts.com/chart/CO/W
http://www.wtrg.com/prices.htm
Natural Gas price trends:
http://futures.tradingcharts.com/chart/NG/W
Monday, February 25, 2002
The Wierd Stuff
It's amazing to me how many people invest totally blind and don't spend the time to research. I can't say that my research has made me any money though!! The XAU did have a great run two weeks ago. I'm still pessimistic. I believe that the accounting woes are one of the mysterious forces that will keep the market down until mid-2003.
Too much wierd stuff going on....
Too much wierd stuff going on....
Friday, February 22, 2002
There's Gold in Them There Hills!!
some light reading for the weekend!!!
http://www.financialsense.com/stormwatch/oldupdates/2002/0215.html
Have a great weekend!
http://www.financialsense.com/stormwatch/oldupdates/2002/0215.html
Have a great weekend!
Tuesday, January 29, 2002
The Color Of Oil
Jim Puplava interviewing Professor Ronald Oligney:
JIM: Looking at the short and the long-term, in your book you wrote that if one were looking at one area to invest in over the next decade to create wealth, energy would be one of those areas. Do you still feel as strongly as you did when you wrote the book?
RON: For sure. With the clear recognition that with the downturn in the Stock Market, energy companies will be punished as badly as anyone else, and maybe worse in a lot of cases. I am personally investing at the moment in a lot of energy issues. I believe it's ridiculous how low some of those are trading and they're going to make a lot of money over the next years. It's certainly a growth business when you look forward. The weak players have largely fallen out. The P/E ratios are trading ridiculously low, the stock valuations compared to cash generation seem to discount the future value of the stocks, when in fact, they're going to be going up, not down. So I feel like there's very solid base for investment there. Certainly that's where I'm putting my money.
JIM: The other thing that strikes me about the industry, if you take a look at the majors, the majors are sitting on 40 billion dollars of cash right now. With multiples this low and price-to-cash flow ratios this low; we've certainly seen a series of acquisitions in the natural gas area. I would not be surprised, I don't know if you would agree with me, that some of the big guys, in trying to replace their reserves, have got to be looking at how cheap these stocks are selling. We're bound to see more takeovers.
RON: That's really inevitable. Of course, that becomes a self-fulfilling prophecy, as you are no longer competing with a long tail of companies that are out there eroding your market value by producing pots of reserves all over the place. It has an effect of lessening the activity and therefore decreasing the supply and therefore increasing the price. So, in some ways, that's why these majors are really in no panic whatsoever to invest and even to build a pipeline from Alaska. You can tell Exxon this is urgent, you need to build this pipeline, but why would they respond to that. Less gas means higher price. They'll wait until they can make a profit; it's not a real problem for them.
JIM: All right, professor, you have a good evening. The name of book is The Color of Oil, written by Michael Economedes and my special guest today, Professor Ronald Oligney.
An additional note from Jim --
Something to think about... a refinery takes 10 years to come on line. It takes 4 years to draft the plans and 6 years to actually build the structure. What would happen to oil prices if the next terrorist attack destroyed even one refinery?
THE ENTIRE INTERVIEW:
http://www.financialsense.com/transcriptions/Oligney.htm
JIM: Looking at the short and the long-term, in your book you wrote that if one were looking at one area to invest in over the next decade to create wealth, energy would be one of those areas. Do you still feel as strongly as you did when you wrote the book?
RON: For sure. With the clear recognition that with the downturn in the Stock Market, energy companies will be punished as badly as anyone else, and maybe worse in a lot of cases. I am personally investing at the moment in a lot of energy issues. I believe it's ridiculous how low some of those are trading and they're going to make a lot of money over the next years. It's certainly a growth business when you look forward. The weak players have largely fallen out. The P/E ratios are trading ridiculously low, the stock valuations compared to cash generation seem to discount the future value of the stocks, when in fact, they're going to be going up, not down. So I feel like there's very solid base for investment there. Certainly that's where I'm putting my money.
JIM: The other thing that strikes me about the industry, if you take a look at the majors, the majors are sitting on 40 billion dollars of cash right now. With multiples this low and price-to-cash flow ratios this low; we've certainly seen a series of acquisitions in the natural gas area. I would not be surprised, I don't know if you would agree with me, that some of the big guys, in trying to replace their reserves, have got to be looking at how cheap these stocks are selling. We're bound to see more takeovers.
RON: That's really inevitable. Of course, that becomes a self-fulfilling prophecy, as you are no longer competing with a long tail of companies that are out there eroding your market value by producing pots of reserves all over the place. It has an effect of lessening the activity and therefore decreasing the supply and therefore increasing the price. So, in some ways, that's why these majors are really in no panic whatsoever to invest and even to build a pipeline from Alaska. You can tell Exxon this is urgent, you need to build this pipeline, but why would they respond to that. Less gas means higher price. They'll wait until they can make a profit; it's not a real problem for them.
JIM: All right, professor, you have a good evening. The name of book is The Color of Oil, written by Michael Economedes and my special guest today, Professor Ronald Oligney.
An additional note from Jim --
Something to think about... a refinery takes 10 years to come on line. It takes 4 years to draft the plans and 6 years to actually build the structure. What would happen to oil prices if the next terrorist attack destroyed even one refinery?
THE ENTIRE INTERVIEW:
http://www.financialsense.com/transcriptions/Oligney.htm
Thursday, January 17, 2002
Exploring New Territory
I ventured into new territory today and bought the XAU (gold/silver index).
It should be another educating investment!
It should be another educating investment!
Saturday, November 24, 2001
The Life Story of R.N. Elliott
The R.N. Elliott story
Here's the story of the famed R.N. Elliott, the business analyst who turned market analyst. This article article orginally appeared as a three-part series in the September to November 1994 issues of Futures magazine.
By Robert Prechter
A man's life, like a piece of tapestry, is made up of many strands, which interwoven make a pattern; to separate a single one and look at it alone not only destroys the whole, but gives the strand itself a false value. - Learned Hand
Ralph Nelson Elliott was that rarest of breeds, a true scholar in the practical world of finance. As you read the story of his life, you may be intrigued that a theory so unique, when compared to other methods of market analysis at that time and even those of today, could have been developed so late in life by a man not of Wall Street background. Financial analyst Hamilton Bolton accurately described the enormity of Elliott's feat when he said that "he developed his principle into a rational method of stock market analysis on a scale never before attempted."
Wave one The formative years Ralph Nelson Elliott was born July 28, 1871, in Marysville, Kan. His family tree featured some distinguished Americans, including his maternal great-grandfather Jonathan Hamblett, who fought in the Battle of Bunker Hill, and his paternal grandfather Hugh Elliott, a veteran of the War of 1812.
By the end of 1880, young Ralph Elliott had moved with his parents and older sister to San Antonio, Texas. During his teen years, he learned to speak and write Spanish fluently and developed a love for Mexico, 150 miles to the south. In 1891, at the age of 20, Elliott left home permanently to work on the railroads in Mexico at the height of North America's great railroad boom. He stayed there throughout his early 20s, where he was employed variously as a lineman, train dispatcher, stenographer, telegraph operator and station agent.
Around 1896, Elliott entered the accounting field (his educational path is unknown). Because he had already learned the industry from the bottom up, he developed the specialty of railroad accounting. In 1903, he married Mary Elizabeth Fitzpatrick (1869-1941), a New Yorker. For 25 years, Elliott held executive positions primarily with railroad companies in Mexico and Central America.
When later recounting a number of personal anecdotes in an analysis of the Latin American region, Elliott revealed his experiences to be more adventurous than one might assume, given his profession. For example, he recalls an incident indicating he was an accomplished horseman. He also described local styles of living that reflected great affluence and luxury, as well as abject poverty and squalor. Though the Elliott's often socialized with the well-to-do, he also saw instances in which "squirrels, lizards, parrots, foxes and even snakes were cooked and eaten with evident gusto." These observations could not have been made by a man who spent all his time in comfortable hotels or corporate offices. Not surprisingly, photos taken in his 40s show a man with a sturdy frame, a hardy appearance and an air of self-assurance, all of which well served Elliott's active life.
As Elliott practiced his profession, his corporate positions became increasingly important. His expertise was much broader than simply accounting. Indeed, he stated flatly in one article, "I do not like accounting, but I do like the work I am doing," which was business organization. He financially reorganized numerous corporations by installing new systems of record keeping, anticipating future expenditures and applying a principle of percentage allocation of revenues, which in another magazine article he called "the only sane method of controlling any business successfully." Much like an independent business consultant, Elliott ultimately served many clients, although his approach was to sign on with companies one at a time, remaining with each until restructuring was complete. Over the years Elliott earned a reputation as an expert business organizer.
The Elliotts might well have remained in Mexico for the rest of their lives, but circumstances ultimately forced their return to the United States. Beginning in 1911, Mexico experienced a series of violent revolutions that extended over the next several years. Eventually, civil strife in the country reached a crisis point, and in June 1916, in Elliott's words, "when the President [Wilson] ordered all Americans out" of Mexico, he complied and returned with his wife to Los Angeles.
