Forecasting Stock Markets

Here's Why You Can Forecast Markets Just by Looking at Chart Patterns
Here are two illustrations of the fractal form of financial markets

By Elliott Wave International

Nature is full of fractals.

Fractals are self-similar forms that show up repeatedly. Consider branching fractals such as blood vessels or trees: a small tree branch looks like an approximate replica of a big branch, and the big branch looks similar in form to the entire tree.

Fractals also form in the price charts of financial markets, at all degrees of trend, in both up- and downtrends. In fact, without knowing the time or price labels, you can't tell if you're looking at a 2-minute chart, a daily chart -- or a yearly one.

Fans of Elliott wave analysis have been using this information to their advantage for decades. Our March 2020 Elliott Wave Theorist gave subscribers two important real-time examples of fractals at work. Here's the first one along with the commentary:

This figure offers a good illustration of the fractal nature of markets. It shows the correction in T-bond futures of 2016-2018 on a weekly chart against the correction in the last four months of 2019 on a daily chart. They look quite similar, and each one led to a run to new highs.

And here's the next example, along with commentary from the March Theorist:

This figure shows another example of the market's adherence to forms. The top graph shows the 10-minute range for the S&P futures contract on March 4, and the bottom graph shows the same for March 5. Don't they look similar?

In fact, however, the trend of the market in the top graph was up, and the trend shown beneath it was down. We simply inverted the bottom graph for our illustration. Prices rose on March 4, and they fell on March 5, in the same pattern.

Here's what this means for investors and traders: The fact that price charts unfold in repetitive and recognizable patterns makes financial markets predictable.

As Elliott Wave Principle: Key to Market Behavior by Frost & Prechter noted:

Scientific discoveries have established that self-similar pattern formation is a fundamental characteristic of complex systems, which include financial markets. Some such systems undergo "punctuated growth," that is, periods of growth alternating with phases of non-growth or decline, building into similar patterns of increasing size.

Learn more about these self-similar pattern formations and how they can help you to anticipate turns in widely traded financial markets, including the stock market.

You can do so by reading the online version of Elliott Wave Principle: Key to Market Behavior, 100% free.

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This article was syndicated by Elliott Wave International and was originally published under the headline Here's Why You Can Forecast Markets Just by Looking at Chart Patterns. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

the Stock Market and the Fed

Elliott Wave: Fed Follows Market Yet Again

By Steve Hochberg and Pete Kendall

Back in December, we wrote an article titled "Interest Rates Win Again as Fed Follows Market."
In the piece, we noted that while most experts believe that central banks set interest rates, it's actually the other way around—the market leads, and the Fed follows.
We pointed out that the December rate hike followed increases in the six-month and three-month U.S. Treasury bill yields set by the market.
What happened with this week's Fed announcement? Well, you guessed it—the Fed simply followed the market yet again.

The chart above is an updated version of the one we showed in our last article. The red line is the U.S. Federal Funds rate, the yellow line is the rate on the 3-month U.S. T-bill and the green line is the rate on the 6-month U.S. T-bill. The latter two rates are freely-traded in the auction arena, while the former rate is set by the Fed.
Now observe the grey ellipses. Throughout 2017-2018, the rates on 3-and-6-month U.S. T-bills were rising steadily, pushing above the Fed Fund's rate. During the period shown on the graph, the Fed raised its interest rate six times, each time to keep up with the rising T-bill rates. The interest-rate market is the dog wagging the central-bank tail.
Now note what T-bill rates have been doing since November of last year; they've stopped rising. Rates have moved net-sideways, which was the market's way of signaling that the Fed would not raise the Fed Funds rate this week.
Too many investors and pundits obsess over whether the Fed will raise or lower the Fed Funds rate and what it all supposedly means. First, if you want to know what the Fed will or will not do, simply look at T-bills, as shown on the chart. Second, whatever their action, it doesn't matter because the Fed's interest-rate policy cannot force people to borrow.
See Chapter 3 of The Socionomic Theory of Finance for more evidence.

