The Psychology of Elliott Waves

By Elliott Wave International

"The Wave Principle" is Ralph Nelson Elliott's discovery that social, or crowd, behavior trends and reverses in recognizable patterns. Elliott isolated patterns of directional movement, called waves, that recur in markets. These waves reflect mass psychological states. The two charts below summarize some of their characteristics.

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This article was syndicated by Elliott Wave International and was originally published under the headline The Psychology of Elliott Waves. 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.

Five Benefits of Using the Elliott Wave Principle to Make Decisions

By Elliott Wave International

While everyone searches for the Holy Grail of forecasting, which does not exist, there is one method of analysis that stands apart from the slew of momentum-based indicators, all of which by definition lag the market. The Elliott Wave Principle is based on the concept that crowd behavior is patterned and that these patterns are easily discerned in the prices of freely traded markets. This alone sets it apart in the world of technical analysis.

1. Identifies Dominant Trend in Any Timeframe

The Wave Principle identifies the direction of the dominant trend in any timeframe. A five-wave advance on a daily chart identifies the dominant trend as up on a daily basis. Looking at the same instrument on an hourly chart might reveal that the dominant trend on an hourly basis is down within the larger daily chart timeframe.

2. Identifies a Countertrend Move

The Wave Principle also identifies countertrend moves. The three-wave pattern is a corrective response to the preceding five-wave pattern. Knowing that a near-term move in price is merely a correction within a larger uptrend is valuable information.

3. Identifies the Maturity of a Trend

Elliott catalogued a finite number of patterns to which the markets adhere. Once a pattern is over, it's over. For example, if prices are advancing in the fifth wave of a five-wave advance, and the fifth wave has already completed four of its subwaves, one more subwave is all that is required to complete the pattern, which, by definition, will lead to a change of trend.

4. Identifies Price Targets

The Wave Principle also provides price targets based on common pattern relationships. When R.N. Elliott wrote about the Wave Principle in Nature's Law, he stated that the Fibonacci sequence was the mathematical basis for the Wave Principle. Elliott waves, both impulsive and corrective, frequently adhere to Fibonacci proportions, as illustrated in Figure 2-1.

5. Identifies Context

Perhaps most important, Elliott observed that wave patterns form larger and smaller versions of themselves. This repetition in form means that price activity is fractal, as illustrated in Figure 2-2. Wave (1) subdivides into five smaller waves yet is part of a larger five wave pattern. This process is occurring at every degree, all the time, and is the key to understanding what market probabilities are next.

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This article was syndicated by Elliott Wave International and was originally published under the headline Five Benefits of Using the Elliott Wave Principle to Make Decisions. 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.

"This is Going to Shock People!": Avi Gilburt and Bob Prechter Chat

By Elliott Wave International

"It's going to make 2008 look like child's play," says ElliottWave Trader's Avi Gilburt when discussing the precarious balance sheets of U.S. banks with Elliott Wave International's Robert Prechter.

In the just-released webinar "A Fireside Market Chat with Robert Prechter & Avi Gilburt," Gilburt shares the story of his year-and-a-half study of U.S. banks and said what he discovered "is going to shock people." You can learn the disturbing details of his findings by accessing the webinar for free.

Before I show you how to get free access, let me share a few nugget-sized insights about other topics from the webinar.

Prechter on Stocks: "The S&P is the most over owned thing in the entire world. When this thing unravels, it's going to be epic."

Gilburt also sees a "major, major top" in stocks ahead, yet you'll learn in the webinar why he may stick with the stock market for a time longer.

Gilburt on Treasuries: "Ultimately, I'm not a fan of holding anything long-term in Treasuries. You want to hold something short-term, that's great. Treasuries even have a certificate of indebtedness, I believe, but they pay no interest. It's just for the Treasury to hold it for you. I don't see a point in that because my fear is the rates are going to be rising because people are going to lose trust in the government's ability to pay their debts on time. When that happens, we run the potential, and I know nobody'll believe this is even possible. But when you look at where our general debt is and where you look at what the federal government can afford now, we're probably going to get to a point in time where the government can't afford to pay the interest on its debt."

Prechter on the Fed: "[Alan Greenspan] got frustrated because people were yelling at him for keeping their interest rate at zero for so long. He said, 'We didn't do that. The market did.' It's the first time a governor has ever spilled the beans and admitted that they just follow the market. It was awesome."

Also, get a specific outlook as Prechter and Gilburt discuss gold & silver.

You're in for a real treat as you watch the entire hour and forty-minute webinar with two of the most renowned Elliotticians on the planet. Follow this link to get free access to "A Fireside Market Chat with Robert Prechter & Avi Gilburt" now.

This article was syndicated by Elliott Wave International and was originally published under the headline . 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.

Deflation in China: Impossible to Ignore

Producer Price Index registers 22 straight months of decline

By Elliott Wave International

Deflation's grip on the world's second largest economy is getting tighter.

As Bloomberg noted on Sept. 9:

China's Deflationary Spiral Is Now Entering Dangerous New Stage

The demand for goods has been weakening. Wages are stagnant. And, in addition to declining property prices, corporate profits are down. Inventories at Chinese manufacturers swell.

China's central bank has unveiled a host of stimulus measures, but Chinese consumers have failed to respond.

As Elliott Wave International's October Global Market Perspective says:

No matter how low rates go, consumers refuse to buy "stuff" that is losing value.

China's Producer Price Index just registered it's 22nd straight month of decline.

This chart from EWI's October Global Market Perspective shows another broad measure of price change:

The GDP deflator is the difference between China's nominal and real GDP growth. By this measure, China entered deflation a year and a half ago. Deflation is already deeply ingrained in the Chinese economy.

China is not the only major global economy experiencing woes. The October Global Market Perspective also discusses "the swiftness of Germany's economic breakdown."

Get free access to highlights of EWI's Global Markets coverage. Just follow this link and select the Global Markets Highlights Issue..

This article was syndicated by Elliott Wave International and was originally published under the headline Deflation in China: Impossible to Ignore. 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.

Don't Count on Fed to Rescue Economy: Here's Why

By Elliott Wave International

The Fed's September lowering of the fed funds rate was greeted with widespread celebration on Wall Street. Yet, history shows that such moves by the Fed don't always translate into a glowing economy. Elliott Wave International's October Financial Forecast provides perspective:

The August 2 issue forecast the Federal Reserve's "approaching rate cut," saying "the Fed will lower the fed funds rate commensurately with the lower level of T-bills." On September 18, the Fed announced a 50-basis-point drop in the Fed Funds rate from 5.5% to 5.0%. By that time, the yield on the 3-month U.S. T-bill had slipped to 4.75%, and the yield on the 6-month U.S. T-bill was 4.50%. This week, the yields have declined to 4.61% and 4.40% respectively. So, the Fed Funds rate is still lagging the decline in market rates.

