Beware of This Deceptive Bear-Market Trait

There's only one rule which applies to a 2nd wave rally...

By Elliott Wave International

Big stock market trends don't progress up or down in a straight line. In a bear market, stocks typically rebound after the first leg down. In a bull market, the opposite happens: Stocks again take a big dive, making everyone think the bear market has returned.

But in a bear market, that "first leg down" is wave 1 and the partial "rebound" which follows is wave 2. I say "partial" because the only rule which applies to wave 2 is that it cannot retrace 100% of wave 1. Meaning, the bear market rally cannot go above the previous market top.

That said, the percentage of these retracements can be quite high. Let's look at a couple of historical Dow Industrials' examples, starting with 1968-69:

As you can see, the wave 2 rebound retraced 80% of the wave 1 decline. The last thing many investors expected was the portfolio-crushing wave 3 which followed.

This next chart shows that the percentage of the wave 2 retracement during the 1937-38 bear market was even higher:

Following wave 2, wave 3 brought a 41% decline in just three months. Parenthetically, by the time wave 5 was complete, the Dow Industrials had dropped 49% from the wave 2 high.

Be aware that a key characteristic of wave 2 during a bear market is that the bullish psychology is usually just as intense -- or even more so -- than what was displayed at the top of the prior bull market. Many investors believe the first drop in the bear market created "bargains" and scoop them up.

Is the same pattern of investor psychology playing out here in 2022? Here are some recent headlines:

• Bank of America, Disney, and Uber All Look Like Bargains (Barron's, August 8)
• [Managing Director] makes his case for S&P to reach 4,800 by year end (CNBC, August 5)
• Investors Spot Bargains Among Small-Cap Stocks (Wall Street Journal, June 1)

The bullish sentiment expressed in these headlines might turn out to be correct.

On the other hand, we do know that the U.S. stock market top occurred in January, and after an initial leg down, the market staged a significant rebound.

If a devastating wave 3 down is next, the remainder of the bear market may be far more devastating than what was shown in the two historical examples.

That's what the Elliott wave model is suggesting. Do keep in mind that no method of market analysis provides a guarantee about a financial market's future price path. That said, this is an ideal juncture at which to learn about Elliott wave analysis if you're unfamiliar with it.

The definitive text on the subject is Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from this Wall Street classic:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave.

Here's the good news: You can read the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

You can join Club EWI for free and you may be interested in knowing that members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading. These resources include articles and videos from Elliott Wave International's analysts. Also know that you are under no obligation as a Club EWI member.

Hop aboard now and enjoy free access to Elliott Wave Principle: Key to Market Behavior (just follow the link).

This article was syndicated by Elliott Wave International and was originally published under the headline Beware of This Deceptive Bear-Market Trait. 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.

Why You Should Expect a Pickup in Stock-Market Volatility

"Traders are convinced the market volatility will remain subdued"

By Elliott Wave International

When things get quiet in a horror movie, that's when you need to really brace yourself. The monster or the killer will soon be on the scene.

That's a close enough analogy to what can happen in the stock market. Just when investors get comfortable with a stretch of low volatility -- wham! -- volatility picks up in a major way.

Back on Nov. 27, 2019, our U.S. Short Term Update, a thrice weekly Elliott Wave International publication which provides near-term forecasts for major U.S. financial markets, showed a chart titled "Calm Before the Craziness," and said:

The CBOE volatility Index (VIX) closed below 12.00 for the third straight session... In fact, investors are so complacent that, paradoxically, it signals a coming pick up in volatility.

About three months later, our Feb. 24, 2020 U.S. Short Term Update noted:

The VIX surged 69% intraday and is now up 130% since the November 26 low. The VIX should eventually move even higher as stocks prices work lower.

As you may recall, a hair-raising stock market decline that had started in mid-February continued to plummet into March 23 of that year.

What does this have to do with today?

This chart and commentary from our August 15, 2022 U.S. Short Term Update provides the answer:

We have inverted the scale to align the VIX with prices. The DSI Indicator (trade-futures.com) has declined to 15, the lowest reading since March 29 (DSI of 13), which coincided with [an Elliott wave high]. The VIX itself declined to 19.12 on August 12 and traders are convinced the market volatility will remain subdued. As shown by the vertical dashed lines, the prior two times that traders were equally confident that volatility will remain muted occurred at or near prior market highs.

Indeed, an August Yahoo Finance headline reflects an example of this confidence:

10 reasons to be bullish on stocks right now, according to [a strategist at the largest U.S. bank]

That strategist may turn out to be correct.

On the other hand, volatility has already picked up since our August 15 analysis published. Of course, during periods of high volatility, there's the potential for big moves on the up- as well as downside.

