Why Sometimes, "Beating the S&P 500" Isn't Good Enough

How money managers who beat a benchmark can still "ruin your retirement"

By Elliott Wave International

Would you like to invest with a money manager who has a track record of "beating the market"?
"Who wouldn't" you might reply. But, hold onto your horses -- or, in this case, onto your portfolio.
Even a professional manager who "performs" the S&P 500 can financially ruin you.
You see, the "beat the market" investment strategy is BOGUS. Learn what EWI's decades of research has uncovered about a long list of market myths.

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This article was syndicated by Elliott Wave International and was originally published under the headline Why Sometimes, "Beating the S&P 500" Isn't Good Enough. 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.

Bitcoin Crashes Below $10,000. What's Next?
Let our free special report give you some much needed answers

By Elliott Wave International

"Wild" only begins to describe Bitcoin's price action. Less than 12 months ago, it traded as low as $1,200. By early December, it hit a high of $19,891 -- on the CBOE, Bitcoin futures topped $20,000.

Side note: Who could have thought that something called a "digital currency" that first appeared in 2009 and was widely available for 1 cent (and no one cared!) eight years later would be going for $20,000 a pop? It's the wildest financial craze of our time. Wait, scratch that -- it's the wildest financial craze ever, because Bitcoin is up not 100%, not 1,000%, not even 10,000%. Since inception, Bitcoin is up 32,000,000%. Yes, thirty-two MILLION percent.

Yet, by December 22, Bitcoin crashed to $10,400. It wasn't entirely unexpected. The day before, Elliott Prechter, Head of Computer Analysis at Elliott Wave International, told Newsmax this:

Elliott Prechter: I Wouldn't Touch Bitcoin, Risk of Collapse Too Big

Thursday, 21 Dec 2017 10:38 AM

"We provided the first financial publication in the world that discussed bitcoin when it traded at 6 cents in 2010. Amidst obscurity, skepticism and disinterest, we explained the currency and said it had great potential," says Prechter, who left Seattle and Microsoft in early 2011 to help start an algorithmic hedge fund in Las Vegas.

Today, however, he says if you aren't already in the game when it comes to bitcoin, you might be better off sitting this one out.

"Bitcoin had great potential in 2010, but not in 2018. With today's elevated prices, manic psychology and weak fundamentals, I wouldn't touch it. The risk that it could collapse is too great."

Prechter says bitcoin could prove to be as fragile as a flower, or more specifically a tulip, comparing the bitcoin phenomena to the 1600s tulip mania in the Netherlands.

After the December crash, Bitcoin rebounded as high as $17,000 -- only to swing down again, trading in the $10,000 range. What's behind these wild gyrations?

Analysts seeking "rational" explanations are looking in the wrong places. The right answer is investor psychology. The same CNBC article we quoted above gets at the heart of the matter, saying that the latest bout of Bitcoin market panic.

"…lead the herd to sell with no other justification than fear..."

Fear and greed among the herd are what's driving cryptocurrencies' volatility. In other words, what's driving these trends is investor collective psychology.

And nothing helps you track and forecast market psychology like Elliott waves.

In our nearly 40 years in the business, we applied Elliott waves to hundreds of different markets -- some mainstream, some exotic. When we first studied cryptocurrency charts, we again discovered familiar price patterns. To understand why, you must first know what Elliott waves are.

Each price move on a chart – or "wave," as well call them -- shows you shifts in the collective psychology of market participants. These bullish/bearish shifts aren't random, but patterned: 5 waves in the direction of the larger trend and 3 waves against it. Once you establish where in this pattern a market is, you can forecast with confidence where prices should go next.

That's it, whether you're looking at the Dow, crude oil – or Bitcoin and Ethereum.

You might think that in extremely emotional markets like cryptos Elliott waves may lose effectiveness. Yet as a rule, the more emotional the market is, the clearer the wave patterns become.

Whenever a brand-new technology emerges, it often attracts a lot of investor interest. We saw it with the internet in the late 1990s. We're seeing it today with Bitcoin. Both have been described as bubbles. The internet survived, and thrived. Blockchain technology behind cryptocurrencies holds much promise, as well. So, despite the tremendous volatility, it may be too soon to write off cryptos as a class.

To help you prepare for what's next, we put together a free report, "Bitcoin: The Greatest Bubble of All Time" that gives you our latest thoughts.

Read it now, free -- and see what market psychology suggests for cryptos next..

How a Simple Line Can Improve Your Trading Success
Elliott Wave International's Jeffrey Kennedy explains many ways to use this basic chart tool

By Elliott Wave International

The following trading lesson has been adapted from Jeffrey Kennedy's eBook, "Trading the Line -- 5 Ways You Can Use Trendlines to Improve Your Trading Decisions."