More important, the popularity of the Fed's "decision" continues to mushroom. In August, Financial Forecast discussed "the positive vibe surrounding" the potential rate cut, saying that it "simply confirms that a bigger peak foreshadows an even bigger economic contraction." The cut itself stoked the optimism. "50 bps...I will take it...BIG!" tweeted one of Wall Street's biggest TV commentators. On CNBC, a well-known investment banker "lauded the Federal Reserve for creating 'nearly perfect' economic conditions." Soaring hopes are a classic setup for the surprising failure called for in the August issue. At that time, we noted that it should be a repeat of September 2007's initial Fed-Funds rate cut, which came three months before the start of the Great Recession. As we also illustrated then, the Fed was behind the curve the whole way, cutting rates continually into the final quarter of the contraction. This time, the effect of a turn toward negative social mood will be greater.

When will social mood go from positive to negative? And what will that mean for major U.S. financial markets like stocks? Tap into all the insights of EWI's Financial Forecast and Elliott Wave Theorist at a special combo price by following this link.

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This article was syndicated by Elliott Wave International and was originally published under the headline Don't Count on Fed to Rescue Economy: Here's Why. 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.

Solana: Catching Opportunities Using Elliott Waves

By Elliott Wave International

The Elliott Wave Principle can help you anticipate price moves in financial markets. If you know where you are in the Elliott wave structure, you know what's likely to come next.

Here's the basic wave structure:

And here's a recent example of the Wave Principle in action. Check out this Solana forecast from Elliott Wave International (EWI):

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10/14/24 4:36 AM ET (Last Price 152.45): Favoring wave ((iv)) ended at 133.11, our immediate focus is higher in five waves for wave (i) of ((v)). We expect further impulsive price action in a third-of-a-third that must take prices towards at least the 1.618 projection multiple at circa 163.54.

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Result: Solana rallied to hit 177.26 on Oct. 24.

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Insights into a Major Stock Market Illusion

By Elliott Wave International

Not everything is what it seems. That includes the stock market. Elliott Wave International's October Financial Forecast takes you behind the curtain:

The chart below shows the DJIA in terms of real money, i.e. ounces of gold:

The left side of the chart shows the Dow’s rally from the meltdown low in March 2020, where the Dow was valued at 11.97 ounces of gold, to the January 5, 2022 high, where it was valued at 20.11 ounces of gold. In terms of U.S. dollars, the Dow declined 22% from January to October 2022. The index also declined 22% in terms of gold to an initial low on March 8, 2022. As the Dow in dollars then rallied to new highs, the index in terms of gold moved sideways in wide swings. While the Dow in U.S. dollars made a new all-time high on Sept. 25, so did gold. As the chart shows, the Dow relative to gold is still down 22% from the January 5, 2022 high, being currently valued at 15.82 ounces of gold. Last month, we showed world stock prices in terms of gold; the ratio this week closed at its lowest level in over four years. The Dow/gold ratio is now on the verge of breaking a two-and-a-half-year support shelf. Stocks are not gaining value in terms of real money; it’s an illusion caused by monetary inflation. The coming bear market will pop the illusion of wealth as stocks decline not only in terms of gold but also in terms of U.S. dollars.

On Oct. 11, 2007, the Dow hit an intraday all-time high -- and then dropped more than 50% in the next 2½ years. Could it happen now?

Get more free highlights of EWI's U.S. Stock Market coverage -- follow this link and select the Stock Market Highlights Issue >>.

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This article was syndicated by Elliott Wave International and was originally published under the headline Insights into a Major Stock Market Illusion. 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.

Pattern Recognition: Your First Step to Using Elliott Waves

By Elliott Wave International

At its most basic level, wave analysis is simply the identification of patterns in market prices.

The essential Elliott wave pattern consists of "motive waves" and "corrective waves." A motive wave is composed of five subwaves. It moves in the same direction as the trend of the next larger size. A corrective wave is divided into three subwaves. It moves against the trend of the next larger size.

As Figure 1 shows, these basic patterns build to form five- and three-wave structures of increasingly larger size (larger “degree,” as Elliott said).

In the above illustration, waves 1, 2, 3, 4 and 5 together complete a larger motive wave sequence, labeled wave (1). The structure of wave (1) tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction -- in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete a sequence of the next larger degree, labeled as Wave 1 (circle). At that point, again, a three-wave correction of the same degree occurs, labeled as Wave 2 (circle).

Note that regardless of the size of the wave, each wave one peak leads to the same result -- a wave two correction.

That's just a snapshot of how the Wave Principle can help you understand and anticipate market price action. I invite you to learn more with this handy -- and free -- reference guide:

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We're Living in a Materials World

Gold's Breakout Signals the End of the Digital Assets Era and the Rise of Emerging Markets

By Mark Galasiewski
Editor, Asian-Pacific Financial Forecast
Elliott Wave International

Viewing global asset classes through the lens of emerging markets provides a perspective that is often missed by analysts who focus on developed markets. That perspective, which is colored by the role that commodities play in the global economy, has been invaluable during the past several years. For example, it helped us to predict, in February 2020, the end of the 2008-2020 bear market in the Bloomberg Commodity Index to within 2% of its price low two months later and then to correctly forecast "enormous upside for commodities, price inflation and interest rates," as we put it in September 2020, when the U.S. 10-year yield was 0.72%.

While the inflationary boom that has followed since that time caught most of the world off guard, most conventional observers still appear to see it as an aberration from the long disinflationary trend that preceded it -- a one-off byproduct of the Covid-19 pandemic. If only the Fed will continue to lower interest rates, so the conventional wisdom goes, then the trend toward lower rates of inflation will resume and the now AI-led good times will continue.