Wave two Retrenchment and consolidation Having been dislodged from his longtime area of work and residence, Elliott appears to have undergone a period of dissatisfaction with his situation. Over the next four years, he changed jobs twice, investigated two others, and several times planned to return to Latin America.
Elliott's abilities were widely known and highly regarded. One position he considered accepting in Cuba was offered to him in an urgent cable that read in part, "Your services badly needed." He later was offered a position with the Cuba Railroad Co. despite the fact it had been accepted by someone else. As the company's vice president and general manager wrote to Elliott, "If we thought you would come, we would notify this party the offer to him was withdrawn." Such energetic solicitations for Elliott's services weren't unusual. Apparently, he was the most talented bilingual accountant and corporate reorganizer available to these Latin American companies.
Unafraid of the political climate, Elliott was back in Mexico in 1918, working as an auditor for the U.S.-owned Pierce Oil Corp., while his wife resided in Asheville, N.C., far from potential danger. Finally, in early 1920 the Elliotts moved to New York City. He may have moved there because of a corporate transfer or to please his New York-born wife. Whatever the reason, the move marked an abrupt change in Elliott's life. Soon afterward, he quit trying to find employment and residence in Latin America. Apparently, in New York, Elliott had found another place that suited his adventurous nature.
Wave three Productivity and progress Elliott, now in his early 50s, maintained a remarkably busy schedule over the next seven years. Later letters to Charles J. Collins reveal that he traveled to Canada, Germany, England and France, though for what reason (personal or business) is unknown. His largest company reorganization outside the railroad field was Amsinck & Co., an export-import house of 500 employees. During this period, Elliott also developed a second specialty as a business consultant to restaurants, cafeterias and tea rooms. To promote his new specialty, Elliott joined the editorial staff of the New York-based monthly business magazine, Tea Room and Gift Shop, in the summer of 1924.
Though the term "tea room" is now quaint, in the 1920s tea rooms were a booming business, and their popularity spread rapidly to the point that entrepreneurs from experienced restaurateurs to housewives were trying their hands at them. Tea Room and Gift Shop boasted 3,000 professional readers around the world. Elliott's arrival to the magazine was marked with some fanfare, with nearly a full page devoted to introducing him to its readers. His monthly column discussed what a Department of Commerce bulletin from the time called "scientific management," and argued that accounting was "just coming into its own" and becoming far more than just bookkeeping. "What I am trying to do," he summarized, "is help you make money," a goal that would later make stock market forecasting an attractive vocation.
The esteem with which Elliott's column was held in the restaurant accounting and management field is reflected by a 1924 invitation from Columbia University to speak on the subject. Elliott had to decline the invitation, as he was again out of New York on business.
Elliott's aggressive mobility and corporate service over the years occasionally brought him into contact with influential people in the academic and political world. One of these contacts was Dr. Jeremiah Whipple Jenks, a distinguished lawyer, academician, political advisor and author of nearly two dozen books on politics, social issues, religion and business. He also had served on the board of directors of several railroads, including the Pacific Railways of Nicaragua. Elliott undoubtedly met Jenks through professional association due to their common interests in the railroad industry, finance and Central America. Their friendship ultimately proved fortuitous, providing Elliott a fascinating opportunity.
In 1912, the long-standing liberal government of Nicaragua was overthrown by a coup. The U.S. Marines entered the country to effect a turnover of administrative control to the U.S. government for the stated purpose of protecting American interests in Nicaragua. After 12 years, the U.S. State Department tired of its role and appointed the High Commission of Nicaragua, of which Jenks was a member, to advise it on how to help stabilize the Nicaraguan government enough to allow the U.S. Marines to withdraw. Jenks was commissioned to establish a new banking system in the country.
At Jenks' recommendation, Elliott was chosen by the State Department for the post of chief accountant for Nicaragua. On Dec. 18, 1924, Elliott met with Secretary of State Charles Evans Hughes in Washington, D.C., to receive his formal appointment and instructions. He arrived in Managua in February 1925. Elliott then applied his experience in corporate reorganization to arranging the finances of an entire country.
Though originally scheduled to stay as long as two years, Elliott served in his official government position only until June of that year, when the U.S. extricated itself from Nicaragua. At that time, the U.S. recalled all State Department appointees as well as the Marines under the assumption that calm and order had been sufficiently restored. Following a brief return to New York, Elliott moved to Guatemala City in August to assume another major corporate position: general auditor of the International Railway of Central America, a U.S. company whose stock was traded on the New York and London Stock Exchanges. It was the last professional position R.N. Elliott held in his longtime field.
***
While serving with the Central American railway system in his last corporate executive position, R.N. Elliott wrote a comprehensive book, expanded from his magazine articles, entitled Tea Room and Cafeteria Management, published in August 1926 by Little, Brown & Co. The first favorable reviews appeared in The New York Herald Tribune and The New York Times Book Review, which commented "Mr. Elliott writes with authority upon all these matters because of his wide and varied business experience and observation." Ads referred to Elliott as "an expert organizer," an ability which was later manifest in his exposition of the Wave Principle. In the book, Elliott referred to business cycles as "the ebb and flow of circumstance," a phrase that uses the liquid metaphor he later called "waves."
This book announced Elliott's return to his career as a restaurant management specialist. He left a position (that in today's dollars paid $170,000 per year after taxes) and returned to New York with a definite goal in mind: to promote the book and cement his stature as the preeminent consultant in the field. From his temporary base at the Wolcott Hotel, Elliott issued numerous communications to his publisher regarding the book's promotion.
As important as Elliott's professional activities were to him, they were no longer his only passion. The State Department appointment in Nicaragua had focused his talent for problem solving in a new realm: politics. Elliott brought another project to the attention of a publisher, as revealed in a letter residing in State Department files concerning a second book he had written: The Future of Latin America. This 100-page manuscript, which Elliott forwarded to the State Department, constituted about half the planned book. It was eventually filed in the U.S. National Archives and discovered 67 years later during research for this biography.
The purpose of Elliott's treatise was to analyze the economic and social problems of Latin America and offer proposals for creating economic stability and lasting prosperity in the region. Elliott recognized that the chief obstacles to economic progress in Latin America were a staggering burden of debt and a cavalier attitude toward repayment.
Elliott outlined a comprehensive plan to be implemented "whenever a Latin American country approaches the United States with a request for financial or political aid." The plan involved U.S. assistance in the issuance of national debt payment bonds, the issuance of U.S. guaranteed bonds to pay outstanding debt, tax reform infrastructure development, civil service reform and public information campaigns in both Latin America and the United States.
In many ways his proposed program resembled later efforts such as the "Good Neighbor" policy of the Franklin D. Roosevelt administration and the more recent pro-development policies of the World Bank. Certainly, Elliott earned the respect of the Coolidge administration, as an internal State Department letter dated Feb. 2, 1929, listed him as a potential appointee for another government post in Nicaragua.
Whatever political influence Elliott's ideas for Latin America may have had, it is of secondary importance to Elliott's later achievement in discovering the Wave Principle. In that regard, The Future of Latin America is primarily meaningful in revealing a mind that was comfortable assimilating mountains of detail while holding the big picture in perspective, a prerequisite ability for discovering and codifying the Wave Principle. One passage in The Future of Latin America in particular shows Elliott's disposition to see patterns in the nature of things:
"The preceding chapters may have led the reader to the conclusion that the problems of the United States and of Latin America lend themselves to mutual solution. By a seeming coincidence, but what may well be a provision of nature working in accordance with laws not yet properly understood, all those things which the United States lacks are to be found in profusion in Latin America, and the needs of Latin America are such as the United States is best fitted to provide for."
Here Elliott implies that nature tends toward balance, in which scarcity of one sort is countered by abundance of another sort. This idea hints at the rhythmic, or dynamic balance he later found in the stock market.
With one book sold and a new one in progress, Elliott had two promising reasons to return to the United States. But there was a third reason: Elliott suffered from a severe alimentary tract illness caused by the organism amoeba histolytica. Though Elliott's lifestyle had been adventurous for decades without serious repercussion, time and chance caught up with him. The United States offered promise of an expert medical review.
By 1927, Elliott had returned to Los Angeles to adopt a more settled lifestyle after 36 years of intense work, travel and hotel living. Having left behind all his old business contacts, he concentrated on relocating his consulting business while attempting to recover from his illness. Curiously, for a man who later connected the Fibonacci sequence of numbers to human life, this change of careers and lifestyles occurred when Elliott was 55 years old, 21 years before his death.
Wave Four Elliott's reputation, built upon a distinguished career, his new book and a long list of references, was once again soaring. Book reviews remained favorable. The National Restaurant Association invited him to speak in Buffalo, N.Y. "The cost of my service," said one of his advertisements, "comes out of additional profits." With that guarantee, he was rapidly securing a sufficient number of clients in his new location.