Now it's time to learn what the Elliott wave pattern of the stock market is suggesting.

If you’re new to Elliott wave analysis or need a refresher, you may want to read Elliott Wave Principle: Key to Market Behavior by Frost & Prechter. Here’s a quote from the book:

It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so.

The ability to identify such junctures is remarkable enough, but the Wave Principle is the only method of analysis that also provides guidelines for forecasting.

You can read the entirety of this Wall Street classic for free once you become a member of Club EWI, the world’s largest Elliott wave educational community (about 500,000 worldwide members).

You can join Club EWI for free and members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading without any obligations.

Just follow this link to get started right away: Elliott Wave Principle: Key to Market Behavior – get instant access – free.

This article was syndicated by Elliott Wave International and was originally published under the headline Why You Should Expect a Pickup in Stock-Market Volatility. 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.

Non-Fungible Tokens (NFTs): Another Financial "Fumble"

NFTs have taken "a round trip to nowhere"

By Elliott Wave International

Tampa Bay Buccaneers' quarterback Tom Brady is a non-fungible token (NFT) enthusiast.

However, glory on the football field has not translated to this field of finance (Business Insider, August 8):

Tom Brady bought a Bored Ape NFT for $430,000 in April. He's lost at least $194,000 on it since then.

He paid 133 ether for it ... which is $235,436 right now. Its best offer is $136,034.

Brady formed his own NFT company in 2021 and is one of many celebrities who became enamored with cryptos.

Yet, celebrity endorsements of cryptos have not exactly had a stellar record. Examples include a 95% plummet in the average price of NFTs sponsored by boxer Mike Tyson, a slide of more than 75% in World of Women NFTs backed by movie star Reese Witherspoon and a big tumble in the price of Bitcoin since movie star Matt Damon appeared in video advertisements in October 2021. And the list goes on.

The Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus worldwide financial markets, has been keeping subscribers apprised of cryptos. The July issue showed this chart and said:

Non-fungible tokens (NFTs) are [an] asset class that demonstrates investors' remarkable tolerance for losses in the wake of The Great Peak. The chart shows the NFT Index, which originated on March 20, 2021 to track the price of these tokens. The index is down 90% from its high.

Remarkably, the major slide in the price of NFTs and other cryptos has not dampened investors' enthusiasm.

This is from the August Global Market Perspective:

Barron's reported on August 4 that "mom and pop investors are pouring money into cryptocurrencies." Retail investors are piling into bitcoin "at the fastest rate in history."

Often, such zeal can serve as a contrarian indicator. On the other hand, manias can persist before they finally end.

This is an ideal time to consult the Elliott wave model. Keep in mind that no method of analysis offers a guarantee, however, the Wave Principle does reflect the repetitive patterns of investor psychology.

As Frost & Prechter's Elliott Wave Principle: Key to Market Behavior says:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Learn about these "forms" by reading the entire online version of this Wall Street classic for free!

The only requirement for free access is a Club EWI membership, which is also free.

Club EWI is the world's largest Elliott wave educational community (approximately 500,000 worldwide members and rapidly growing), and members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading.

Get on board now by following this link: Elliott Wave Principle: Key to Market Behavior -- get instant access for free.

This article was syndicated by Elliott Wave International and was originally published under the headline Non-Fungible Tokens (NFTs): Another Financial "Fumble". 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 Final Act BEFORE a Housing Bubble Bursts

Here's a time-tested indicator of trend turns in financial markets

By Elliott Wave International

Financial history shows that feverish foreign buying of a financial asset usually marks the end of that asset's upward trend.

The reason why is that foreign buyers tend to enthusiastically jump on a trend after it's already run its course -- or nearly so.

You can find an example of this going as far back as Tulip Mania in Holland in the 1600s. But let's stick with history which goes back just a generation or so, namely, the commercial real estate boom of the late 1980s.

Japan's stock market had been racing higher and Japanese investors were pouring money into U.S. real estate. One of their prize purchases was Rockefeller Center in 1989. Mitsubishi paid $2 billion for this "Hope Diamond of world real estate." By 1995, Rockefeller Center went bankrupt and Mitsubishi lost its entire investment.

Another case in point is the U.S. stock market in 2007.

The August 2007 Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus worldwide financial markets, showed this chart and said:

Foreigners jumped into the U.S. market like never before in May [2007]. The new record was a full third higher than the old one, which was set in February 2000, one month after the Dow Industrials' 2000 peak. ... The first five months of [2007] produced what was easily the biggest gusher of net foreign buying in history. The record suggests that falling prices lie directly ahead for the U.S. market.