China's Stock Market Rollercoaster Ride

China's Stock Market Rollercoaster Ride Continues
But there is a way to endure the wild ride -- with Elliott wave analysis

By Elliott Wave International

"Chao gu" is the Chinese term for speculating in stocks. Roughly translated, it means "stir-frying" shares. Lately, though, for millions of Chinese investors, it means getting fried.
Enter the "nerve-shredding," "whiplash-inducing," rollercoaster "tantrum" of China's stock market. After soaring to 7-year highs on June 12, both the Shanghai Composite and Shenzhen stock indexes collapsed in a respective 21% and 25% sell-off (as of June 30), frequently marked by wrenching intraday swings the likes of which haven't been seen in 20 years.
In the words of one June 28 news source (bold added):

"You have to have a very strong stomach to trade in China. You have to be prepared for days when you are up or down more than 5% and there is no clear fundamental explanation." (FinanceAsia)

In fact, not only isn't there a bearish fundamental explanation for the market rout, but those fundamentals widely seen as bullish for stocks have also failed to stem the slide. Take, for instance, these recent stock-boosting initiatives on the part of the People's Bank of China:

• A .25% cut to both its 1-year lending and deposit rates
• A decrease in banks' reserve requirements to loosen the lending spigot
• The first-ever approval of local government pensions to buy stocks 

That China's stock market shrugged off these (and other) supposedly bullish catalysts hasn't gone unnoticed. In the words of one Chinese investor, these moves imply "the stock market is kidnapping the government." (The Globe & Mail, June 30)
Well, he's sort of right. The moves imply the government is not in control of the market. Actually, on June 5, our own Asian-Pacific Financial Forecast expressed this exact sentiment and wrote:

"China's current bull market is not a product of government stimulus or of investor ignorance or -- as a prominent short-seller told CNBC this week -- 'the largest pump-and-dump in history.' "(Bloomberg, 6/1/15).

So, what is it a product of? Well, our Asian-Pacific Financial Forecast provides this Elliott wave explanation:

"Actually, it's the initial wave within China's wave V up, which followed the end of its wave IV contracting triangle."

In other words, Chinese stocks have been in a bullish Elliott wave formation, but those don't develop in a straight line; you should expect pullbacks, whether or not there is a good "fundamental" explanation for them.
In fact, before the current rollercoaster ride began, our Asian-Pacific Financial Forecast wave count showed China's stocks nearing a wave 3 peak, setting the stage for an important decline. On June 5, we wrote:

"The indexes should soon correct in wave 4 for some weeks"

One week later -- on June 12 -- China's stocks turned down in the stomach-churning decline we see today.
Whether this decline marks a long-term top for China's bull market -- the same June 5 Asian-Pacific Financial Forecast shows you what key indicators to look for, and when.
The best part is, EWI has bundled exclusive charts and commentary from that subscriber-only report and made it available as a FREE resource to all Club EWI members.
This free resource, titled "China Stocks: Where Have They Been and Where Are They Going?" may be the most valuable report you read on the developing trend in China's stock market. And the best part is, it's absolutely FREE to all Club EWI members. If you haven't joined already, a life-time membership to Club EWI is also FREE!
Or -- for existing Club EWI members, click here for instant access to the entire "China Stocks: Where Have They Been and Where Are They Going?" report.

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This article was syndicated by Elliott Wave International and was originally published under the headline China's Stock Market Rollercoaster Ride Continues. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Get Ready for the Rest of the Crash

Position Yourself for the Rest of "Conquer the Crash"
The earlier you prepare, the better
May 23, 2012

By Elliott Wave International

To this day, I wonder why Robert Prechter's book Conquer the Crash has not been more widely recognized. It described in advance much of what happened in the 2008 financial crisis.
Published in 2002, the book provided detailed descriptions of then-future economic scenarios. They were detailed vs. general. Prechter was specific in a way that would prove right or wrong; there was no gray.
This is from the book:

There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks' debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients' potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.

Conquer the Crash, second edition, (p. 179)

That's just one excerpt about one topic in a 456-page text. Perhaps you see why I believe the book deserves more credit. Yet even that one paragraph from the book turned out to be a virtual mirror of what came to pass. And much of what he predicted is unfolding today: the JPMorgan trading fiasco, massive withdrawals at Greek banks, downgrades of Italian and Spanish banks and much more. Those are just a few headlines.
The broader point is that Conquer the Crash prepared its readers. Around the time the book's second edition published in 2009, the Chicago Sun-Times remarked
And the credit implosion is still not over. Please take a look at the chart:

In the Conquer the Crash quote in the first part of this article, you'll notice the last three words are "deflation and depression."
The world has yet to completely pass through these economic valleys.