Just when Elliott's future appeared its brightest, disaster struck. Instead of recovering from his illness, Elliott relapsed. By 1929 his affliction had developed into a debilitating case of pernicious anemia, leaving him bedridden. The adventurous and productive Elliott was forced into an unwanted retirement. Several times over the next five years he came close to death. His photograph in Financial World magazine a decade later shows that the relentless affliction took its toll, leaving Elliott much thinner than in earlier years.
Elliott needed something to occupy his mind while recuperating between the worst attacks of his illness. He then was living through the most exciting period in U.S. stock market history: the peak years of the roaring bull market of the 1920s, and immediately thereafter the most dramatic bear market crash on record. These events sparking his interest, he read Robert Rhea's 1932 book, Dow Theory, and became one of the first subscribers to Rhea's stock market service, "Dow Theory Comment." It was around this time that Elliott turned his full attention to studying the behavior of the stock market.
The discovery Like the Dow Theory genius Robert Rhea, who suffered from tuberculosis and was bedridden at the time, Elliott, who spent long hours on his front porch recuperating and studying, began to make some observations concerning the movement of stock prices. His decision to look for patterns in aggregate stock price movement was undoubtedly prompted by exposure to the tenets of Dow Theory. However, Elliott's ultimate discovery was his own. Investigating the possibility of form in the marketplace, he examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. He constructed the hourly charts from a data series that began for the Dow Jones Industrial Average Oct. 5, 1932, and the half-hourly charts from figures he collected off the tape in the trading room of a brokerage house. Elliott was fulfilling a mission he had enunciated for all responsible men in his manuscript on Latin America: "There is a reason for everything, and it is [one's] duty to try to discover it."
In May 1934, two months after his final brush with death, Elliott's observations of stock market behavior began coming together into a general set of principles that applied to all degrees of wave movement in the stock price averages. Today's scientific term for a large part of Elliott's observation about markets is that they are "fractal," coming under the umbrella of chaos science, although he went further in actually describing the component patterns and how they linked together. The former "expert organizer" of businesses had uncovered, through meticulous study, the organizational principle behind the movement of markets. When Elliott applied his principles over the next several months to expectations for the stock market, he felt, as he later put it, "something like the inventor who is trying to become proficient as an operator of a machine of his own design." As he got more proficient in the application of his principles and corrected initial errors in their formulation, their accuracy amazed him.
At this point, Elliott's finances were at a precarious low due to the expenses of his illness, his inability to pursue his accounting business, a dependent wife and several investments that had suffered in the 1929-1932 market crash. His depleted financial condition, his developing fascination with the stock market and his discoveries combined to prompt Elliott's decision to undertake a new profession. He decided to "begin all over again," as he put it, "especially in work that I like, which is half the battle." So, at the age of 64, Elliott launched his new career and started what he later referred to as "Wave number five of my own life."
By November 1934, R.N. Elliott's confidence in his ideas had developed to the point that he decided to present them to at least one member of the financial community. For quite some time, Elliott had subscribed to a market service founded and edited by Charles J. Collins and published by Investment Counsel Inc. of Detroit. Elliott felt he had learned enough about Collins through his stock market publication to trust him with his discovery. This assumption, to Elliott's advantage, proved correct.
On Feb. 19, 1935, following an exchange of letters, Elliott mailed Collins 17 pages of a treatise entitled "The Wave Principle." The first page contained Elliott's statement of the utility of the Wave Principle: "A careful study of certain recurring phenomena within the price structure itself has developed certain facts which, while they are not always vocal, do nevertheless furnish a principle that determines the trend and gives clear warning of reversal."
On the art of application, he commented, "waves do not make errors, but my version may be defective. The nearer one approaches the primary law, the less errors will occur." Referring to the repetition of the five wave pattern in the stock market, Elliott concluded, "Possibly the reason why I have not yet, and possibly never will know why this series occurs is because it is a law of nature. The laws of nature, and incidentally economics, are ruthless, which is as it should be."
Collins had put off the numerous correspondents who continually offered him systems for beating the market by asking them to forecast the market for a while, assuming that any truly worthwhile system would stand out when applied in current time. Not surprisingly, the vast majority of these systems proved to be dismal failures. Elliott's principle, however, was another story.
The Dow Jones averages had been declining throughout early 1935, and Elliott had pinpointed hourly turns by telegram with a fair degree of accuracy. In the second week of February, the Dow Jones Rail Average, as Elliott had predicted, broke below its 1934 low of 33.19. Advisors were turning negative and memories of the 1929-32 crash were rekindled as bearish pronouncements about the future course of the economy proliferated. The Dow Industrials had fallen about 11% and were approaching the 96 level, while the Rails (a more important average then) had fallen 50% from their 1933 peak to the 27 level.
On Wednesday, March 13, 1935, just after the close of trading, with the Dow Jones averages finishing near the lows for the day, Elliott sent this famous telegram to Collins: "NOTWITHSTANDING BEARISH (DOW) IMPLICATIONS ALL AVERAGES ARE MAKING FINAL BOTTOM."
Collins read the telegram on the morning of the next day, Thursday, March 14, 1935, the day of the closing low for the Dow Industrials that year. The day prior to the telegram, Tuesday, March 12, marked the 1935 closing low for the Dow Jones Rails. The 13-month corrective wave was over, and the market immediately turned to the upside.
Two months later, as the market continued on its upward climb, Collins, "impressed by (Elliott's) dogmatism and accuracy," proposed that Investment Counsel subscribe to Elliott's forecasts and said, "we are of the opinion that the Wave Principle is by far the best forecasting approach that has come to our attention."
Elliott responded with a proposal that Collins subscribe to his market timing service for a period of two years. If Investment Counsel was still satisfied with Elliott's success after that period, then Collins, whom Elliott considered a master writer, would prepare a book on the Wave Principle suitable for public distribution. For the next two years Collins monitored Elliott's calls on the market. His accuracy remained true, and at the end of the second year, in March 1937, Collins began working on the book, which was based on Elliott's original treatise. The Wave Principle was published August 31, 1938.
The first chapter of The Wave Principle states the following:
"No truth meets more general acceptance than that the universe is ruled by law. Without law, it is self-evident there would be chaos, and where chaos is, nothing is...Very extensive research in connection with...human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern...The stock market illustrates the wave impulse common to social-economic activity...It has its law, just as is true of other things throughout the universe."
Within weeks after the publication of his book, Elliott packed up his belongings and moved with his wife to Columbia Heights, Brooklyn, a short subway stop from Manhattan's financial district. On Nov. 10, he published the first in a long series of Interpretive Letters, which outlined and forecasted the path of the market in terms of the Wave Principle. He issued the one- to four-page letters irregularly ("as the occasion requires"), ranging from three to seven issues annually between Nov. 10, 1938, and Aug. 6, 1945. Elliott initially priced his Interpretive Letters at $60 per year and continued to sell his monograph, which he called "the Treatise," for $15. Ralph Elliott was finally back in the saddle, and as independently in business as he had planned 11 years before.
A regular feature writer for Financial World magazine, Collins contacted the editors and introduced them to Elliott and his work in early 1939. Elliott was commissioned to write 12 articles on the Wave Principle, which were published between April and July. These articles established Elliott's reputation with the investment community.
After the publication of the Financial World articles, Elliott began writing in-depth follow-up essays that quickly evolved into a formal Educational Service, which he published from 1940 to 1944. One of Elliott's earliest "Educational Bulletins" was a groundbreaking work that lifted the Wave Principle from a comprehensive catalog of the market's behavioral patterns to a broad theory of collective human behavior not before seen in the field of economics and sociology.
Since 1935, Collins had sent Elliott books discussing natural occurrences of the Fibonacci sequence, a mathematical basis for patterned growth known and admired for centuries. Collins was apparently the person who first observed that totaling the number of waves in Elliott's description of the stock market's structure at successively lower degrees of trend reproduced the Fibonacci sequence. Elliott's own observation from his 1938 book that the Wave Principle applied to data series outside the stock market was another impetus to his investigation into the broader meaning of his discovery.
By the early 1940s, Elliott had fully developed his concept that the ebb and flow of human emotions and activities follow a natural progression governed by laws of nature. The culmination of this train of thought was a treatise of importance equal to that of his original book. On Oct. 1, 1940, Elliott published his first discussion of Leonardo Fibonacci's "Summation Series of Dynamic Symmetry" in an Educational Bulletin entitled "The Basis of the Wave Principle" under the subhead "How the Wave Principle Works, and its Correlation with Mathematical Laws." In it, he tied the patterns of collective human behavior to the Fibonacci, or "golden" ratio, a mathematical phenomenon known for millennia by mathematicians, scientists, artists, architects and philosophers as one of nature's ubiquitous laws of form and progress.