"How to draw a trendline" is one of the first things traders and investors learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools.

Yet you'd be amazed at the value a simple line can offer when you analyze a market. As Jeffrey Kennedy, editor of Elliott Wave International's Trader's Classroom service, puts it:

"A trendline represents the psychology of the market, specifically, the psychology between the bulls and the bears. If the trendline slopes upward, the bulls are in control. If the trendline slopes downward, the bears are in control. Moreover, the actual angle or slope of a trendline can determine whether or not the market is extremely optimistic or extremely pessimistic."

In other words, a trendline can help you identify the market's trend. And, "the trend is your friend," remember? Consider this example in the price chart of Google.

 

That one trendline -- drawn between the lows in 2004 and the lows in 2005 -- provided price support for several corrective retracements over the next two years. Each time prices would touch that line, they would rebound higher and higher.

That's pretty basic. But there are many more ways to draw trendlines. For example, when a market is in a correction you can draw a trendline -- and then draw a parallel line to create a channel. You'll find that it often "contains" the corrective price action. When price breaks out of this channel, there's a good chance the correction is over and the main trend has resumed. Here's an example of a trend channel in a chart of Soybeans. Notice how the upper trendline provided support for the subsequent rally.

Bottom line is, if you've been considering adding technical analysis to your arsenal, know that it doesn't have to be complicated. As Jeffrey Kennedy likes to tell his students, "A kid with a ruler can make a million bucks in the stock market if he/she knows how to draw a trendline."

5 Ways You Can Use Trendlines to Improve Your Trading Decisions Learn five ways to draw trendlines that will help you to identify support and resistance, the end of a move, and changes in trend -- critical information for your trading success. Learn how to get free, instant access to this resource.

This article was syndicated by Elliott Wave International and was originally published under the headline How a Simple Line Can Improve Your Trading Success. 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.

A Timely Lesson for Today’s Stock Market Investors
"The names may change, but the psychology remains the same."

By Elliott Wave International

Have you ever compared chart patterns from history with financial markets today? Elliott Wave International can show you the unique value of doing exactly that.

Why?

Because patterns on market charts repeat themselves. It happens across the globe, regardless of time period. When a still-unfolding pattern in the present looks a lot like a chart from the past, the price action to come may well remain on that earlier path.

Which means you can anticipate what's next. [Ed. note: this video link shows you an example]

As the book The Mania Chronicles (2009) by Peter Kendall and Robert Prechter says:

The names may change, but the psychology remains the same.

The Mania Chronicles is an account of the financial bubble between 1995 and 2008, and it illustrates the point with this September 2000 chart and commentary:

Since January [2000], the Elliott Wave Financial Forecast has been tracking the NASDAQ's uncanny resemblance to the Japanese Nikkei-225 in 1989 and 1990. Now that it has fallen and bounced, it has acquired a look that is also very similar to the post-peak performance of the 1929 DJIA, the 1987 DJIA and the 1997 Hong Kong Hang Seng index.

In all cases, the manic final run to all-time highs was followed by an initial leg down that led to a three-wave countertrend rebound, the classic Elliott wave signature of a correction. Look closely, and you will notice that these rebounds usually start with a big up day (sometimes on a gap) that fools the bulls into thinking that a major bottom has been recorded. The rallies last mere days, though, and then prices turn down in a crash. The NASDAQ gapped higher off its May low at 3043 and then traced a three-wave move to the September 1 high of 4260. The decline since then has violated the trendline support that contained the entire countertrend rally.

…The clock is ticking for the start of the "cascading phase" of the pattern. Prices may rally briefly, but a severe decline is likely.

As we now know, the NASDAQ did cascade downward into 2002, with the entire 2000-2002 bear market consuming 78% of the index's value.

Lately, Elliott Wave International has also been reviewing other chart formations with similarities to the present.

In July 2017, the Elliott Wave Financial Forecast showed this chart and said:

The chart shows [a] succession of tops. The bottom four panels show peaks in real estate, commodities and bonds since 2006, and an impending high in stocks. The topping sequence is similar to that which occurred during the last peak of Supercycle degree, wave (III) in 1929. The current top is a Grand Supercycle degree peak ….

Since we showed that chart in July 2017, yet another chart pattern surfaced in the stock market -- and it's eerily similar to 1929. EWI's Robert Folsom reveals that pattern, in his Chart of the Day video titled "Believe Your Own Eyes: Ghost of a Stock Market Past in the Present." Follow this link to watch the video.