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It's not too late to prepare yourself for what's ahead Elliott Wave International is offering a special free report with 8 lessons from Conquer the Crash to help you prepare for your financial future. In this 42-page report, you'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt, a list of imperative do's and don'ts, plus much more. Get Your FREE 8-Lesson Conquer the Crash Report Now >>

Fractals and the Stock Market

What Does a Fractal Look Like?
And What Does It Have to Do with the Stock Market? 
May 26, 2011

By Elliott Wave International

If the word 'fractal' comes up at all in conversation, that conversation is probably being held in a mathematics department. However, anyone who is interested in the Wave Principle and how it applies to the stock market may have stumbled across the phrase "robust fractal." If you want to know more about what it means in that context, here's an excerpt from Elliott Wave International's primer on fractals that explains the connection.

* * * * *

Excerpted from The Human Social Experience Forms a Fractal
by Robert R. Prechter
In the 1930s, Ralph Nelson Elliott discovered that aggregate stock market prices trend and reverse in recognizable patterns. In a series of books and articles published from 1938 to 1946, he described the stock market as a fractal. A fractal is an object that is similarly shaped at different scales.
Although Elliott came to his conclusions fifty years before the new science of fractals blossomed, he took a step that current observers of natural processes have yet to take. He explained not only that the progress of the market was fractal in nature but discovered and described the component patterns. The patterns that Elliott discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated and defined a number of patterns, or "waves," that recur in market price data. He named and illustrated the patterns. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns at the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle….
The Stock Market as a Robust Fractal
A classic example of a self-identical fractal is nested squares. One square is surrounded by eight squares of the same size, which forms a larger square, which is surrounded by eight squares of that larger size, and so on.
A classic example of an indefinite fractal is the line that delineates a seacoast. When viewed from space, a seacoast has a certain irregularity of contour. If we were to drop to ten miles above the earth, we would see only a portion of the seacoast, but the irregularity of contour of that portion would resemble that of the whole. From a hundred feet up in a balloon, the same thing would be true.

Scientists today recognize financial markets' price records as fractals, but they presume them to be of the indefinite variety. Elliott undertook a meticulous investigation of financial market behavior and found something different. He described the record of stock market prices as aspecifically patterned fractal yet with variations in its quantitative expression. I call this type of fractal, which has properties of both self-identical and indefinite fractals, a robust fractal. Robust fractals permeate life forms. Trees, for example, are branching robust fractals, as are animals, circulatory systems, bronchial systems and nervous systems. The stock market record belongs in the category of life forms since it is a product of human social interaction.
How Is the Stock Market Patterned?

Figure 1 shows Elliott's idea of how the stock market is patterned. If you study this depiction, you will see that each component, or "wave," within the overall structure subdivides in a specific way by one simple rule: If the wave is heading in the same direction as the wave of one larger degree, then it subdivides into five waves. If the wave is heading in the opposite direction as the wave of one larger degree, then it subdivides into three waves (or a variation). These are called motive and corrective waves, respectively. Each of these waves adheres to specific traits and tendencies of construction, as described in Elliott Wave Principle (1978).
Waves subdivide this way down to the smallest observable scale, and the entire process continues to develop larger and larger waves as time progresses. Each wave's degree may be identified numerically by relative size on a sort of social Richter scale.

Want to Know More About Fractals and the Stock Market? Then read the whole special report, called "The Human Social Experience Forms a Fractal." It's free of charge, so long as you are a member of Club EWI, which gives you access to many free reports that explain Elliott wave analysis and the Wave Principle.

Popular Music and the Stock Market

How Punk Rock and Pop Music Relate to Social Mood and the Markets

March 10, 2011

By Elliott Wave International

We can now add the recent uprisings in North Africa and the Middle East to the category of life imitating art -- specifically, music lyrics. Those who lived through the 1980s might be forgiven for hearing an unbidden snatch of music run through their heads as they watched first Hosni Mubarak and now Moammar Gadhafi try to hold onto power -- "Should I Stay or Should I Go" by The Clash. In Libya, where Gadhafi has used air strikes and ground forces against the rebels, The Clash's other huge hit from 1981, "Rock the Casbah," describes the current situation so well it's almost eerie:
The king called up his jet fighters
He said you better earn your pay
Drop your bombs between the minarets
Down the Casbah way
Punk rock played by bands like The Clash, X, The Ramones, and the Sex Pistols had that in-your-face, defy-authority attitude that crashed onto the scene in Great Britain and the United States in the '70s and '80s. It's interesting that the lyrics can still ring true 30 years later, but even more trenchant is how the prevailing mood is reflected by the music of the times, as seen in this chart that Robert Prechter included in a talk he gave last year.

