Here's What Stock Market Bulls Might Be Overlooking
A growing economy is not necessarily bullish -- see for yourself

By Elliott Wave International

Editor's note: You'll find a text version of this story below the video.

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On Friday (Feb. 27), the 4th quarter U.S. GDP was revised downward to 2.2% from the original 2.6%.
"U.S. stock markets shrugged off the revision," wrote Fox Business. And why wouldn't they -- after all, the conventional wisdom says that as long as the economy is growing, so is the stock market.
Except, it's not exactly true.
See, if that notion were true, then you'd have to assume that the U.S. economy was in a bad shape in 2007, when the stock market began its biggest decline since the Great Depression. But the facts show the opposite.

When the Dow topped in October 2007, key economic measures were indeed strong:

• In the quarter preceding the market peak, GDP expanded at 2.7%
• Unemployment in 2007 was 4.6%
• Consumer confidence was very strong, too (top red circle; chart: Bloomberg)

If a strong economy means a strong stock market, then stocks should have continued higher. They didn't. The Dow fell more than 50% over the next year and a half:

If you think that's counterintuitive, then fast forward to early 2009. That's when we saw the opposite economic picture:

• Consumer confidence fell to an all-time low (the second red circle on the blue chart)
• GDP growth fell to a negative 5.4%
• Unemployment rate more than doubled to almost 10%

Because of such terrible economic data, few mainstream economists were optimistic in early 2009. And yet the stock market bottomed in March of that year.
This reminds me of a quote from our monthly Elliott Wave Theorist:

"Suppose you were to possess perfect knowledge that next quarter's GDP will be the strongest rising quarter for a span of 15 years, guaranteed.
"Would you buy stocks?
"Had you anticipated precisely this event for 4Q 1987, you would have owned stocks for the biggest stock market crash since 1929.
"GDP was positive every quarter for 20 straight quarters before the 1987 crash -- and for 10 quarters thereafter.
"But the market crashed anyway."

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Stock Trading Opportunity

Diagonal: Straight Shot to a Trading Opportunity

April 08, 2012

By Elliott Wave International

Today we sit down with Elliott Wave International's Futures Junctures Editor and Senior Tutorial Instructor Jeffrey Kennedy to discuss his favorite wave pattern of all: the diagonal.
EWI: You say if you had to pick just ONE of all 13 known Elliott wave structures to spend the rest of your technical trading life with, it would be the diagonal. First, tell us what the diagonal is.
Jeffrey Kennedy: The diagonal is a five-wave pattern labeled 1 through 5, in which each leg subdivides into three smaller waves: 3-3-3-3-3. Unlike impulse waves, however, diagonals are the only five-wave structures in the direction of the main trend in which wave 4 almost always moves into the price territory of wave 1. (See illustrations below.)

EWI: So, what makes this pattern so darn special?
JK: As you can see in the above charts, the diagonal is a terminating pattern. They can only occur in waves 5 of impulses or C-waves of corrections. This is why they're so exciting. Diagonals precede a dramatic change in trend. And, when they end, prices tend to retrace the entire pattern, or more, and fast -- in 1/3 to 1/2 the time it took the pattern to form.

Put simply: If you see a diagonal, you know the train of change is coming into the station.
EWI: Well, in your Daily Futures Junctures service, you do, in fact, see a diagonal underway in the recent price action of a major grain market. There, you present the following Elliott wave chart (some Elliott labels have been removed, while I took the liberty to draw a blue circle around the diagonal pattern for clarity):

JK: Yes. This is a classic diagonal unfolding in the final wave of the larger trend. As you can see, prices have put the finishing touches on wave (v) of c (circled). And, if my wave count is correct, this market's prices are about to board the "Exciting Southbound Turn" Railway.
EWI: Thank you so much for taking the time to explain the ins and outs of your favorite structure, the diagonal. And also, for alerting readers to the possible DRAMA in store for this major grain market thanks to this Elliott wave pattern.