This groundbreaking presentation led to what may have been an incident of intellectual piracy. On May 19, 1941, less than eight months after Elliott's treatise was disseminated to his small list of subscribers, Barron's published an article authored by "Edson Beers," a pseudonym of Edson Gould, whose middle name was Beers. The article, "A New Idea for Speculators: Applying the Principles of 'Dynamic Symmetry' to the Stock Market," purported to introduce this unquestionably novel idea, yet neglected to mention Elliott.
Gould confirmed the editor of Barron's told him he had received a call from Elliott, who was (justifiably) angry about the article, but declined further comment on the subject. History was kind, however, and in ensuing decades afforded Elliott full credit for his achievement.
On Dec. 30, 1941, Elliott's wife Mary Elizabeth, who had remained with him throughout his travels, career changes and medical misfortune, died at age 72. They had been married 38 years.
Elliott wrote the last of his Interpretive Letters in August 1945 and spent the rest of the year and the first five months of 1946 putting together what he considered his definitive work, Nature's Law - The Secret of the Universe, a grandiose title to be sure, but one that nevertheless has some justification. This monograph, which Elliott published at age 75, includes almost every thought he had concerning the theory of the Wave Principle. The book was published June 10, 1946, and the reported 1,000 copies sold out quickly to various members of the New York financial community.
Elliott managed to issue at least two additional periodical pages, in July and December of 1946, but his chronic anemia was catching up with him, severely affecting his health once again. By 1947, Elliott's Wall Street friends persuaded him to admit himself to Methodist Hospital in Brooklyn for a health review. Then he moved to Kings Park State Hospital, one of New York's leading psychiatric hospitals, a type of facility that in those days also served as a home for the elderly. There Elliott's basic needs were satisfied as he lived out the final months of his life. Elliott and Collins continued their occasional meetings and remained friends and correspondents. According to accounts, Elliott remained mentally sharp right up to his final day.
Elliott died Jan. 15, 1948. The cause of death was listed as chronic myocarditis, a persistent inflammation of the heart muscle. As with the amoebic infection that led to a forced retirement from his earlier career, Elliott almost certainly contracted this illness during his time in Central America. In that region, chronic myocarditis often is caused by a parasitic infection called Chagas' disease, which can cause death many years after initial exposure.
One former trader claimed that Elliott's friends took up a collection (a common practice when the deceased left no immediate relatives) for his cremation, which took place two days later at the Fresh Pond Crematory in Middle Village, N.Y.
At the time of Elliott's death, a comparatively small number of investors employed his methods. Today, thousands of institutional portfolio managers, traders and private investors use the Wave Principle in their investment decision making. Ralph Elliott undoubtedly would be gratified to see it.
Yet Elliott's legacy has only begun to manifest itself, as his discovery pertains not only to market movements, but to the dynamics of social mood change in general. Someday it will be recognized that Elliott's contribution to sociology is a breakthrough equivalent to the one that occurred in the 1600s and 1700s in the physical sciences. Given time and attention, the Wave Principle may ultimately save sociology from the realm of speculation and place it firmly in the sphere of science.
This three-part series of articles is condensed from "A Biography of Ralph Nelson Elliott," published in R.N. Elliott's Masterworks - The Definitive Collection. Robert Prechter is president of Elliott Wave International in Gainesville, Ga.
Here's the story of the famed R.N. Elliott, the business analyst who turned market analyst. This article article orginally appeared as a three-part series in the September to November 1994 issues of Futures magazine.
By Robert Prechter
A man's life, like a piece of tapestry, is made up of many strands, which interwoven make a pattern; to separate a single one and look at it alone not only destroys the whole, but gives the strand itself a false value. - Learned Hand
Ralph Nelson Elliott was that rarest of breeds, a true scholar in the practical world of finance. As you read the story of his life, you may be intrigued that a theory so unique, when compared to other methods of market analysis at that time and even those of today, could have been developed so late in life by a man not of Wall Street background. Financial analyst Hamilton Bolton accurately described the enormity of Elliott's feat when he said that "he developed his principle into a rational method of stock market analysis on a scale never before attempted."
Wave one The formative years Ralph Nelson Elliott was born July 28, 1871, in Marysville, Kan. His family tree featured some distinguished Americans, including his maternal great-grandfather Jonathan Hamblett, who fought in the Battle of Bunker Hill, and his paternal grandfather Hugh Elliott, a veteran of the War of 1812.
By the end of 1880, young Ralph Elliott had moved with his parents and older sister to San Antonio, Texas. During his teen years, he learned to speak and write Spanish fluently and developed a love for Mexico, 150 miles to the south. In 1891, at the age of 20, Elliott left home permanently to work on the railroads in Mexico at the height of North America's great railroad boom. He stayed there throughout his early 20s, where he was employed variously as a lineman, train dispatcher, stenographer, telegraph operator and station agent.
Around 1896, Elliott entered the accounting field (his educational path is unknown). Because he had already learned the industry from the bottom up, he developed the specialty of railroad accounting. In 1903, he married Mary Elizabeth Fitzpatrick (1869-1941), a New Yorker. For 25 years, Elliott held executive positions primarily with railroad companies in Mexico and Central America.
When later recounting a number of personal anecdotes in an analysis of the Latin American region, Elliott revealed his experiences to be more adventurous than one might assume, given his profession. For example, he recalls an incident indicating he was an accomplished horseman. He also described local styles of living that reflected great affluence and luxury, as well as abject poverty and squalor. Though the Elliott's often socialized with the well-to-do, he also saw instances in which "squirrels, lizards, parrots, foxes and even snakes were cooked and eaten with evident gusto." These observations could not have been made by a man who spent all his time in comfortable hotels or corporate offices. Not surprisingly, photos taken in his 40s show a man with a sturdy frame, a hardy appearance and an air of self-assurance, all of which well served Elliott's active life.
As Elliott practiced his profession, his corporate positions became increasingly important. His expertise was much broader than simply accounting. Indeed, he stated flatly in one article, "I do not like accounting, but I do like the work I am doing," which was business organization. He financially reorganized numerous corporations by installing new systems of record keeping, anticipating future expenditures and applying a principle of percentage allocation of revenues, which in another magazine article he called "the only sane method of controlling any business successfully." Much like an independent business consultant, Elliott ultimately served many clients, although his approach was to sign on with companies one at a time, remaining with each until restructuring was complete. Over the years Elliott earned a reputation as an expert business organizer.
The Elliotts might well have remained in Mexico for the rest of their lives, but circumstances ultimately forced their return to the United States. Beginning in 1911, Mexico experienced a series of violent revolutions that extended over the next several years. Eventually, civil strife in the country reached a crisis point, and in June 1916, in Elliott's words, "when the President [Wilson] ordered all Americans out" of Mexico, he complied and returned with his wife to Los Angeles.
Wave two Retrenchment and consolidation Having been dislodged from his longtime area of work and residence, Elliott appears to have undergone a period of dissatisfaction with his situation. Over the next four years, he changed jobs twice, investigated two others, and several times planned to return to Latin America.
Elliott's abilities were widely known and highly regarded. One position he considered accepting in Cuba was offered to him in an urgent cable that read in part, "Your services badly needed." He later was offered a position with the Cuba Railroad Co. despite the fact it had been accepted by someone else. As the company's vice president and general manager wrote to Elliott, "If we thought you would come, we would notify this party the offer to him was withdrawn." Such energetic solicitations for Elliott's services weren't unusual. Apparently, he was the most talented bilingual accountant and corporate reorganizer available to these Latin American companies.
Unafraid of the political climate, Elliott was back in Mexico in 1918, working as an auditor for the U.S.-owned Pierce Oil Corp., while his wife resided in Asheville, N.C., far from potential danger. Finally, in early 1920 the Elliotts moved to New York City. He may have moved there because of a corporate transfer or to please his New York-born wife. Whatever the reason, the move marked an abrupt change in Elliott's life. Soon afterward, he quit trying to find employment and residence in Latin America. Apparently, in New York, Elliott had found another place that suited his adventurous nature.
Wave three Productivity and progress Elliott, now in his early 50s, maintained a remarkably busy schedule over the next seven years. Later letters to Charles J. Collins reveal that he traveled to Canada, Germany, England and France, though for what reason (personal or business) is unknown. His largest company reorganization outside the railroad field was Amsinck & Co., an export-import house of 500 employees. During this period, Elliott also developed a second specialty as a business consultant to restaurants, cafeterias and tea rooms. To promote his new specialty, Elliott joined the editorial staff of the New York-based monthly business magazine, Tea Room and Gift Shop, in the summer of 1924.
Though the term "tea room" is now quaint, in the 1920s tea rooms were a booming business, and their popularity spread rapidly to the point that entrepreneurs from experienced restaurateurs to housewives were trying their hands at them. Tea Room and Gift Shop boasted 3,000 professional readers around the world. Elliott's arrival to the magazine was marked with some fanfare, with nearly a full page devoted to introducing him to its readers. His monthly column discussed what a Department of Commerce bulletin from the time called "scientific management," and argued that accounting was "just coming into its own" and becoming far more than just bookkeeping. "What I am trying to do," he summarized, "is help you make money," a goal that would later make stock market forecasting an attractive vocation.