However, long-term patterns in commodities and interest rates beg to differ with that line of thinking. Conventional observers -- which means most people -- are completely unprepared for the extent of the long-term inflationary trend that began in 2020. Here are the most important trends that are likely to unfold in global financial markets for the next decade or longer based on long-term Elliott wave patterns in various asset classes:

• The global infotech sector, represented by America's Nasdaq Index, is approaching the end of a five-wave advance that began in 2003. The cryptocurrency sector, which was spawned by the infotech sector toward the end of the global financial crisis of 2008, has ebbed and flowed with infotech since that time.
• The leading cryptocurrency, bitcoin, which accounts for about 60% of the total market cap of all cryptocurrencies, is approaching the end of a five-wave advance from 2008 in line with the five-wave advance in the Nasdaq. The parallel trends in the Nasdaq and bitcoin are not a coincidence; they are a byproduct of the same animal spirits that have made infotech the dominant asset class of the past several decades.
• As the intangible or digital assets enter the final years of their era of dominance, they have begun to pass the baton to physical or material assets. The Bloomberg Commodity Index began a large third-wave advance in 2020 that could last as long as a few decades and will likely be paralleled by rising interest rates, such as the U.S. 10-Year Bond Yield. The dramatic rise in the prices of almost everything since 2020 is an early expression of this new era.
• The recent rise of gold, which is now the leading physical asset, marks it as the new bitcoin. The metal's breakout in early 2024 from a 13-year net sideways trend is as significant for materials as bitcoin's initial advance from 2009 and the Nasdaq's 2012 breakout were for infotech. The lagging behavior of gold miners in recent years -- it's typical of producers to underperform their underlying commodities early in bull markets -- simply confirms that most market participants are completely unaware of how large gold's bull market will be and how long the new inflationary trend will last.
• Gold's breakout is also a bullish sign for emerging markets, which -- like commodities -- underperformed infotech after 2011. In fact, gold has ebbed and flowed with the iShares MSCI Emerging Markets ETF (NYSE: EEM) since 2011. Our wave counts indicate that the two asset classes should continue to advance impulsively for years to come...

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For more market insights, check out Elliott Wave International's must-read Highlights Issue for Global Markets. Read it free now >>.

Gold: The Calm Before a Record Run

By Elliott Wave International

The basis for analysis and forecasting at Elliott Wave International is fundamentally different from everyone else's.

Here's a prime example in gold.

This excerpt is from the March Elliott Wave Financial Forecast, when gold was trading below $2,050/oz.

Gold's three-month implied volatility has declined to its lowest level in over four years. While low volatility is not a short term timing tool, low volatility eventually precedes high volatility. At the same time, total open interest in gold futures has declined to its lowest level since December 2018, as traders are either closing futures contracts or abstaining from opening new ones. The low level of open interest means that investors’ attention is turning away from gold, and the low implied volatility indicates that investors do not expect gold to move much over the course of the next three months. Both are preludes to what we see as a major move forming in gold prices.

Gold rallied above $2,700/oz -- to all-time highs -- following EWI's forecast.

For an objective method to track and forecast gold's price moves -- read the Gold Investors' Survival Guide (free).

Manias Always End Poorly

By Elliott Wave International

Stocks relative to commodities are historically over-priced. A major sea change appears to be ahead. The September Elliott Wave Financial Forecast elaborates:

The title of the May 2021 issue of The Elliott Wave Theorist was, "Commodities and the Stock Market: Paradigm Shift Emerging." The issue included a version of the chart below showing stocks priced in terms of commodities all the way back to 1900. "This ratio has risen to 200 times since 1922, which is 102 years ago," EWT said. "It is time for a tidal change in both sectors, in the opposite direction." The inset on the chart shows that the tidal change is underway, regardless of a countertrend rally in the ratio from 2022, when the mania for technology and AI shares went into full blown orbit.

Note how each time the Dow/CRB ratio rallied to meet the top trendline over the past 60 years, a major peak in stocks relative to commodities occurred. The first run up took place before the trendline began, from 1920-1928, coinciding with the Roaring '20s. The ratio peaked at the end of 1928, and stocks crashed in 1929, which kicked off a bear market lasting until 1932. In inflation-adjusted terms, the bear market ended in 1949, one year after the ratio made a low. The ratio's rise until the late 1960s and early 1970s culminated with the Nifty-Fifty stock mania. The stock market then plunged amidst an oil crisis until late 1974, while commodity prices soared. Commodities peaked in 1980, at which time stocks started a major bull market. The Dow/CRB's rise to meet the trendline in 1999 coincided with the top in the dot-com mania and a crash in the NASDAQ. The Great Credit Crisis ended in early 2009, giving way to a bull market in stocks, as the ratio rose to meet the top trendline once again. This time, the push to the peak in April 2020 coincided with a bond-market bubble that resulted in negative yields and all-time highs in bond prices.

As optimism toward equities has reached a historic extreme, bearishness toward commodities is at a multi-decade extreme. As EWT noted, the Dow/CRB ratio is "set to fall back to the 'sensible' level of the 1960s-1970s."

You won't see analysis like this in the financial media news. Get unique insights delivered straight to your inbox – FREE.

This article was syndicated by Elliott Wave International and was originally published under the headline Manias Always End Poorly. 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.

Hey, Fed: Denial is Not Just a River in Africa

By Elliott Wave International

Posted September 11, 2024

It's the Federal Reserve's Open Market Committee meeting next week, and the money markets are pricing in a 25-basis point cut in the Federal Funds interest rate. Judging by the chart below, though, it could well be a 50-basis point cut.

It shows that the spread between the U.S. Treasury 2-year yield and the Federal Funds rate is at its most extreme since the 1980s, meaning that the 2-year yield is far below the Fed Funds rate.

Note the occasions when the 2-year yield was below the Fed Funds rate, and it was either a precursor to an economic recession, growth scare or a crisis. Yet the current consensus is that a "soft landing" for the economy is most probable. Given the obvious history, it's incredible that people think this time will be different.

Murray Gunn
Head of Global Research
Elliott Wave International

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The Fed -- Why Are We Paying These Guys

By Elliott Wave International

When it comes to interest rates, the Fed is NOT in control. The Fed does not lead; it follows the market.

This chart shows the Federal Funds Rate alongside the U.S. Treasury 2-Year Yield. You can see that at major turning points, it's the 2-Year Yield that moves first, and then after a while, the Fed changes its benchmark interest rate. This was profoundly the case in 2019 when the Fed cut rates well after the 2-Year Yield had declined. And of course, in 2022, the Fed had lagged the move higher in 2-Year Yields by many, many months before it started hiking.

Conventional analysts and the financial media are obsessed with how the Fed will change interest rates, thinking that it will influence the financial markets. But to find out how the Fed will act, all they need to do is look at the short end of the bond market.

Want more market insights like this? Get them sent straight to your inbox - FREE - from Elliott Wave International: https://www.elliottwave.com/free/

Why We Tip Our Hat to Warren Buffett

One would think that investors would be emulating their #1 hero. One would be wrong.

By Elliott Wave International

Warren Buffett recently acknowledged that he's playing in overtime in this thing we call life. At 93, the acclaimed investor is still very much in the game and making his moves.