Two months after that analysis was provided, the Dow Industrials topped, and then entered a bear market which lasted nearly a year and a half.

What does all of this have to do with today?

Get this: Chinese investors spent a record $6.1 billion on U.S. homes from April 2021 through March 2022, according to the National Association of Realtors.

Canada was second on the list -- buyers there spent $5.5 billion on U.S. residential real estate. Buyers from India ranked third at $3.6 billion.

So this July Washington Post headline is not surprising:

The housing market, at last, appears to be cooling off

Here's a quote from the Elliott Wave Theorist, a monthly publication which has provided analysis of financial markets and major cultural trends since 1979:

A burst in the U.S. housing bubble could have enormous repercussions in the world economy. The aggregate value of housing is far greater than that of the stock market, so fluctuations in house prices may have a much greater effect on consumer spending.

This was written in January 2006 -- about six months before the peak in the prior housing bubble, which helped to usher in the Great Recession.

Another housing market indicator is none other than the stock market. In other words, the housing market tends to be correlated with the trend of the stock market.

Elliott wave analysis can help you anticipate what's next for the stock market. If you need a refresher on the Elliott wave model, you are encouraged to read Frost & Prechter's book, Elliott Wave Principle: Key to Market Behavior. Here's a quote from this Wall Street classic:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

You can delve deeper into the Wave Principle by reading the entire online version of the book for free!

The only requirement for free and unlimited access is a Club EWI membership, which is also free.

Club EWI is the world's largest Elliott wave educational community and members enjoy complimentary access to a wealth of Elliott wave resources on financial markets, investing and trading without any obligations.

Simply follow the link to get started right away: Elliott Wave Principle: Key to Market Behavior -- get instant access -- free.

This article was syndicated by Elliott Wave International and was originally published under the headline The Final Act BEFORE a Housing Bubble Bursts. 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.

Big Bitcoin Bets Burn This Firm: What's Next for the Cryptocurrency?

MicroStrategy executive remains bullish on Bitcoin -- mentions "ideal entry point"

By Elliott Wave International

Big bets on a hot financial market can be rewarding, but you know the flip side.

These sizzling markets can just as quickly severely punish because they have a way of cooling off just when nearly everyone is convinced that the market will get even hotter.

Consider MicroStrategy, a software firm which borrowed money to invest in Bitcoin.

So far, things haven't worked out so well. Here's an August 3 Marketwatch headline:

MicroStrategy racks up $1 billion loss, says CEO will leave that post

That loss was due almost entirely to its investment in Bitcoin and occurred in Q2 -- cumulatively, MicroStrategy has racked up around $2 billion in Bitcoin losses.

These losses are mentioned as an update to the January Global Market Perspective coverage (The Global Market Perspective is an Elliott Wave International monthly which provides analysis of 50-plus worldwide financial markets):

The chart shows the long-term trend in the largest corporate holder of bitcoin, MicroStrategy Inc. At this point, MicroStrategy is down 62% from a countertrend rally top in February 2021. ... The Global Market Perspective issued [a] reversal warning in April 2021 based on the latest change of trend in MicroStrategy's share price: "The huge looming thing is how common these reversals of fortune are going to become."

At the time of that Global Market Perspective coverage of more than six months ago, MicroStrategy had already raised its Bitcoin holdings to $5.9 billion (as of Dec. 30, 2021).

Despite the loss, MicroStrategy is not backing off its bullish view of Bitcoin with the CEO saying in an early August interview that this is an ideal entry point to buy Bitcoin.

Of course, only time will tell if the CEO turns out to be right or wrong. All the while, Bitcoin's Elliott wave pattern is revealing its own message.

If you'd like to learn how Elliott wave analysis can be useful to you as an investor (or you simply need a refresher), you are encouraged to read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote from that book:

Without Elliott, there appear to be an infinite number of possibilities for market action. What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum. Among those, the best interpretation, sometimes called the "preferred count," is the one that satisfies the largest number of guidelines.

Review the "guidelines" and delve into many more details of the Elliott wave model by reading the online version of Elliott Wave Principle: Key to Market Behavior for free!

The only requirement for free and instant access to this Wall Street classic is a Club EWI membership. Club EWI is the world's largest Elliott wave educational community and is free to join with zero obligations.

Club EWI members get free access to Elliott wave resources on financial markets and investing, including articles and videos from Elliott Wave International's analysts.

Follow this link and you can have Elliott Wave Principle: Key to Market Behavior on your computer screen in moments -- 100% free.

This article was syndicated by Elliott Wave International and was originally published under the headline Big Bitcoin Bets Burn This Firm: What's Next for the Cryptocurrency?. 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.