The esteem with which Elliott's column was held in the restaurant accounting and management field is reflected by a 1924 invitation from Columbia University to speak on the subject. Elliott had to decline the invitation, as he was again out of New York on business.
Elliott's aggressive mobility and corporate service over the years occasionally brought him into contact with influential people in the academic and political world. One of these contacts was Dr. Jeremiah Whipple Jenks, a distinguished lawyer, academician, political advisor and author of nearly two dozen books on politics, social issues, religion and business. He also had served on the board of directors of several railroads, including the Pacific Railways of Nicaragua. Elliott undoubtedly met Jenks through professional association due to their common interests in the railroad industry, finance and Central America. Their friendship ultimately proved fortuitous, providing Elliott a fascinating opportunity.
In 1912, the long-standing liberal government of Nicaragua was overthrown by a coup. The U.S. Marines entered the country to effect a turnover of administrative control to the U.S. government for the stated purpose of protecting American interests in Nicaragua. After 12 years, the U.S. State Department tired of its role and appointed the High Commission of Nicaragua, of which Jenks was a member, to advise it on how to help stabilize the Nicaraguan government enough to allow the U.S. Marines to withdraw. Jenks was commissioned to establish a new banking system in the country.
At Jenks' recommendation, Elliott was chosen by the State Department for the post of chief accountant for Nicaragua. On Dec. 18, 1924, Elliott met with Secretary of State Charles Evans Hughes in Washington, D.C., to receive his formal appointment and instructions. He arrived in Managua in February 1925. Elliott then applied his experience in corporate reorganization to arranging the finances of an entire country.
Though originally scheduled to stay as long as two years, Elliott served in his official government position only until June of that year, when the U.S. extricated itself from Nicaragua. At that time, the U.S. recalled all State Department appointees as well as the Marines under the assumption that calm and order had been sufficiently restored. Following a brief return to New York, Elliott moved to Guatemala City in August to assume another major corporate position: general auditor of the International Railway of Central America, a U.S. company whose stock was traded on the New York and London Stock Exchanges. It was the last professional position R.N. Elliott held in his longtime field.
***
While serving with the Central American railway system in his last corporate executive position, R.N. Elliott wrote a comprehensive book, expanded from his magazine articles, entitled Tea Room and Cafeteria Management, published in August 1926 by Little, Brown & Co. The first favorable reviews appeared in The New York Herald Tribune and The New York Times Book Review, which commented "Mr. Elliott writes with authority upon all these matters because of his wide and varied business experience and observation." Ads referred to Elliott as "an expert organizer," an ability which was later manifest in his exposition of the Wave Principle. In the book, Elliott referred to business cycles as "the ebb and flow of circumstance," a phrase that uses the liquid metaphor he later called "waves."
This book announced Elliott's return to his career as a restaurant management specialist. He left a position (that in today's dollars paid $170,000 per year after taxes) and returned to New York with a definite goal in mind: to promote the book and cement his stature as the preeminent consultant in the field. From his temporary base at the Wolcott Hotel, Elliott issued numerous communications to his publisher regarding the book's promotion.
As important as Elliott's professional activities were to him, they were no longer his only passion. The State Department appointment in Nicaragua had focused his talent for problem solving in a new realm: politics. Elliott brought another project to the attention of a publisher, as revealed in a letter residing in State Department files concerning a second book he had written: The Future of Latin America. This 100-page manuscript, which Elliott forwarded to the State Department, constituted about half the planned book. It was eventually filed in the U.S. National Archives and discovered 67 years later during research for this biography.
The purpose of Elliott's treatise was to analyze the economic and social problems of Latin America and offer proposals for creating economic stability and lasting prosperity in the region. Elliott recognized that the chief obstacles to economic progress in Latin America were a staggering burden of debt and a cavalier attitude toward repayment.
Elliott outlined a comprehensive plan to be implemented "whenever a Latin American country approaches the United States with a request for financial or political aid." The plan involved U.S. assistance in the issuance of national debt payment bonds, the issuance of U.S. guaranteed bonds to pay outstanding debt, tax reform infrastructure development, civil service reform and public information campaigns in both Latin America and the United States.
In many ways his proposed program resembled later efforts such as the "Good Neighbor" policy of the Franklin D. Roosevelt administration and the more recent pro-development policies of the World Bank. Certainly, Elliott earned the respect of the Coolidge administration, as an internal State Department letter dated Feb. 2, 1929, listed him as a potential appointee for another government post in Nicaragua.
Whatever political influence Elliott's ideas for Latin America may have had, it is of secondary importance to Elliott's later achievement in discovering the Wave Principle. In that regard, The Future of Latin America is primarily meaningful in revealing a mind that was comfortable assimilating mountains of detail while holding the big picture in perspective, a prerequisite ability for discovering and codifying the Wave Principle. One passage in The Future of Latin America in particular shows Elliott's disposition to see patterns in the nature of things:
"The preceding chapters may have led the reader to the conclusion that the problems of the United States and of Latin America lend themselves to mutual solution. By a seeming coincidence, but what may well be a provision of nature working in accordance with laws not yet properly understood, all those things which the United States lacks are to be found in profusion in Latin America, and the needs of Latin America are such as the United States is best fitted to provide for."
Here Elliott implies that nature tends toward balance, in which scarcity of one sort is countered by abundance of another sort. This idea hints at the rhythmic, or dynamic balance he later found in the stock market.
With one book sold and a new one in progress, Elliott had two promising reasons to return to the United States. But there was a third reason: Elliott suffered from a severe alimentary tract illness caused by the organism amoeba histolytica. Though Elliott's lifestyle had been adventurous for decades without serious repercussion, time and chance caught up with him. The United States offered promise of an expert medical review.
By 1927, Elliott had returned to Los Angeles to adopt a more settled lifestyle after 36 years of intense work, travel and hotel living. Having left behind all his old business contacts, he concentrated on relocating his consulting business while attempting to recover from his illness. Curiously, for a man who later connected the Fibonacci sequence of numbers to human life, this change of careers and lifestyles occurred when Elliott was 55 years old, 21 years before his death.
Wave Four Elliott's reputation, built upon a distinguished career, his new book and a long list of references, was once again soaring. Book reviews remained favorable. The National Restaurant Association invited him to speak in Buffalo, N.Y. "The cost of my service," said one of his advertisements, "comes out of additional profits." With that guarantee, he was rapidly securing a sufficient number of clients in his new location.
Just when Elliott's future appeared its brightest, disaster struck. Instead of recovering from his illness, Elliott relapsed. By 1929 his affliction had developed into a debilitating case of pernicious anemia, leaving him bedridden. The adventurous and productive Elliott was forced into an unwanted retirement. Several times over the next five years he came close to death. His photograph in Financial World magazine a decade later shows that the relentless affliction took its toll, leaving Elliott much thinner than in earlier years.
Elliott needed something to occupy his mind while recuperating between the worst attacks of his illness. He then was living through the most exciting period in U.S. stock market history: the peak years of the roaring bull market of the 1920s, and immediately thereafter the most dramatic bear market crash on record. These events sparking his interest, he read Robert Rhea's 1932 book, Dow Theory, and became one of the first subscribers to Rhea's stock market service, "Dow Theory Comment." It was around this time that Elliott turned his full attention to studying the behavior of the stock market.
The discovery Like the Dow Theory genius Robert Rhea, who suffered from tuberculosis and was bedridden at the time, Elliott, who spent long hours on his front porch recuperating and studying, began to make some observations concerning the movement of stock prices. His decision to look for patterns in aggregate stock price movement was undoubtedly prompted by exposure to the tenets of Dow Theory. However, Elliott's ultimate discovery was his own. Investigating the possibility of form in the marketplace, he examined yearly, monthly, weekly, daily, hourly and half-hourly charts of the various indexes covering 75 years of stock market behavior. He constructed the hourly charts from a data series that began for the Dow Jones Industrial Average Oct. 5, 1932, and the half-hourly charts from figures he collected off the tape in the trading room of a brokerage house. Elliott was fulfilling a mission he had enunciated for all responsible men in his manuscript on Latin America: "There is a reason for everything, and it is [one's] duty to try to discover it."
In May 1934, two months after his final brush with death, Elliott's observations of stock market behavior began coming together into a general set of principles that applied to all degrees of wave movement in the stock price averages. Today's scientific term for a large part of Elliott's observation about markets is that they are "fractal," coming under the umbrella of chaos science, although he went further in actually describing the component patterns and how they linked together. The former "expert organizer" of businesses had uncovered, through meticulous study, the organizational principle behind the movement of markets. When Elliott applied his principles over the next several months to expectations for the stock market, he felt, as he later put it, "something like the inventor who is trying to become proficient as an operator of a machine of his own design." As he got more proficient in the application of his principles and corrected initial errors in their formulation, their accuracy amazed him.