Our August Elliott Wave Theorist elaborates:

We Are in Good Company

We have been steadfastly recommending complete safety in the form of Treasury bills, 2-year Floating Rate Notes, a safe bank and gold stored offshore. We have felt quite alone in this opinion. So, we were pleasantly surprised to see this headline, from CNBC on August 7:

Warren Buffett now owns more T-bills than the Federal Reserve

It's true: Buffett's investment firm, Berkshire Hathaway, owns $235 billion worth of T-bills; the Fed owns $195 billion worth. Of course, most of the Fed's money is in other government-guaranteed debt. Buffett's is mostly in stocks. Still, his current cash holdings are about twice the average for the previous five years. How did he accumulate so much cash? By selling stocks in this heady environment. As CNBC reported,

"Buffett, 93, pulled off a surprising and yet prescient move by selling big chunks in stock holdings including Apple last quarter, ahead of a drastic global sell-off this week. Berkshire has been a seller of stocks for seven quarters straight, but that selling accelerated in the last period with Buffett shedding more than $75 billion in equities in the second quarter."

One would think that investors would be emulating their #1 hero. One would be wrong.

The August Elliott Wave Theorist goes on to explain how many investors are behaving in the opposite manner as the Oracle of Omaha.

More than that, you'll learn why the Quarterly Report on Bank Trading and Derivatives Activities is one of the scariest reports you'll ever read.

Robert Prechter's Elliott Wave Theorist has published since 1979 and is still going strong.

Find out how you can access our latest stock market insights below.

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This article was syndicated by Elliott Wave International and was originally published under the headline Why We Tip Our Hat to Warren Buffett. 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 Stock-Market Success Is Usually Only Temporary

Here's a sample of record sentiment readings for stocks

By Elliott Wave International

Recession coming or not, people are still EXTREMELY bullish.

Read this excerpt from the May 17, 2024 Elliott Wave Theorist:

Record Sentiment Readings for Stocks

Investors are enamored with stocks that pay little or nothing in the way of dividends. The extent of that bias has now reached an all-time extreme. The chart below shows the history of investors' preferences for low vs. high-dividend stocks, on a 20-year return basis. ... Here in 2024, the preference for low-payout stocks over high-payout stocks just established a new record.

On May 15, Goldman Sachs published a chart showing record equity allocation among a broad spectrum of investors.

[And,] on May 4 and 14, respectively, the Financial Times of London showed that retail investors' gorging on equity ETFs leveraged by two to three times has approached the 2021 extreme, while the total flow of retail money into the stock market has exceeded that of 2021.

[Finally,] here is the title of an opinion piece, published by Bloomberg on May 9:

It's Dangerous to Stay Out of Stocks
Research from Barclays provides fresh evidence that you should almost always have
some money in equities

No one expressed this attitude in 1974, 1988 or early 2009. Today it is gospel.

The consensus is always to be in cash at major bottoms and fully invested at tops. The reason for this inevitability is that pessimism makes market bottoms, and optimism makes tops. In both environments, few can see the inevitable turn. Success among the crowd is always temporary.

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This article was syndicated by Elliott Wave International and was originally published under the headline Why Stock-Market Success Is Usually Only Temporary. 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.

Gold Prices: The calm before a record run

By Elliott Wave International

The basis for analysis and forecasting at Elliott Wave International is fundamentally different from everyone else’s.

Here's a prime example in gold.

This excerpt is from the March Elliott Wave Financial Forecast, when gold was trading below $2,050/oz.

Gold’s three-month implied volatility has declined to its lowest level in over four years. While low volatility is not a short term timing tool, low volatility eventually precedes high volatility. At the same time, total open interest in gold futures has declined to its lowest level since December 2018, as traders are either closing futures contracts or abstaining from opening new ones. The low level of open interest means that investors’ attention is turning away from gold, and the low implied volatility indicates that investors do not expect gold to move much over the course of the next three months. Both are preludes to what we see as a major move forming in gold prices.

Gold rallied to $2,500/oz in five months following our forecast.

Has the rally stalled or is there more to go?

There are two ways you can benefit from our precious metals coverage now. See your subscription options.

Not ready to subscribe? Read our must-read Highlights Issue on gold and silver for free now..

This article was syndicated by Elliott Wave International and was originally published under the headline Gold Prices: The calm before a record run. 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.

This Trend Will Likely Soon Rock the U.S. Financial System

Why monetary inflation has been shrinking

By Elliott Wave International

Nearly everyone who buys groceries, fills their car tank with gas, pays rent, buys car insurance and so on is talking about the high cost of living. And it’s true that consumer price inflation is higher today than before the pandemic – although, it’s nowhere near as high as it was two years ago, when the annual inflation rate spiked to a 40-year peak of 9.1%.

Since then, the pace of inflation has slowed way down. In fact, the latest reading of the Consumer Price Index, or CPI, came in at 3%, close to the Federal Reserve’s “ideal” target of 2% a year.

But that’s price inflation. There is another measure of inflation that has to do with money supply. It’s the so-called monetary inflation, or the supply of printed money. It has also declined over the past two years and is likely set to decrease even more. And while it sounds like a good trend, it’s actually the opposite.

Here’s insight from our just-published July Elliott Wave Theorist:

Monetary inflation … is unlikely to continue. Why? because since early 2022 the Fed’s clear aim has been to reduce the size of its balance sheet. Over the past two years, the value of the Fed’s assets, representing “printed” money, has gone from $8.94 trillion to $7.22 trillion, a decline of nearly 20 percent.

The July Elliott Wave Theorist continues:

This shrinkage of base money, moreover, has taken place even as total debt has expanded. This situation cannot maintain. The dichotomy will soon rock the financial system. It’s just a matter of when.

Indeed, U.S. household debt – which is part of that “total debt” The Theorist is referring to -- grew by $800 million from 2022 to 2023, including a 16.6% growth in credit card debt, according to Marketwatch.

The financial website had this headline on June 20:

Americans Are Carrying Record Household Debt into 2024

Interestingly, Washington D.C. has the highest per capita credit card debt in the country.

And speaking of the nation’s capital, out of control spending has led to a national debt of nearly $35 trillion.

As CBS News noted earlier this year (March 1):

U.S. interest payments on its debt are set to exceed defense spending.

The Congressional Budget Office projects the annual interest on the debt will hit $1.4 trillion by 2033.

And this does not even consider the huge amount of debt at the state and local levels – as well as the debt of corporations.

U.S. household debt is growing and will only get bigger. In turn, so will the scale of the news coverage about "the importance of the household debt to economic activity." Regardless of where in the world you live or invest, staying ahead of the trends in the U.S. stock market and economy is worth your while. Elliott Wave International has a free must-read issue on U.S stocks that I suggest you check out, on www.elliottwave.com.

This article was syndicated by Elliott Wave International and was originally published under the headline This Trend Will Likely Soon Rock the U.S. Financial System. 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.

Want to Learn How to "Read" a Price Chart? Start Here.

See how Elliott wave patterns "subsume" other technical analysis chart patterns

By Elliott Wave International

Some investors who are fans of technical analysis may not realize that another way to look at many classic chart patterns -- for example, Head and Shoulders -- is to describe them in terms of Elliott waves.