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Learn More about Diagonals and Other Elliott Wave Patterns Get a better understanding of Elliott wave analysis with our Elliott Wave Patterns educational feature. You'll have access to basic lessons on Elliott wave patterns, along with video clips from our online courses which will explain the pattern, the rules and the guidelines. Plus, you'll see real-life examples that show you how each pattern fits into the overall wave structure. Some patterns will even offer a brief quiz to test your knowledge and ensure that you understand the material. Access the free Elliott Wave Patterns feature now.

the Long Decline Ahead: 20 Questions with Robert Prechter

20 Questions with Robert Prechter: Long Decline Ahead

July 2, 2010

By Elliott Wave International

The following article is an excerpt from Elliott Wave International’s free report, 20 Questions With Deflationist Robert Prechter. It has been adapted from Prechter’s June 19 appearance on Jim Puplava’s Financial Sense Newshour.

Jim Puplava: I want to come back to government spending, but first I want to move onto the stock market. In your last two Elliott Wave Theorist issues, you laid out a scenario that would put the Dow and S&P, which in your opinion may have peaked on April 26, as the top from here. You feel that this top is the biggest top formation of all time, a multi-century top and we could head straight down in a six-year collapse that would end in 2016 that could see a substantial portion of the S&P and the Dow wiped out in a similar way that we saw between 1929 and 1933. Let's talk about that and the reasoning behind it.

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

RP: Yes, you're exactly right. I did a lot of work on technical forms, cycle forms and Elliott wave forms in April and May and put them in a double issue. Let’s talk about the cycles first.
The 7¼-year cycle has been quite regular since the first bottom in 1980. The next bottom was at the crash in October 1987. The next one was November 1994, which is when the economy went through four years with lots of layoffs; it was a recessionary period throughout until that cycle bottomed. The next one was between September 2001, which was the 9/11 attack, and the October 2002 bottom. And the latest one was at the low in March 2009. All those periods are 7¼ years apart, so we are in the uptrend portion of the 7¼-year cycle.
However, notice for example that in 1987, the market went up until August of that year and then bottomed in October, just a couple of months later. So the decline occurred very, very late in the cycle. This time it occurred a little bit earlier in the cycle, topping in '07 and bottoming in '09. In the current cycle, prices should peak the earliest of all of them. It's what we in the cycle prediction business call “left-hand translation.” The market’s already gone up for about a year, and I think that's just about enough. I think we're going to spend most of the cycle going down. But the important thing to note is that the next bottom is due in 2016. That means I think we're going to have a repeat of what happened between 1930—which was the top of the rally following the 1929 crash—and the July 1932 low. Instead of taking two years, it's going to take about six years.
It's going to be a very long decline. It's going to be interrupted by many, many rallies, just as the decline from 1930 to 1932 was. And every time it bottoms and rallies, people are going to say “OK, that's enough; it's over.” But it won't be over. It's just going to be a long, long process. I think you and I will probably be talking a few times during this period. One of the interesting aspects of this process is that optimism should actually remain dominant through the first three years of the cycle. That will carry us into 2012. Even though prices will be edging lower, most people are going to think it's a buy, and you shouldn't get out of your stocks, and recovery is just around the corner, probably for the next three years. And then, for the final half of the cycle, the final three years, that's when you'll get the capitulation phase when everyone finally gives up.

Editor’s Note: The article you are reading is just one small excerpt from Elliott Wave International’s FREE report, 20 Questions With Deflationist Robert Prechter. The full 20-page report includes even more of Prechter’s insightful analysis on fiat currency, gold, the Fed, the Great Depression, financial bubbles, and government intervention. You’ll learn how to protect your money -- and even profit -- in today's environment. Read ALL of Prechter's candid answers for FREE now. Access the free 20-page report here.

This article, 20 Questions with Robert Prechter: Long Decline Ahead,was syndicated by Elliott Wave International. EWI is the world's largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.