Severe Bear Market: Will You Be Among the Prepared 1.5%?

"Oftentimes, rallies will end with an inter-index non-confirmation"

By Elliott Wave International

A long-long time ago in a galaxy far away... errr, on the heels of the year 2000 dot-com crash, to be exact -- which is ancient history for many investors today -- the February 2003 Elliott Wave Theorist, a monthly publication which has covered financial markets and major cultural trends since 1979, published an interview with Elliott Wave International President Robert Prechter.

Prechter was asked if he was surprised by investors' lack of capitulation since the bear market started in 2000.

Prechter replied:

I read a statistic that said no more than 1 to 1½% of investors actually got out. This is utterly typical. The average investor stays in. [emphasis added]

This is mentioned because the patterns of investor psychology tend to repeat, which is the entire basis of Elliott wave analysis, which helps you track those patterns on the scale from intraday to multi-century.

So, with that in mind, consider what the July 2022 Elliott Wave Financial Forecast, a monthly publication which focuses on major U.S. financial markets, says:

Even as stocks fell hard into the middle of June, the bullish resolve of investors remained on display. On June 14, for instance, Bloomberg reported that "Undeterred Retail Traders Piled into Stocks."

The chances are high that many of these investors will hold onto their stocks into the worst part of the bear market, if indeed the January top in stocks marked the end of the long bull market.

By one measure, investors know that the S&P 500 had already suffered at least a minimum bear market because in June, the index had declined 25% from its January all-time high. Of course, a 20% decline is widely considered to be the "official" entry into a bear market.

Since June 17, however, the index has rallied.

The question is: Is the bear market over, or is the price climb since June 17 a countertrend rally in a bigger bear market?

Well, if indeed the rally is countertrend, the August 1 U.S. Short Term Update, a thrice weekly Elliott Wave International publication which offers near-term analysis of key U.S. financial markets, provided a clue on how to possibly ascertain the end of the rally:

Oftentimes, rallies will end with an inter-index non-confirmation, where one or more stock index will fail to confirm the final rally high in the other indexes.

Elliott Wave International's analysts show you where the various related indexes are right now in relation to each other in EWI's publications. EWI's analysts also show what the Elliott wave model is revealing about the price pattern of the main indexes.

The whole idea is to make sure you're among the 1.5% of investors who are on the sidelines if a bigger bear market has yet to unfold.

If you're new to Elliott wave analysis, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

After you have acquired an Elliott "touch," it will be forever with you, just as a child who learns to ride a bicycle never forgets. Thereafter, catching a turn becomes a fairly common experience and not really too difficult. Furthermore, by giving you a feeling of confidence as to where you are in the progress of the market, a knowledge of Elliott can prepare you psychologically for the fluctuating nature of price movement and free you from sharing the widely practiced analytical error of forever projecting today's trends linearly into the future. Most important, the Wave Principle often indicates in advance the relative magnitude of the next period of market progress or regress. Living in harmony with those trends can make the difference between success and failure in financial affairs.

Good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community (about 500,000 worldwide members and growing).

You can join Club EWI for free, and members get complimentary access to an array of Elliott wave resources on financial markets and investing, which includes videos and exclusive interviews with Elliott Wave International's analysts.

If you're already familiar with Elliott wave analysis and you love "free," the chances are high that you'll love Club EWI.

Jump on the Club EWI bandwagon by following this link: Elliott Wave Principle: Key to Market Behavior -- get instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Severe Bear Market: Will You Be Among the Prepared 1.5%?. 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.

Elliott Waves: Your "Rhyme & Reason" to Mainstream Market Opinions

R.N. Elliott's stock market observations fell together "into a general set of principles"

By Elliott Wave International

It's understandable why investors with little experience consult the market opinions of professionals.

But many of these new investors are left scratching their heads. Two headlines from July 29 indicate why:

• [Fundstrat Managing Partner] says the 2022 bear market is over, stocks could hit new highs before year-end (CNBC)
• Stock market's post-Fed bounce is a 'trap,' says Morgan Stanley's [Chief Investment Officer] (Marketwatch]

Yes, two directly opposing opinions that were published on the same day.

The date before those headlines published (July 28), happened to be Ralph Nelson Elliott's 151st birthday.

You may be interested in his discovery about stock market behavior because it offers an alternative to consulting mainstream financial stories.

Here's a brief overview: In the 1930s, Ralph Nelson Elliott (1871-1948) discovered that the stock market moves in recurring patterns that he called waves.

Elliott had led an active life as an accountant and management consultant, working at various times for railroad companies in Mexico, Central America and South America, a business magazine, and for the State Department before becoming seriously ill with pernicious anemia.