What this means is that once you've learned Elliott wave analysis, by proxy you've learned most other technical analysis chart patterns that simply go by different names!

It's a huge time saver.

In August and October 2005, as well as February 2006, Robert Prechter's Elliott Wave Theorist discussed several chart patterns and showed two examples (with an introductory quote from the August 2005 Elliott Wave Theorist):

The acknowledged "bible" of traditional chart interpretation is Technical Analysis of Stock Trends (1948) by Robert Edwards and MIT alumnus John Magee. ... The discussion here utilizes the fifth edition (1966).

Edwards and Magee collected others' observations about chart patterns and added their own, producing a comprehensive list of forms against which we may compare related aspects of the Wave Principle. It may not be necessary that we undergo this exercise, as these authors observed and displayed these patterns exclusively in charts of individual stocks, not in the averages where the Wave Principle is deemed best to apply. Nevertheless, because many chartists use the same forms for general market interpretation and since the Wave Principle has some applicability to individual stocks, this exercise is important in order to determine if there are any valid market patterns outside the forms of the Wave Principle.

Head and Shoulders Top

Figure 8a shows Edwards and Magee's depiction of a head and shoulders top, and Figure 8b is Figure 7-4 from Elliott Wave Principle. In a normal wave development, wave five of 3 and wave 4 form the "left shoulder" of the pattern, wave 5 and wave A form the "head," and wave B and wave one of C form the "right shoulder." Wave two of C creates the return to the neckline that is typical of the pattern.

Symmetrical Triangle

The Wave Principle covers the chartist's "symmetrical triangle." As you can see in Figures 11a and 11b, Edwards and Magee's example is a perfect rendition of Elliott's description, right down to the five subwaves.

Edwards and Magee claim, "Prices may move out of a Symmetrical Triangle either up or down. There is seldom if ever...any clue as to the direction...." Elliott's form is more specifically defined, and its position in the market structure and therefore its implications are more definite.

Even though just two examples were shown here, hopefully, you get a flavor of what was presented in 2005 and 2006 -- and an idea of the quality of analysis which our Financial Forecast Service regularly offers.

Realize that a chart pattern -- even though it's "classic" -- offers no guarantees -- and the same with the Wave Principle.

Yet, keep in mind this adaptation of a Q&A with Robert Prechter from an issue of The Elliott Wave Theorist:

Q: Do you believe that the Wave Principle provides for an objective form of analysis? Two different people can look at the same chart and derive very different wave counts. There are market watchers who say that applying wave theory is very subjective.

A: I always ask, "compared to what?" There is no group more subjective than conventional analysts who look at the same "fundamental" news event [like] a war, the level of interest rates, the P/E ratio, GDP reports, the President's economic policy, the Fed's monetary policy, you name it and come up with countless opposing conclusions. They generally don't even bother to study the data. The Wave Principle is an excellent basis for assessing probabilities regarding future market movement. Probabilities are by nature different from certainties. Some people misinterpret this aspect of analysis as subjectivity, but all probabilities may be put in order objectively according to the rules and guidelines of wave formation.

If you're unfamiliar with Elliott wave analysis, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior, which is the definitive text on the subject. Here's a quote from the book:

[Ralph N.] Elliott recognized that not news, but something else forms the patterns evident in the market. Generally speaking, the important analytical question is not the news per se, but the importance the market places or appears to place on the news. In periods of increasing optimism, the market's apparent reaction to an item of news is often different from what it would have been if the market were in a downtrend. It is easy to label the progression of Elliott waves on a historical price chart, but it is impossible to pick out, say, the occurrences of war, the most dramatic of human activities, on the basis of recorded stock market action. The psychology of the market in relation to the news, then, is sometimes useful, especially when the market acts contrarily to what one would "normally" expect.

If you'd like to read the entire online version of Elliott Wave Principle: Key to Market Behavior, you can get complimentary access by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Want to Learn How to "Read" a Price Chart? Start Here.. 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.

What You Can Learn from Europe's "Dow Theory"-esque Non-confirmation

By Brian Whitmer | European Financial Forecast editor

Charles Dow (yes, the one with the averages named after him) developed a foundational concept in technical analysis that requires that price movement in industrial stocks and transportation shares confirm one another.

The main condition for a Dow Theory non-confirmation occurs when one sector makes a new extreme absent the other. Its classic application is observing the position of the Dow Jones Industrial Average, an index of 30 "industrial" stocks, versus the position of the Dow Jones Transportation Average, an index of 20 "transportation" stocks. In essence, whenever one index fails to keep up with the other, in either direction, it suggests an impending reversal.

These concepts can be applied universally.

For example, right now over in Britain, the FTSE 100's divergence with the FTSE 350 Transportation Index just pushed to 29 months.

This is a far more prolonged Dow Theory non-confirmation than that seen in July 2007 (seven months) or December 1999 (17 months). In 1999, the FTSE 100 eventually collapsed 53%, while the FTSE 350 Transports fell 66%. In 2007, the resulting declines were 49% and 77%, respectively.

In our view, Britain's prolonged non-confirmation makes sense given a host of investor psychology and other extremes we've been tracking, not just in Europe but around the globe. If you want to stay up-to-date on our findings regarding the position of stocks and bond markets, currencies and the broad economic trends, check out some of our free must-read issues on www.elliottwave.com.

Are You a "Betting Man"? Then Take a Look -- and Make Your Bet.

By Murray Gunn | Global Rates & Money Flows editor

I have spent much of my career among professional traders. By nature, traders are a betting crowd; if they can't bet on the markets, they'll bet on something else.

A monthly highlight on trading floors was always the 'NFP Sweepstake,' where everyone would pay some money to guess what the U.S. Non-Farm Payroll (NFP) number would be. The winner, who would take the whole pot, was the guess that came closest to the actual number. A good strategy, therefore, would be to try and be either the highest or lowest number because, sometimes, NFPs do surprise.

That was the case last month when NFPs came in showing that 272,000 jobs were added in May compared with a consensus forecast of 185,000. Momentum in the U.S. labor market is waning, though. From January 2021 to December 2022 the average NFP number was 490,000 jobs added each month. From January 2023, the monthly average has halved to 241,000. The unemployment rate has increased from 3.4% in April 2023 to 4.1% now and jobless claims are rising.

The chart above shows annualized percentage change in those in the U.S. engaged in full-time employment. Full-time employment has been shrinking on an annualized basis since February this year, and you can see that every one of the eight recessions (the shaded areas on the chart) since 1970 has been accompanied by a negative reading. On three occasions, this metric has dipped into negative territory without a recession occurring.

I'm no expert bookie, but it seems to me that those odds tilt towards favoring a recession. What do you think?