Popular culture reflects social mood, and the stock market reflects that same social mood. That's why we get loud, angry music when people are unhappy with their situation; they want to sell stocks. We get light, poppy, bubblegum music when they feel happy and content; they want to buy stocks. In a USA Today article about music and social moods in November 2009, reporter Matt Frantz made clear the connection that Elliott Wave International has been writing about for years:

The idea linking culture to stock prices is surprisingly simple: The population essentially goes through mass mood swings that determine not only the types of music we listen to and movies we watch, but also if we want to buy or sell stocks. These emotional booms and busts are followed by corresponding swings on Wall Street.
"The same social elements driving the stock market are driving the gyrations on the dance floor," says Matt Lampert, research fellow at the Socionomics Institute, a think tank associated with well-known market researcher Robert Prechter, who first advanced the idea in the 1980s. [USA Today, 11/17/09]

In the talk he gave to a gathering of futurists in Boston, Prechter explained how the music people listen to relates to social mood and the stock market:

When the trend is up, they tend to listen to happier stuff (see chart). Back in the 1950s and ‘60s, you had doo-wop music, rockabilly, dance music, surf music, British invasion — mostly upbeat, happy material. As the value of stocks fell from the 1960s into the early 1980s, you had psychedelic music, hard rock, heavy metal, very slow ballads in the mid-1970s, and finally punk rock in the late ’70s. There was more negative-themed music. [excerpt from Robert Prechter’s speech to the World Future Society's annual conference, 7/10/10]

Which brings us right back to punk rock. Although there's lots of upbeat music in the air now, we can assume that after this current bear market rally, we will hear angrier music on the airwaves as the market turns down. It might be a good time, then, to pay attention to what the markets were doing the last time punk rock blasted the airwaves. Here's an excerpt from "Popular Culture and the Stock Market," which is the first chapter of Prechter's Pioneering Studies in Socionomics.

The most extreme musical development of the mid-1970s was the emergence of punk rock. The lyrics of these bands' compositions, as pointed out by Tom Landess, associate editor of The Southern Partisan, resemble T.S. Eliot's classic poem "The Waste Land," which was written during the 'teens, when the last Cycle wave IV correction was in force (a time when the worldwide negative mood allowed the communists to take power in Russia). The attendant music was as anti-.musical. (i.e., non-melodic, relying on one or two chords and two or three melody notes, screaming vocals, no vocal harmony, dissonance and noise), as were Bartok's compositions from the 1930s.
It wasn't just that the performers of punk rock would suffer a heart attack if called upon to change chords or sing more than two notes on the musical scale, it was that they made it a point to be non-musical minimalists and to create ugliness, as artists. The early punk rockers from England and Canada conveyed an even more threatening image than did the heavy metal bands because they abandoned all the trappings of theatre and presented their message as reality, preaching violence and anarchy while brandishing swastikas.
Their names (Johnny Rotten, Sid Vicious, Nazi Dog, The Damned, The Viletones, etc.) and their song titles and lyrics ("Anarchy in the U.K.," "Auschwitz Jerk," "The Blitzkrieg Bop," "You say you've solved all our problems? You're the problem! You're the problem!" and "There's no future! no future! no future!") were reactionary lashings out at the stultifying welfare statism of England and their doom to life on the dole, similar to the Nazis backlash answer to a situation of unrest in 1920s and 1930s Germany.
Actually, of course, it didn't matter what conditions were attacked. The most negative mood since the 1930s (as implied by stock market action) required release, period. These bands took bad-natured sentiment to the same extreme that the pop groups of the mid-1960s had taken good-natured sentiment. The public at that time felt joy, benevolence, fearlessness and love, and they demanded it on the airwaves. The public in the late 1970s felt misery, anger, fear and hate, and they got exactly what they wanted to hear. (Luckily, the hate that punk rockers. reflected was not institutionalized, but then, this was only a Cycle wave low, not a Supercycle wave low as in 1932.)
In summary, an "I feel good and I love you" sentiment in music paralleled a bull market in stocks, while an amorphous, euphoric "Oh, wow, I feel great and I love everybody" sentiment (such as in the late '60s) was a major sell signal for mood and therefore for stocks. Conversely, an "I'm depressed and I hate you" sentiment in music reflected a bear market, while an amorphous tortured "Aargh! I'm in agony and I hate everybody" sentiment (such as in the late '70s) was a major buy signal.

Popular Culture and the Stock Market. Read more about musical relationships to social mood and the markets in this 40-page-plus free report from Elliott Wave International, called Popular Culture and the Stock Market. All you have to do to read it is sign up to become a member of Club EWI, no strings attached. Find out more about this free report here.