At this point, Elliott's finances were at a precarious low due to the expenses of his illness, his inability to pursue his accounting business, a dependent wife and several investments that had suffered in the 1929-1932 market crash. His depleted financial condition, his developing fascination with the stock market and his discoveries combined to prompt Elliott's decision to undertake a new profession. He decided to "begin all over again," as he put it, "especially in work that I like, which is half the battle." So, at the age of 64, Elliott launched his new career and started what he later referred to as "Wave number five of my own life."
By November 1934, R.N. Elliott's confidence in his ideas had developed to the point that he decided to present them to at least one member of the financial community. For quite some time, Elliott had subscribed to a market service founded and edited by Charles J. Collins and published by Investment Counsel Inc. of Detroit. Elliott felt he had learned enough about Collins through his stock market publication to trust him with his discovery. This assumption, to Elliott's advantage, proved correct.
On Feb. 19, 1935, following an exchange of letters, Elliott mailed Collins 17 pages of a treatise entitled "The Wave Principle." The first page contained Elliott's statement of the utility of the Wave Principle: "A careful study of certain recurring phenomena within the price structure itself has developed certain facts which, while they are not always vocal, do nevertheless furnish a principle that determines the trend and gives clear warning of reversal."
On the art of application, he commented, "waves do not make errors, but my version may be defective. The nearer one approaches the primary law, the less errors will occur." Referring to the repetition of the five wave pattern in the stock market, Elliott concluded, "Possibly the reason why I have not yet, and possibly never will know why this series occurs is because it is a law of nature. The laws of nature, and incidentally economics, are ruthless, which is as it should be."
Collins had put off the numerous correspondents who continually offered him systems for beating the market by asking them to forecast the market for a while, assuming that any truly worthwhile system would stand out when applied in current time. Not surprisingly, the vast majority of these systems proved to be dismal failures. Elliott's principle, however, was another story.
The Dow Jones averages had been declining throughout early 1935, and Elliott had pinpointed hourly turns by telegram with a fair degree of accuracy. In the second week of February, the Dow Jones Rail Average, as Elliott had predicted, broke below its 1934 low of 33.19. Advisors were turning negative and memories of the 1929-32 crash were rekindled as bearish pronouncements about the future course of the economy proliferated. The Dow Industrials had fallen about 11% and were approaching the 96 level, while the Rails (a more important average then) had fallen 50% from their 1933 peak to the 27 level.
On Wednesday, March 13, 1935, just after the close of trading, with the Dow Jones averages finishing near the lows for the day, Elliott sent this famous telegram to Collins: "NOTWITHSTANDING BEARISH (DOW) IMPLICATIONS ALL AVERAGES ARE MAKING FINAL BOTTOM."
Collins read the telegram on the morning of the next day, Thursday, March 14, 1935, the day of the closing low for the Dow Industrials that year. The day prior to the telegram, Tuesday, March 12, marked the 1935 closing low for the Dow Jones Rails. The 13-month corrective wave was over, and the market immediately turned to the upside.
Two months later, as the market continued on its upward climb, Collins, "impressed by (Elliott's) dogmatism and accuracy," proposed that Investment Counsel subscribe to Elliott's forecasts and said, "we are of the opinion that the Wave Principle is by far the best forecasting approach that has come to our attention."
Elliott responded with a proposal that Collins subscribe to his market timing service for a period of two years. If Investment Counsel was still satisfied with Elliott's success after that period, then Collins, whom Elliott considered a master writer, would prepare a book on the Wave Principle suitable for public distribution. For the next two years Collins monitored Elliott's calls on the market. His accuracy remained true, and at the end of the second year, in March 1937, Collins began working on the book, which was based on Elliott's original treatise. The Wave Principle was published August 31, 1938.
The first chapter of The Wave Principle states the following:
"No truth meets more general acceptance than that the universe is ruled by law. Without law, it is self-evident there would be chaos, and where chaos is, nothing is...Very extensive research in connection with...human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern...The stock market illustrates the wave impulse common to social-economic activity...It has its law, just as is true of other things throughout the universe."
Within weeks after the publication of his book, Elliott packed up his belongings and moved with his wife to Columbia Heights, Brooklyn, a short subway stop from Manhattan's financial district. On Nov. 10, he published the first in a long series of Interpretive Letters, which outlined and forecasted the path of the market in terms of the Wave Principle. He issued the one- to four-page letters irregularly ("as the occasion requires"), ranging from three to seven issues annually between Nov. 10, 1938, and Aug. 6, 1945. Elliott initially priced his Interpretive Letters at $60 per year and continued to sell his monograph, which he called "the Treatise," for $15. Ralph Elliott was finally back in the saddle, and as independently in business as he had planned 11 years before.
A regular feature writer for Financial World magazine, Collins contacted the editors and introduced them to Elliott and his work in early 1939. Elliott was commissioned to write 12 articles on the Wave Principle, which were published between April and July. These articles established Elliott's reputation with the investment community.
After the publication of the Financial World articles, Elliott began writing in-depth follow-up essays that quickly evolved into a formal Educational Service, which he published from 1940 to 1944. One of Elliott's earliest "Educational Bulletins" was a groundbreaking work that lifted the Wave Principle from a comprehensive catalog of the market's behavioral patterns to a broad theory of collective human behavior not before seen in the field of economics and sociology.
Since 1935, Collins had sent Elliott books discussing natural occurrences of the Fibonacci sequence, a mathematical basis for patterned growth known and admired for centuries. Collins was apparently the person who first observed that totaling the number of waves in Elliott's description of the stock market's structure at successively lower degrees of trend reproduced the Fibonacci sequence. Elliott's own observation from his 1938 book that the Wave Principle applied to data series outside the stock market was another impetus to his investigation into the broader meaning of his discovery.
By the early 1940s, Elliott had fully developed his concept that the ebb and flow of human emotions and activities follow a natural progression governed by laws of nature. The culmination of this train of thought was a treatise of importance equal to that of his original book. On Oct. 1, 1940, Elliott published his first discussion of Leonardo Fibonacci's "Summation Series of Dynamic Symmetry" in an Educational Bulletin entitled "The Basis of the Wave Principle" under the subhead "How the Wave Principle Works, and its Correlation with Mathematical Laws." In it, he tied the patterns of collective human behavior to the Fibonacci, or "golden" ratio, a mathematical phenomenon known for millennia by mathematicians, scientists, artists, architects and philosophers as one of nature's ubiquitous laws of form and progress.
This groundbreaking presentation led to what may have been an incident of intellectual piracy. On May 19, 1941, less than eight months after Elliott's treatise was disseminated to his small list of subscribers, Barron's published an article authored by "Edson Beers," a pseudonym of Edson Gould, whose middle name was Beers. The article, "A New Idea for Speculators: Applying the Principles of 'Dynamic Symmetry' to the Stock Market," purported to introduce this unquestionably novel idea, yet neglected to mention Elliott.
Gould confirmed the editor of Barron's told him he had received a call from Elliott, who was (justifiably) angry about the article, but declined further comment on the subject. History was kind, however, and in ensuing decades afforded Elliott full credit for his achievement.
On Dec. 30, 1941, Elliott's wife Mary Elizabeth, who had remained with him throughout his travels, career changes and medical misfortune, died at age 72. They had been married 38 years.
Elliott wrote the last of his Interpretive Letters in August 1945 and spent the rest of the year and the first five months of 1946 putting together what he considered his definitive work, Nature's Law - The Secret of the Universe, a grandiose title to be sure, but one that nevertheless has some justification. This monograph, which Elliott published at age 75, includes almost every thought he had concerning the theory of the Wave Principle. The book was published June 10, 1946, and the reported 1,000 copies sold out quickly to various members of the New York financial community.
Elliott managed to issue at least two additional periodical pages, in July and December of 1946, but his chronic anemia was catching up with him, severely affecting his health once again. By 1947, Elliott's Wall Street friends persuaded him to admit himself to Methodist Hospital in Brooklyn for a health review. Then he moved to Kings Park State Hospital, one of New York's leading psychiatric hospitals, a type of facility that in those days also served as a home for the elderly. There Elliott's basic needs were satisfied as he lived out the final months of his life. Elliott and Collins continued their occasional meetings and remained friends and correspondents. According to accounts, Elliott remained mentally sharp right up to his final day.
Elliott died Jan. 15, 1948. The cause of death was listed as chronic myocarditis, a persistent inflammation of the heart muscle. As with the amoebic infection that led to a forced retirement from his earlier career, Elliott almost certainly contracted this illness during his time in Central America. In that region, chronic myocarditis often is caused by a parasitic infection called Chagas' disease, which can cause death many years after initial exposure.
One former trader claimed that Elliott's friends took up a collection (a common practice when the deceased left no immediate relatives) for his cremation, which took place two days later at the Fresh Pond Crematory in Middle Village, N.Y.