The U.S. jobs market remains the most important economic variable on the planet given the importance of the U.S. consumer to economic activity. Regardless of where in the world you live or invest, staying ahead of the trends in the U.S. stock market and economy is worth your while. Elliott Wave International has a free must-read issue on U.S stocks that I suggest you check out, on www.elliottwave.com.

Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes

By Mark Galasiewski | Elliott Wave International

The U.S. government in early May sanctioned 300 Chinese entities for supplying machine tools and parts to Russia for its war against Ukraine, while in mid-May Russian president Vladimir Putin made a two-day visit to China. In turn I found myself thinking about how tensions between China and the United States could lead to open conflict, specifically over Taiwan.

The likelihood of conflict depends in part on the region's social mood, as reflected in Asia's stock market indexes. When social mood is negative, countries are more likely to behave aggressively.

Tensions in the region have been high. On May 23, China conducted a military drill that sent 111 warplanes plus several navy destroyers and frigates close to Taiwan and its outer islands. China said the drill meant to punish Taiwan for an offense committed by its new head of state, Lai Ching-te, who used his May 20 inauguration speech to suggest that Taiwan is not part of China.

Yet China appeared to end the provocative move after just two days, much like Iran quickly ended its reprisal drone attack on Israel in April. Both examples reflect the desire to limit the scope of new conflicts, consistent with the improving social mood and burgeoning rally in emerging markets.

As our "Bull versus Bear" chart shows, the mood in Taiwan remains positive amid the global tech boom: The Taiwan Index rose right through the military drill. In contrast, the mood in China remains severely negative, as reflected in the Shanghai Composite's long-term pattern. That does raise the risk of Chinese aggression -- or at the least increases the risk of accidents and miscalculations. As Singapore's deputy prime minister Gan Kim Yong recently said at the Nikkei Forum in Tokyo, bad outcomes tend to follow during periods "when each side views the other as an adversary."

Some geopolitical observers frame the Russia-Ukraine conflict as a proxy battle in a new cold war between the United States and its democratic allies, versus the China-dominated axis of autocratic states that includes Russia, North Korea and Iran.

Long-term charts offer perspective.

In 2020, the MSCI Asia-Pacific Ex-Japan Index ended a 26-year sideways pattern, while the MSCI World Ex-U.S. Index ended its own, similar 20-year-long sideways trend. This two-decade period is comparable to the 1929-1949 corrective period in the U.S. stock market. The Covid pandemic erupted toward the end of the triangless much like the 1948-1955 polio epidemic spread across the globe and killed half a million people a year at its peak.

The first proxy battle in the current cold war -- Russia-Ukraine -- erupted two years post-Covid during the correction in the index, much like the first proxy battle -- the Korean War -- in the earlier Cold War erupted in 1950 and lasted until 1953. The Russia-Ukraine war could follow that precedent by ending in a stalemate sooner than most observers imagine, even as the developing bull market in world ex-U.S. stocks contributes to years of relative peace. Then, once China becomes much stronger militarily, the next proxy battle in the cold war rivalry -- perhaps over Taiwan -- would be analogous to the Vietnam War when the U.S. dramatically escalated the fighting in 1965 and pulled out eight years later, as the communist government of North Vietnam in turn took over South Vietnam to reunite the country.

We're watching the region's stock market indexes closely.

If you'd like to learn more about Elliott wave price patterns, including the triangles mentioned above, EWI has made available the entire online version of the book Elliott Wave Principle: Key to Market Behavior.

FX, Stocks, Commodities, Cryptos... Learn How to Know When This Key Price Pattern is Over (Video)

By Elliott Wave International

"12345-ABC." That's a basic Elliott wave pattern in a nutshell. That "12345" is a so-called impulse, and it's a key price pattern to know, because impulses point in the direction of the larger trend. In this clip from a recent Trader's Classroom lesson, host Favio Poci shows you step-by-step how to spot an impulse and know when it's likely over. (Market in focus: EUR/CHF, but you can apply this to any liquid market.)

Continue Your Education on Impulse Waves with this FREE Online Course!

For a very limited time, you can get free access to our online course, "How to Spot and Capitalize on Impulse Waves." ($99 value)

In about 1 hour, you'll learn:

1. "What do I look for?" -- just what, exactly, should you look for on a price chart? See an easy way to spot an impulse wave.
2. "What does it tell me?" -- Impulse waves are great at showing you the direction of the larger trend (which, as you know, is "your friend"!)
3. "Are there variations?" -- Most impulse waves are simple, but some are... well, different. You'll see how to quickly distinguish one from another.

Start Watching Now

This article was syndicated by Elliott Wave International and was originally published under the headline FX, Stocks, Commodities, Cryptos... Learn How to Know When This Key Price Pattern is Over (Video). 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.

Trouble Lies Ahead. Are You Ready For It?

By Steven Hochberg | Elliott Wave International

Conversations about whether or not the Fed will cut interest rates any time soon continue to dominate the airwaves. But we are looking elsewhere for signs about where markets and the economy are headed.

Having observed market behavior for 45 years, we've got a lot of historical precedents to lean on. The emerging picture suggests that investors not paying attention may be caught unprepared for an impending change.

The chart below is stunning in its implications.

It shows the spread between the yield on U.S. corporate junk bonds and the yield on 3-month U.S. Treasury bills going back to the 1990s.

Junk bonds, IOUs of companies with the weakest financial structures, currently yield just 2.7% more than the risk-free rate on 3-month U.S. T-bills, which is 5.4%.

This is one of the narrowest spreads in history, revealing a hunger for risk-taking so fervent that investors cannot comprehend a financial environment that will be different from today's.

Back in February 2007, the junk-yield-to-T-bill-yield spread narrowed to just 2.2%. That extreme coincided with a peak in the S&P 500 Financials Index, which occurred at the forefront of the worst economic and monetary crisis since the Great Depression. Near the end of the crisis, the spread had skyrocketed by a full ten times, to 22.9%, as corporate defaults shot higher and investors panicked into any asset that was perceived to offer safety.

When another widening of this spread starts, investors' historic complacency toward risk will be replaced by anxiety and eventually panic as financial asset values contract.

If you want to learn how you can prepare for difficult times, Elliott Wave International has a free report that not only explains the problems, but also offers solutions, such as how to bank safely and store your precious metals: Preparing for Difficult Times.

The Fed Leads and the Market Follows? It's a Big Fat MYTH

By Murray Gunn | Head of Global Research, Elliott Wave International

We help investors by analyzing what really drives the markets. Along the way, we often uncover a market myth, something most investors believe moves the markets, but really doesn't.

I want to show you one of the biggest market myths in existence. It will help you understand what the Fed can and cannot do.

The one thing the Federal Reserve can do is control the money supply. The physical printing of dollars, or the digital creation of reserves, is in its gift. The natural state of affairs is for the money supply to grow at a rate of around 5% per annum.

