Getting comfortable in the stock market can be a financially dangerous thing. And that's what many investors are doing now -- feeling comfortable with the market.
Perspective is key in analyzing the market because it's all too easy to get caught up in the psychology of the moment. Alduous Huxley quipped "That men do not learn very much from the lessons of history is the most important of all the lessons of history."
Most investors don't appear to learn from stock market history, even when it is very recent -- like the 2000 and 2007 tops, when the last thing on most market commentator's minds was a big stock market decline.
It's no secret that Elliott Wave International says the decline that started in 2007 is far from over. We are fully aware that the present rally has lasted for several months. But that does not mean investors can safely cozy up for the winter.
In his November Elliott Wave Theorist, EWI's Robert Prechter urges subscribers to learn from history:
"...if we were to cave in and adopt the crowd's "fundamental" logic (which in our view is just the latest fairy story), you would be doomed. People who chase giddy markets tend to get wiped out, because they have no basis for a sell decision."
A recent example of having no basis for a sell decision is a market commentator 's claim that "we're overdue for a 5 percent correction" (in other words, that a market pullback is a buying opportunity). You don't have to listen or read the financial media for too long to discover other like-minded pundits.
Those who follow mainstream "expert" advice, could be buying under the faulty assumption that the start of that decline is just another overdue "dip." Moreover, a sizeable percentage of investors will "average down" after the market falls from their initial buy point.
The rally has lasted longer than we initially anticipated. The Wave Principle is based on probabilities, and no method can guarantee forecasting success. Indeed, as Frost and Prechter put it in their book "Elliott Wave Principle,"
"...there are often times when, despite a rigorous analysis, there is no clearly preferred interpretation. At such times, you must wait until the count resolves itself. 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."
And right now, our analysis points to a developing story in the market's wave structure that you need to understand.
Moreover, beyond the actual wave structure itself, Prechter describes the market today as a "technical disaster."
www.elliottwave.com
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