In the book, R.N. Elliott's Masterworks, Elliott Wave International President Robert Prechter describes what happened next:

Despite being physically debilitated by his malady, Elliott needed something to occupy his acute mind while recuperating between its worst attacks. ... It was around 1932 that Elliott began turning his full attention to ... finding out whether there was any rhyme or reason to the stock market. ...

Around May 1934 ... his numerous observations of general stock market behavior began falling together into a general set of principles that applied to all degrees of wave movement in the stock price averages.

Elliott's insights continue to be employed by investors today.

The basic Elliott wave pattern consists of five subwaves (denoted by numbers) which move in the same direction as the trend of the next larger size and three corrective subwaves (denoted by letters) which move against the trend of the next larger size:

When this initial eight-wave cycle such as shown by the illustration ends, a similar cycle begins.

In other words, the basic Elliott wave pattern links to form five- and three-wave structures of increasingly larger size.

An important point is that the Wave Principle helps investors to identify turning points in the trends of financial markets.

Indeed, here's a quote from Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior:

When after a while the apparent jumble gels into a clear picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%. It is a thrilling experience to pinpoint a turn, and the Wave Principle is the only approach that can occasionally provide the opportunity to do so.

Here's the good news: You can access the entire online version of the book for free once you become a member of Club EWI, the world's largest Elliott wave educational community.

Club EWI is free to join without any obligations and members enjoy free access to Elliott wave resources on financial markets and investing, including exclusive articles and interviews with Elliott Wave International's analysts.

Click on the link to get started right away: Elliott Wave Principle: Key to Market Behavior -- get free and instant access.

This article was syndicated by Elliott Wave International and was originally published under the headline Elliott Waves: Your "Rhyme & Reason" to Mainstream Market Opinions. 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.

Will the S&P 500 Index Go the Way of Meme Stocks?

Here's what usually happens when "financial lunacy" is prevalent

By Elliott Wave International

You don't hear much about the meme stock craze anymore -- and for good reason.

It's all but dead and has been for months (Barron's, Jan. 28):

A Year After It Began, Meme-Stock Mania Is on Life Support

Early last year, the movement to buy meme stocks -- like AMC, Gamestop and others -- was largely driven by discussions on the internet, mainly by stock market novices.

When the movement was still going strong, the February 2021 Elliott Wave Financial Forecast, a monthly publication which covers major U.S. financial markets, made this comment about meme stocks:

A mania is pretty funny, especially at the very end, when financial lunacy is so prevalent that many assume it to be permanent.

Here's an update from the July Elliott Wave Financial Forecast:

As you can see on the chart, the Meme Stock Index is down 65% from its early 2021 peak (as of the time the July Elliott Wave Financial Forecast published). So, indeed, the assumption of permanency was what you would call -- misplaced.

What you need to know is that an assumption of permanency is now geared toward the main stock indexes -- not just by amateur investors, but professionals (Bloomberg June 27):

S&P Analysts Haven't Been This Bullish In 20 Years

It's clear that these S&P analysts are shrugging off the downtrends that began in the Dow Industrials and S&P 500 index in January.

They may turn out to be correct -- in other words, the downtrend is over and another major leg up is set to start.

Then again, you may want to consult the stock market's Elliott wave structure.

The July Elliott Wave Financial Forecast describes two Elliott wave options for the S&P 500 index between now and the end of summer.

If you're unfamiliar with Elliott wave analysis, you are encouraged to read Frost & Prechter's Wall Street classic, Elliott Wave Principle: Key to Market Behavior. Here's a quote from the book:

In the 1930s, Ralph Nelson Elliott discovered that stock market prices trend and reverse in recognizable patterns. The patterns he discerned are repetitive in form but not necessarily in time or amplitude. Elliott isolated five such patterns, or "waves," that recur in market price data. He named, defined and illustrated these patterns and their variations. He then described how they link together to form larger versions of themselves, how they in turn link to form the same patterns of the next larger size, and so on, producing a structured progression. He called this phenomenon The Wave Principle.

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market's position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis.

Would you like to delve deeper into the Wave Principle?

If your answer is "yes," here's good news: You can access the entire online version of the book for free once you join Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is free and allows free access to a wealth of Elliott wave resources on investing and trading. These resources include videos and special reports, many of which are from Elliott Wave International's analysts.

Get started by following this link: Elliott Wave Principle: Key to Market Behavior -- get instant access -- free.

This article was syndicated by Elliott Wave International and was originally published under the headline Will the S&P 500 Index Go the Way of Meme Stocks?. 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.