Make no mistake: This is actual inflation, and is used by the Fed in an attempt to grease the wheels of economic growth.

All it really does though is devalue the purchasing power of the dollar over time. Now, after historic inflation of money in 2020 and 2021, the money supply is being purposefully deflated by the Fed.

When it comes to interest rates though, the Fed is NOT in control. The Fed does not lead; it follows the market.

This chart shows the Federal Funds Rate alongside the U.S. Treasury 2-Year Yield. You can see that at major turning points, it's the 2-Year Yield that moves first, and then after awhile, the Fed changes its benchmark interest rate. This was profoundly the case in 2019 when the Fed cut rates well after the 2-Year Yield had declined. And of course in 2022, the Fed had lagged the move higher in 2-Year Yields by many, many months before it started hiking.

Conventional analysts and the financial media are obsessed with how the Fed will change interest rates, thinking that it will influence the financial markets. But to find out how the Fed will act, all they need to do is look at the short end of the bond market.

The idea that the Fed leads the market is just one of many myths that investors believe. Other myths include that corporate earnings drive stocks and that OPEC decisions determine oil prices. If you want to learn about these market fallacies and others, EWI has a free report that uncovers 13 market myths that deceive most investors.

This article was syndicated by Elliott Wave International and was originally published under the headline The Fed Leads and the Market Follows? It's a Big Fat MYTH. 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.

What New York City's Art Auctions Tell You About the Stock Market -- and Social Mood

By Peter Kendall | Chief Analyst for U.S. Markets and Cultural Trends

The fall and spring auctions in New York City are the art market's bellwether sales events. And according to The New York Times, the results from the City's spring art auction season "tell a story of a masterpiece market come down to earth." The article notes that the spring sales at Christie's, Sotheby's and Phillips delivered $1.4 billion -- a 22 percent decrease from total earnings of $1.8 billion in 2023.

While auction experts called it a "respectable finish," the general art market nervousness is a bad sign for the next major auction season in November. It's "a momentum-based market," said one expert about the art industry. "There can be a little bit of a herd mentality."

We agree wholeheartedly, save for the "a little bit" part. The art scene, like any speculative, freely-traded market, is very much driven by herd mentality. And as such, it often closely tracks the stock market, because both are driven -- higher or lower -- by waves of social mood. Positive social mood impels demand for fine art and stocks, whereas negative social mood decreases demand.

Signs of weakness in the art market were apparent before this spring auction season. The message of last November's bidding was decidedly mixed. "While the figures from the fortnight of sales looked impressive, there were still several significant indicators of an art market in flux," reported Artsy.com. "Each auction house held a sale that cumulatively fell beneath their low estimates," and there were lots of withdrawals. Sotheby's modern evening sale, for instance, was reduced to 33 lots from an original 40.

"A notable clutch of works by blue chip artists failed to achieve their low estimates. Works by Jeff Koons, Andy Warhol, Pablo Picasso, and Salvador Dali all hammered below their low targets."

"Despite a Sagging Art Market," The New York Times reported that this Picasso from August 1932 did bring a winning bid of $139.4 million, the highest price paid for a work of art in 2023.

"The sale of 'Femme a' la montre' not only cements its status as a masterpiece, but also underscores the enduring fascination and value of Picasso's work."

Interestingly, Picasso started the painting at the bottom of a massive decline in the Dow Jones Industrial Average and the start of a multi-decade rally.

With the painting's record price aligning closely with what we believe is the end of a long upward wave in the stock market, we suspect that the sale will mark a peak for Picasso and many other artists and artworks of "enduring fascination." The fascination should yield to bafflement at the artistry as well as the prices that were paid for it.

Follow along via our free EWI newsletter and I'll send you occasional updates like this.

This article was syndicated by Elliott Wave International and was originally published under the headline What New York City's Art Auctions Tell You About the Stock Market -- and Social Mood. 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.

Another Bank Failure: How to Tell if Your Bank is At Risk

By Elliott Wave International

Another bank failure, another underperforming share price.

Philadelphia-based Republic First Bank was closed down on Friday, April 26, and the assets were sold to Fulton Bank. Republic First becomes the first bank failure of 2024. Given our outlook for the stock market and the economy, it will probably not be the last.

We track the probability of bank failures within the KBW Bank Index by looking at the relative performance of share prices. If the share price is in an underperforming trend, it tells us that something is not right and, therefore, the chance of an underlying weakness emerging is high. We're working on expanding our coverage to the hundreds of banks in the U.S. but, in the meantime, we would strongly urge you to check the relative performance of your own bank's share price.

The chart below shows that the share price of Republic First was underperforming the iShares US Regional Banks ETF (ticker IAT) since 2022, with that trend accelerating lower in the summer of 2023. It was a warning that something was up at the bank and, sure enough, existential problems have now emerged. The Republic First Bank failure should not be a surprise to anyone who was tracking the share price.

Is the collapse a harbinger of things to come? We have been raising a red flag about major issues in the banking system for years. Investors got a first whiff of the burgeoning debacles in March and May of last year, which saw three of the seven largest bank failures in U.S. history. We remain concerned that these are early warnings of a much deeper malady. Stay prudent.

Discover 5 Solid Alternatives to Banks

In light of recent bank failures and concerns about the vulnerability of the global banking system, many people are (or, in our researched opinion, should be) looking for alternatives to traditional banks.

Our special report "Your 5 Top Alternatives to Banks" gives you actionable ideas to help you protect the bulk of your liquid wealth -- and in some of the cases, earn you a nice, healthier-than-banks return along the way. You can get the report when you join Club EWI for just $2/month.

Read the report now. Or, follow along for updates via our free newsletter.

This article was syndicated by Elliott Wave International and was originally published under the headline Another Bank Failure: How to Tell if Your Bank is At Risk. 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.

Stoxx Europe 600: What Signs of Investor Exuberance Keep Telling Us

By Elliott Wave International

Every day, you read news stories about the state of the economy and the stock market affecting consumer and investor behavior. The story goes something like this: When the economy and financial markets show signs of improvement, consumers start to spend more, and investors buy stocks.

But if you're a student of Elliott waves, you understand that this type of thinking is precisely backwards. It's consumer optimism and the resulting consumer spending that elevates the economic markets; and it's the investors' bullish mood that translates into a rising stock market as investors buy stocks.

Social mood, in other words, comes first. Consumer and investor behavior -- bullish or bearish -- follows.

That's why social trends can give you clues as to where the financial markets are likely heading next. For example, exuberant investor optimism often appears near major stock market tops, while deep pessimism accompanies major lows.