At the time of Elliott's death, a comparatively small number of investors employed his methods. Today, thousands of institutional portfolio managers, traders and private investors use the Wave Principle in their investment decision making. Ralph Elliott undoubtedly would be gratified to see it.
Yet Elliott's legacy has only begun to manifest itself, as his discovery pertains not only to market movements, but to the dynamics of social mood change in general. Someday it will be recognized that Elliott's contribution to sociology is a breakthrough equivalent to the one that occurred in the 1600s and 1700s in the physical sciences. Given time and attention, the Wave Principle may ultimately save sociology from the realm of speculation and place it firmly in the sphere of science.
This three-part series of articles is condensed from "A Biography of Ralph Nelson Elliott," published in R.N. Elliott's Masterworks - The Definitive Collection. Robert Prechter is president of Elliott Wave International in Gainesville, Ga.
Wednesday, November 21, 2001
War, The Economy, and Suddam
I believe that history has shown that a long war is good for the economy. I hope that we regain momentum without one. I think that the Middle East will continue to be hot. The big question will be oil prices. One bomb at Suddam and the whole equation changes.
Have a great Thanksgiving!!
Have a great Thanksgiving!!
Tuesday, November 20, 2001
Hubbert's Peak Graphs
I just finished reading "Hubbert's Peak" about the predicted peak in production (2004-2008). Check this out and let me know what you think...
http://www.hubbertpeak.com/hubbert/
http://www.hubbertpeak.com/hubbert/
Tuesday, November 6, 2001
Hubbert's Peak
Amazon just delivered a new book today, "Hubbert's Peak".
It's about the petroleum industry and the future of energy. You should check it out.
http://www.amazon.com/exec/obidos/ASIN/0691090866/qid=1005107204/sr=8-1/ref=sr_8_3_1/102-2810503-3649750
It's about the petroleum industry and the future of energy. You should check it out.
http://www.amazon.com/exec/obidos/ASIN/0691090866/qid=1005107204/sr=8-1/ref=sr_8_3_1/102-2810503-3649750
Tuesday, September 18, 2001
Chaos, Fractals, and Complexity
Ten years ago I was spending the days studying geologic information and the late evenings analyzing stock charts. One day it occurred to me that well logs and sea level curves had similar patterns. It later became obvious to me that the patterns on the geologic information resembled the patterns on stock charts. What did these things have in common? Nothing that I've ever determined except "sameness in form". This made me curious.
In 1987, James Gleick published a book called Chaos. This book brought knowledge of a new science to the masses. An excerpt.....
"Where chaos begins, classical science stops. For as long as the world has had physicists inquiring into the laws of nature, it has suffered a special ignorance about disorder in the atmosphere, in the turbulent sea, in the fluctuations of wildlife populations, in the oscillations of the heart and the brain. The irregular side of nature, the discontinuous and erratic side---these have been puzzles to science, or worse, monstrosities. But in the 1970s a few scientists in the United States and Europe began to find a way through disorder. They were mathematicians, physicists, biologists, chemists, all seeking connections between different kinds of irregularity."
http://www.around.com/chaos.html
Chaos theory and complexity are being studied in every imaginable field integrating science and mathematics.
http://www.santafe.edu/sfi/organization/vision.html
In 1988, I attended a seminar on chaos theory. From that point on, I was forever curious about the relationship between "things" and mathematical algorithms. The most interesting to me has been the "s-curve" or logistic equation. We've all seen S-curves representing many things. Its first breakthrough was in studying population growth in various species.
http://thesaurus.maths.org/dictionary/map/word/2129?PHPSESSID=2d169eb0cb114d58ebca8a2a51675771
This pattern seemed to appear constantly in stock charts.... especially on "moving averages".
Fractals are similar patterns that repeat in a variety of scales. Fractals appear naturally
in living and non-living things. Heartbeats create fractal patterns...snowflakes, clouds,
and the stock market.
http://library.thinkquest.org/3493/
This self-study of chaos and complexity has led me through over thirty books on the subject. I can't say I understand more than 10% of it, but it continues to be fascinating.
In 1987, James Gleick published a book called Chaos. This book brought knowledge of a new science to the masses. An excerpt.....
"Where chaos begins, classical science stops. For as long as the world has had physicists inquiring into the laws of nature, it has suffered a special ignorance about disorder in the atmosphere, in the turbulent sea, in the fluctuations of wildlife populations, in the oscillations of the heart and the brain. The irregular side of nature, the discontinuous and erratic side---these have been puzzles to science, or worse, monstrosities. But in the 1970s a few scientists in the United States and Europe began to find a way through disorder. They were mathematicians, physicists, biologists, chemists, all seeking connections between different kinds of irregularity."
http://www.around.com/chaos.html
Chaos theory and complexity are being studied in every imaginable field integrating science and mathematics.
http://www.santafe.edu/sfi/organization/vision.html
In 1988, I attended a seminar on chaos theory. From that point on, I was forever curious about the relationship between "things" and mathematical algorithms. The most interesting to me has been the "s-curve" or logistic equation. We've all seen S-curves representing many things. Its first breakthrough was in studying population growth in various species.
http://thesaurus.maths.org/dictionary/map/word/2129?PHPSESSID=2d169eb0cb114d58ebca8a2a51675771
This pattern seemed to appear constantly in stock charts.... especially on "moving averages".
Fractals are similar patterns that repeat in a variety of scales. Fractals appear naturally
in living and non-living things. Heartbeats create fractal patterns...snowflakes, clouds,
and the stock market.
http://library.thinkquest.org/3493/
This self-study of chaos and complexity has led me through over thirty books on the subject. I can't say I understand more than 10% of it, but it continues to be fascinating.
Spirals and Fibs
Last year I read a book called, The Spiral Calendar by Christopher Carolan.
http://www.calendarresearch.com/
I don't remember how I heard about the book, but on the initial look, it appeared "way out
there". Basically, the premise is that many things on the earth, including events, are aligned with the lunar cycles. Yes, we know that the tides are controlled by that and the fish are aligned with it, but that's about all we are buying. Well this book took the concept a little farther. In 1987, the author was a bond trader on the Pacific Exchange. He became fascinated with the stock market and through his research became curious about the similarities between the 1929 and 1987 market crashes. His initial research concluded that there were four similarities:
-Both had a small correction that ended in late spring
-Sharp rallies in both markets peaked in late summer
-Both markets attempted rallies in the early fall
-Both crashes occurred in October
His research led him to the lunar calendar. Here are some excerpts....
"The calendar that we use is the Gregorian calendar. It is an improve version of the Julian calendar named for Julius Caesar. Our calendar, with its Roman origin, does a very good job of keeping time. The time it keeps is solar time, the rotation of the earth around the sun once every 365.25 days. The Jewish calendar is a lunar calendar, which is
still in use to mark religious holy days. One of the holy days, Yom Kippur, fell exactly on the third point of the four market similarities in 1987, the fall market top. There is an old stock market adage,' buy on Rosh Hashanah, sell them on Yom Kippur'. Selling stocks on Yom Kippur in 1987 was a good thing to do. My desire to know when Yom Kippur fell in 1929 was the original impetus for my calendar investigations. With this calendar, I realigned the comparison of 1929 and 1987 stock charts. Four points are very similar. The crash of 1987 occurred on the same lunar date as the crash of 1929! The other three points each fall one day later on the lunar calendar than their 1929 counterparts. Within one day, the 1929 autumnal market top occurred on the Jewish holy day of Yom Kippur. Could this be a coincidence? Now seen in lunar terms, the likeness is an empirical fact. Where there was similarity, there is now sameness. What appeared as a resemblance is revealed to be a replication. It was 1988 when I made the discovery of the lunar connection between the crashes. I understood immediately that this was an important advance in the understanding of both markets and man. However, it does not provide a method for forecasting market behavior by itself. It was a clue to the market's mechanism, and it points the direction I should look to for additional discoveries. It is not a new idea that the position of the moon and sun in the sky has influence on the behavior of man. Each event in 1987 occurred approximately 717 moons form the analogous point in 1929. I felt that if there were a larger pattern to be found, this number should turn out to be significant. My first inclination was to check if it was a Fibonacci number. My experience with Fibonacci numbers came through the work of R.N.Elliott and Robert Prechter and their analysis of the stock market." http://www.nottingham.ac.uk/education/number/gl/fibon.html
"Yet 717 is not a Fibonacci number. I wondered if 717 might be some permutation of a Fibonacci number, maybe a multiple or a square root. With calculator and pencil in hand, I proceeded through the sequence of Fibonacci numbers. When I entered the 29th Fibonacci number, 514,229 into the calculator and pressed the square root button...there was 717.0976. My first thought then is still very close in my memory: the world is a very beautiful place. Market panics have long been considered a mystery. The Spiral Calendar lifts the veil of mystery from the bouts of sudden fear that periodically sweep the market. This is a dramatic and convincing demonstration of the Spiral Calendar's role as the time piece and primary regulator of social human nature.”
