With Knowledge comes Opportunity
With Opportunity comes Success

Technical Analysis Portal Financial Analysis Value Investing Behavioral Finance Portal
>Home Page >Technical Analysis >Elliot Wave, Dow Theory, Time Cycles, Etc.:
[Frost & Prechter] Elliott's observations led him to believe that markets move in waves of progress and regress (motive and corrective). He further stated that periods of progress ultimately take the form of five waves with periods of regress taking the form of three waves: "...this is the minimum requirement for, and therefore the most efficient method of, achieving both fluctuation and progress in linear movement. The fewest subdivisions to create fluctuation is three waves. Three waves (of unqualified size) in both directions does not allow progress. To progress in one direction despite periods of regress, movements in the main trend must be at least five waves, simply to cover more ground than the three waves and still contain fluctuation. While there could be more waves than that, the most efficient form of punctuated progress is 5-3, and nature typically follows the most efficient path".
A Capsule Summary Of The Wave Principle, Prechter
"The Wave Principle is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Using stock market data as his main research tool, Elliott isolated thirteen patterns of movement, or "waves", that recur in market price data. He named, defined and illustrated those patterns. He then described how these structures link together to form larger versions of those same patterns, how those in turn link to form identical patterns of the next larger size, and so on. In a nutshell, then, the Wave Principle is a catalog of price patterns and an explanation of where these forms are likely to occur in the overall path of market development".
Elliott Waves and Social Reality, Prechter, 2001
"The primary thesis of this book is that changes in social mood cause and therefore precede changes in the character of social events. In contrast to this idea, most people erroneously try to devine the implications of event in attempts to forecast financial markets and people's collevtive feelings. This appraoch cannot work because markets are driven by natural trends in mass psychology, and events resulting from those psychological trends come afterward. It is the changes in such trends, as indicated by turns in the stock market, that signal a coming change in the tenor of social events".
Cultural Trends - Manifestation of a Bear Market Mood in Europe, Elliott Wave International's, 2004
"Major bear markets are accompanied by a reduction in the size of people's unit of allegiance, the group that they consider to be like themselves. At the peak, it's all 'we'; everyone is a potential friend. At a bottom it's all 'they'; everyone is a potential enemy. When times are good, tolerance is greater and boundaries weaker. When times are bad, intolerance for differences grows, and people build walls and fences to shut out those perceived to be different. Ultimately, persecution and war result. Let's look at four examples of xenophobia and exclusionism going on in Europe now: Anti-immigration behavior, Extreme right-wing political victories, Anti-Americanism, Anti-Semitism. All these "anti-isms" spring from the same source: the emerging bear market in social mood. As Europe heads lower, the urge to close ranks and close out others will metamorphose into open conflict and escapist activities. The decline has a long way to go, so the likelihood is that the national boundaries separating EU members will regain much of their historic significance".
[Yamada] "Dow theory suggests that if the companies that make the goods and those that transport the goods move up in tandem, therein lies an economic message".
The Dow Theory: William Peter Hamilton's Track Record Re-considered, Brown, Goetzmann and Kumar, 1998
Alfred Cowles' (1934) test of the Dow Theory apparently provided strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. In this paper, we review Cowles' evidence and find that it supports the contrary conclusion - that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that his timing strategies yield high Sharpe ratios and positive alphas. The contribution of this paper is not simply to show that Hamilton was a successful market timer. Alfred Cowles' (1934) analysis of the Hamilton record is a watershed study which led to the random walk hypothesis, and thus played a key rule in the development of the efficient market theory. Ever since Cowles' article, "chartists" in general, and Dow theorists in particular, have been regarded by financial economists with skepticism. Our replication of Cowles' analysis yields results contrary to Cowles' conclusions. At the very least, it suggests that more detailed analysis of the Hamilton version of the Dow Theory is warranted. In broader terms it also suggests that the empirical foundations of the efficient market theory may not be as firm as long believed".
Time Cycles - A Short Primer, Yamada, 2004
Time is usually the stepchild to price and volume in the realm of technical analysis. In fact, too often we want to know where the market is going, while when it may get to our target becomes a secondary consideration. Technicians are loath to judge both where and when. The study of time cycles is another dimension to the investment strategy picture that may help with this dilemma.
The Halloween Indicator, 'Sell in May and Go Away', Jacobsen and Bouman, 2001
"We document the existence of a strong seasonal effect in stock returns based on the popular market saying 'Sell in May and go away', also known as the 'Halloween indicator'. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample".
Years ending in "5", Hussman, 2005
It's unfortunate that serious investors would even entertain superstitions of this type, but with valuations higher than they were at the 1929, 1972 and 1987 market peaks, I suppose that investors have to reach for something. In this case, bullish arguments have increasingly included the observation that there have been no down-years ending in 5 over the past century. Now, stare at that for a second. Historically, the market has advanced some 70% of the time, declining the other 30%. Over the past century, a year ending in any particular number has had 10 times to show its stuff. So the probability of getting an advancing year 10 times in a row for a year ending in any particular number is just (0.7)^10 = 2.82%. Of course, there are 10 digits that you could end with, so the probability that you would have seen all-advances in at least one of those ending-digits is 1 minus (1 minus .0282)^10 = 24.9%, which is relatively low, but not strikingly mysterious. Of course, if you mine the historical data a dozen independent ways for patterns like this, each having only a 24.9% chance of showing up, the probability that at least one such pattern will emerge is 1 minus (1 minus .249)^12 = 96.8%. In short, if you give me a dozen opportunities to mine the data in ways that have even modest probability of coming up with an interesting superstition, it's almost certain that I'll come up with an interesting superstition. Notice that this is why you should always be aware of the sample size and the number of groups included in a particular analysis. For example, if every year ending in an even number had been an advancing year over the past century, there would be 50 such events, and the probability of all being advances would be (0.7)^50 = 0.000000018. Even allowing 2 groups (even/odd), and the opportunity to mine the data for thousands of similar relationships, the likelihood of this being a chance outcome would still be nearly zero. As for years ending in "5", the statistics are completely unimpressive.