Let's look at a key European market as an example. Back in March, the pan-European Stoxx Europe 600 index extended its rally to seven consecutive weeks. Most investors probably saw the strength as a reason to load up on European stocks. Readers of our European Financial Forecast, on the other hand, saw warning signs of exuberance flashing throughout society.

First, Lamborghini's 2023 sales results showed an all-time record 10,112 cars sold last year. Lamborghini's electric V12 Revuelto is sold out until late 2026 -- a three-year wait! Luxury goods tend to be popular at extremes in positive social mood, as the stock market and economic prosperity approach major peaks. They tend to go out of favor when these trends reverse.

Second, a March 10 Bloomberg headline said, "One of the Most Infamous Trades on Wall Street Is Roaring Back." The trade in question was the so-called short volatility trade, where traders sell products that track stock volatility. "Investors are sinking vast sums into strategies whose performance hinges on enduring equity calm." According to data from Global X ETFs, short volatility bets nearly quadrupled in two years.

"Enduring equity calm" attitude among investors rang a bell. We had been here before. An earlier iteration of the same trade famously blew up on February 5, 2018, when the CBOE Volatility Index (VIX) suddenly spiked 20 points and destroyed vast numbers of professional and retail portfolios. The spike coincided with a global stock market sell-off and a two-and-a-half-year period of volatility that left the S&P 500 where it started. In Europe, the Stoxx 600 had peaked three years before the S&P, so the stretch of zero returns lasted nearly six years. This chart of Europe's VIX equivalent, the VStoxx Implied Volatility Index, illustrates a few of the infamous volatility spikes over the past quarter century.

In our view, the re-emergence of the short-volatility casino is a much larger version of 2018. Five years ago, traders were gambling with a little more than $2 billion within a small handful of funds. Today, a mind-blowing $64 billion is being bet using "ETFs that sell options on stocks or indexes in order to juice returns" (Bloomberg, 3/10/24). Whether they know it or not, these traders are relying on smoothly functioning markets that behave the same way today and tomorrow as they did yesterday or the day before.

The warning signs we see in investor and consumer behavior are worth heeding.

To predict the next move in European markets, I'll continue to monitor social trends for clues. But more importantly, I'll compare the Elliott wave price structures in stock market indexes to previous major junctures in those indexes. Tune in to The European Financial Forecast for my ongoing analysis, or sign up for our free newsletter, and I'll send you occasional updates like this.

This article was syndicated by Elliott Wave International and was originally published under the headline Stoxx Europe 600: What Signs of Investor Exuberance Keep Telling Us. 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 Pay Attention to This Time-Tested Indicator Now

"How High Can Markets Go?" -- asks this magazine cover

By Elliott Wave International

Paul Montgomery's Magazine Cover Indicator postulates that by the time a financial asset makes it to the cover of a well-known news weekly, the existing trend has been going on for so long that it's getting close to a reversal.

A classic case in point is this Time magazine cover from June 13, 2005:

As you can see, it says, "Home $weet Home," followed by "Why we're going gaga over real estate."

Interestingly, this was published around the time that the S&P Supercomposite Homebuilding index was peaking. The housing bubble of that time was on the verge of bursting, and you'll likely remember that major crash.

Fast forward and here's what was shown on the March 2 -- 8, 2024 Economist cover:

As a large cluster of balloons carries a bull upward, it asks, "How High Can Markets Go?"

The March Elliott Wave Financial Forecast, a monthly publication which provides analysis of major U.S. financial markets, said:

It is a bearish signal for stocks. ... In the context of the multitude of other sentiment extremes ..., as well as a fully mature wave pattern, we think this cover is meaningful.

Just a few weeks after that was published, the Dow Industrials hit a high of 39,889 on March 21. The NASDAQ indexes also topped on that date.

As you probably know, the stock market has trended lower since. Only time will tell if the downward turn morphs into a major bear market.

Also know, from a technical analysis point of view, that the price pattern of the Dow Industrials is also sending a major message.

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

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. This context provides both a basis for disciplined thinking and a perspective on the market's general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

Here's the good news: If you'd like to read the entire online version of Elliott Wave Principle: Key to Market Behavior," you can get complimentary access by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Why You Should Pay Attention to This Time-Tested Indicator Now. 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.

This "Bullish Buzz" Reaches Highest Level in 53 Years

Learn what the AIM Index reveals

By Elliott Wave International

Yes, there's been a recent pickup in stock market volatility, but overall, bullish sentiment remains very much alive and well.

Indeed, here's a Feb. 18 Yahoo! Finance headline:

A Bull Market is Here.

On April 9, a Fox Business headline reflects the views of a well-known investment manager:

Fed doesn't matter in this bull market

An extreme in bullish sentiment also shows up in the Advisor and Investor Model, which is a very broad measure of market sentiment compiled by SentimenTrader.com. The model is also known as the AIM Index.

This chart and commentary from the April Elliott Wave Financial Forecast, a monthly publication which covers major U.S. financial markets, provide insight:

The AIM Index constantly fluctuates between extremes; what's unparalleled about it now is how long it's been pinned to the top of its range. After hitting its highest possible reading of 1.0 on December 19, it stayed above .90 for the entirety of the first quarter for all but one week. This relentless bullish buzz is represented here by the index's 20-week average. At 0.93, the April 2 reading is the highest in 53 years.

Yes, it's possible that this dogged bullish sentiment could persist even longer. Yet, as you might imagine, Elliott Wave International considers extremes in market sentiment to be major red flags.

The April Elliott Wave Theorist, a monthly publication which analyzes major financial and cultural trends, reveals another cautionary sign via this chart and commentary:

As many pundits are saying, the market is not beyond the valuation of 2021, so what's the problem? But that was the year of the most overvalued U.S. stock market of all time, from which broad indexes such as the Russell 2000 have not recovered. That optimism has returned to an equivalent level is a big deal. ...

This is an especially critical time to keep on top of the stock market's Elliott wave pattern.

If you're unfamiliar with Elliott wave analysis, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior, which is the definitive text on the subject. Here's a quote from the book:

[Ralph N.] Elliott recognized that not news, but something else forms the patterns evident in the market. Generally speaking, the important analytical question is not the news per se, but the importance the market places or appears to place on the news. In periods of increasing optimism, the market's apparent reaction to an item of news is often different from what it would have been if the market were in a downtrend. It is easy to label the progression of Elliott waves on a historical price chart, but it is impossible to pick out, say, the occurrences of war, the most dramatic of human activities, on the basis of recorded stock market action. The psychology of the market in relation to the news, then, is sometimes useful, especially when the market acts contrarily to what one would "normally" expect.

If you'd like to read the entire online version of Elliott Wave Principle: Key to Market Behavior, you can get complimentary access by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline This "Bullish Buzz" Reaches Highest Level in 53 Years. 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.