“Yom Kippur is the ‘day of atonement’, when Jews are to atone with fasting for their past mistakes before God. The ancient myth associated with Yom Kippur is that a person’s behavior during the period between Rosh Hashanah and Yom Kippur will form the basis of a judgment by God which will determine his fate for the coming year. In 1987 and 1929, anyone who shorted stocks during those ten days was judged as successful by the market in the following weeks and, likewise, anyone who bought stocks during those ten days were quickly judged as damned.”
“These are threads that connect the knowledge and actions of the ancients and come down to our time as ritual and custom. In this so called age of science, we too readily dismiss much of our inherited culture. We do not have a reasoning power or brain capacity greater than that of those who live three or five thousand years ago. In the case of the Mesopotamians, we have not begun to equal the tradition of observation of nature over time that they accomplished.”
“In fact ultimately, when viewed as a societal whole, human actions assume the shape, structures and fractal patterns found elsewhere throughout nature.”
…..end of excerpt……
So what does all this “mumbo jumbo” mean????? Hell, I don’t know. All I know is this:
· Today the Dow Jones Industrial Average suffered its worst point loss in history
· Tomorrow, September 18, is Rosh Hoshanah, and
· September 27 is Yom Kippur
What any of this means, I have no idea, but it sure keeps me up at night!!!!
Sunday, September 16, 2001
Airlines at The Crest of The Tidal Wave
Saturday afternoon I happen to catch the Continental Airlines CEO's press conference where he announced major cuts and incredible "doom and gloom" for the airlines industry.
This event forced me back to my information source, "At The Crest Of The Tidal Wave" by Robert Prechter, because I remembered some interesting comments on the transportation
industry.
...some more "brain candy"....
Saturday September 15, 11:19 am Eastern Time
Press Release
SOURCE: Continental Airlines
Continental Airlines Announces Long-Term Schedule Reduction And Furlough of 12,000 employees
HOUSTON, Sept. 15 /PRNewswire/ -- Continental Airlines (NYSE: CAL - news)
Continental Airlines announced today that it will immediately reduce its long-term flight schedule by approximately 20 percent on a systemwide available seat mile basis, and will be forced to furlough approximately 12,000 employees in connection with this reduction. "The U.S. airline industry is in an unprecedented financial crisis. We call on the President and members of Congress to take immediate action to restore the stability of this vital industry, on which our nation's economy heavily depends,'' said Gordon Bethune, Continental chairman and chief executive officer. "Our industry needs immediate Congressional action if the nation's air transportation system is to survive.'' Prior to the terrorist attacks and this announcement, Continental Airlines and its subsidiaries flew over 2,500 flights a day. The airline, which currently employs more than 56,000 people, has been the industry leader with superior operational performance, 26 straight profitable quarters, numerous national and international customer service awards, and repeated designation as one of the 100 Best Companies to Work For in America.
"At The Crest of The Tidal Wave"....published in 1995
---p.103
"The airlines issue credits to reward people who fly, order flowers, take a language course, stay in certain hotels, rent cars, call long distance, or even invest in a mutual fund. This frezied purchase of customer goodwill has been paid for with future obligation, so it is simply debt, a huge debt. Already, nonpaying flyers account for 7% of the seats filled on the average flight by major carriers. When the depression arrives, that percentage will soar. The industry's debt
to its best customers is now huge, and its ability to pay it is negligible. The problem is just beginning to show up in airline's policies of further restricting the time and seats available for certificate redemption. This is only the hint of the default that is coming. Any renewed contraction in the economy will devestate the transportation industry. If you have accumulated
any frequent flyer miles, you should use them up as fast as you can."
p.161
"Only a true understanding of the nature of people's behavior as it relates to markets will allow you to reason through emotionally charged situations and deal with them properly"
p.435
"Even at this early date, we might speculate on just a few developments that appear likely. For instance, I would be inclined to expect that the Middle East and Latin America will destabilize;....wars will erupt in Asia and the Middle East....foreigners will commit terrorist acts on U.S. soil"
p.217
"So what is the right course of action? The Elliott Wave Theorist cautioned in early 1986,'Once the craze really takes hold, just be aware of what is going on, and make sure you are not caught up in the amorphous feelings of confidence, complacency and love at the ultimate top.' The reader of this book faces a difficult task, one that will put him in such an extreme minority
that he will feel isolated and unsupported. By selling all of your stocks, you will take the maverick road, and you will take it alone. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. Do not lose your perspective when the time comes. It will take great courage to make money during this bull market. However, it will take greater courage to get out near the top, because that's when the world will call you a damn fool for selling."
p.12
It forces the analyst to look at the big picture. A proper long term perspective elevates the wave analyst above the cacophony of daily news. It provides the opportunity to make sense of the great trend changes in markets and dramatic social events that accompany them."
p.438
"If you can keep your head when all about you are losing theirs...Yours is the Earth and everything that's in it" Rudyard Kipling
p.20
"Collective man will enjoy the same successes and repeat the same mistakes over and over, with minor differences in specifics, throughout eternity, although each time from a higher level of advancement. Mistakes are repeated not because people fail to learn from history, as many contend, but precisely because they do learn from history, from recent history, their own experience."
A must read......
This event forced me back to my information source, "At The Crest Of The Tidal Wave" by Robert Prechter, because I remembered some interesting comments on the transportation
industry.
...some more "brain candy"....
Saturday September 15, 11:19 am Eastern Time
Press Release
SOURCE: Continental Airlines
Continental Airlines Announces Long-Term Schedule Reduction And Furlough of 12,000 employees
HOUSTON, Sept. 15 /PRNewswire/ -- Continental Airlines (NYSE: CAL - news)
Continental Airlines announced today that it will immediately reduce its long-term flight schedule by approximately 20 percent on a systemwide available seat mile basis, and will be forced to furlough approximately 12,000 employees in connection with this reduction. "The U.S. airline industry is in an unprecedented financial crisis. We call on the President and members of Congress to take immediate action to restore the stability of this vital industry, on which our nation's economy heavily depends,'' said Gordon Bethune, Continental chairman and chief executive officer. "Our industry needs immediate Congressional action if the nation's air transportation system is to survive.'' Prior to the terrorist attacks and this announcement, Continental Airlines and its subsidiaries flew over 2,500 flights a day. The airline, which currently employs more than 56,000 people, has been the industry leader with superior operational performance, 26 straight profitable quarters, numerous national and international customer service awards, and repeated designation as one of the 100 Best Companies to Work For in America.
"At The Crest of The Tidal Wave"....published in 1995
---p.103
"The airlines issue credits to reward people who fly, order flowers, take a language course, stay in certain hotels, rent cars, call long distance, or even invest in a mutual fund. This frezied purchase of customer goodwill has been paid for with future obligation, so it is simply debt, a huge debt. Already, nonpaying flyers account for 7% of the seats filled on the average flight by major carriers. When the depression arrives, that percentage will soar. The industry's debt
to its best customers is now huge, and its ability to pay it is negligible. The problem is just beginning to show up in airline's policies of further restricting the time and seats available for certificate redemption. This is only the hint of the default that is coming. Any renewed contraction in the economy will devestate the transportation industry. If you have accumulated
any frequent flyer miles, you should use them up as fast as you can."
p.161
"Only a true understanding of the nature of people's behavior as it relates to markets will allow you to reason through emotionally charged situations and deal with them properly"
p.435
"Even at this early date, we might speculate on just a few developments that appear likely. For instance, I would be inclined to expect that the Middle East and Latin America will destabilize;....wars will erupt in Asia and the Middle East....foreigners will commit terrorist acts on U.S. soil"
p.217
"So what is the right course of action? The Elliott Wave Theorist cautioned in early 1986,'Once the craze really takes hold, just be aware of what is going on, and make sure you are not caught up in the amorphous feelings of confidence, complacency and love at the ultimate top.' The reader of this book faces a difficult task, one that will put him in such an extreme minority
that he will feel isolated and unsupported. By selling all of your stocks, you will take the maverick road, and you will take it alone. I have no doubt that by the time this bull market is ending, our call for a huge crash and depression will be laughed off the street. Do not lose your perspective when the time comes. It will take great courage to make money during this bull market. However, it will take greater courage to get out near the top, because that's when the world will call you a damn fool for selling."
p.12
It forces the analyst to look at the big picture. A proper long term perspective elevates the wave analyst above the cacophony of daily news. It provides the opportunity to make sense of the great trend changes in markets and dramatic social events that accompany them."
p.438
"If you can keep your head when all about you are losing theirs...Yours is the Earth and everything that's in it" Rudyard Kipling
p.20
"Collective man will enjoy the same successes and repeat the same mistakes over and over, with minor differences in specifics, throughout eternity, although each time from a higher level of advancement. Mistakes are repeated not because people fail to learn from history, as many contend, but precisely because they do learn from history, from recent history, their own experience."
A must read......
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