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Wednesday, October 14, 2009

Prechter

Robert Prechter, the founder of EWI, is getting badmouthed as predicted. On August 28th, in the morning while futures were bullish, Prechter issued a special issue of Elliott Wave Theorist recommended returning to a full short position. In other words, he recommended selling all remaining longs and holding only shorts. Since Prechter is a DOW guy, I'll use DOW numbers.

On August 28th the DOW hit an intraday peak of 9666. If one had taken his recommendation that morning and shorted the DOW at say, 9600, he or she would be down approximately 4% on the "investment" as of today.

But what else did he say during that August 28th?

"The market could go higher in the normal retracement range so leave some leeway."

And the chart he showed for the "normal" level for a P2 retrace was 38% to 61%. Since he conveyed that he didn't think the market had too much left in it, one could assume that the DOW may make a lurch toward the 50% mark at most, of which it is still shy. Or, using common, sense, at least DOW 10K. But what he really meant is that P2 was not expected to morph into something more complex such as a "double three" pattern of some sort. Double zigzag yes. Anything more, no.

So I take his statement to mean that one should not go "all in" on August 28th. Rather scale your investment as you did at sub 750.

So lets say you had a plan on investing $60K to go short. One could easily have shorted 1/3rd the amount on the DOW straight up at 9600. You would now show about a 4% loss as of today.
So your account would show $59,200. You have lost $800 on your early scaled-in short.

Now suppose you decide to scale in another $20K at 10000 Dow with a plan to scale in another $20K at the 50% retracement mark. Lets just say since you scaled in at 9600 and 10000 your last scale in would be 10400 Dow for an average of 10K DOW price.

Would this be a foolish investment?

Prechter recommended buying at 750 and under. Recommended to sell at/above 1030.

Was that bad advice?

That's after he recommended to short at 1530 in 2007 and recommended covering at 750 in February. And yes the market went to 1576 so he was likely bad mouthed then too.

For those who diss Prechter so easily, I would say first that he is a "buy and hold" investor. He caters to the buy and holders except on some cases "holding" means holding shorts just like you would an investment long.

Now obviously the daytrader mentality cannot see much past the next day let alone 8 months at a time. But in the long run I bet his methods stack up pretty damn good against any trading method.

And in March if someone had told you, you could short the DOW at 10K average again what would you have said? You'd said " Hell yeah with extreme leverage no doubt!"

But here we are and the same people who licked their chops at the thought of shorting 10K DOW are now fully turned to seeing nothing but Fed-funded upside.

Yet the Fed fumbled for 2 years running and could not prevent a 900 point loss! And now they are all of a sudden omnipotent.

Back to Prechter. Why did he recommend when he did to turn full short? Because the spread between bulls/bears via Investor's Intelligence surveys was the greatest that week. It has yet to even match that August spread (although it may again as a result of today's move). It was a valid pattern at the time and the data supported the call.

I really don't care if the DOW goes to 10,250-10,500K. I hope it does! The disconnect from reality will be much greater than it was in the NASDAQ in 2000. At least the tech bubble left us with great companies. The "asset mania" bubble left us with debt. And the current debt bubble will leave us bankrupt...The higher it flies, the harder it will fall.

Because reality is that America is a financially spent nation with trillions more in deleveraging we need to do. We are taking drugs to mask the pain. We are on hallucinogens.

Spark for P3? I suppose like Erik says, when they announce positive GDP and the official end of the recession is what will do it.

Rallies of this magnitude don't end on bad news. They end on great news. The news should get even better. Its expected!

Except underneath, if you look at the nuts and bolts, you'll realize its still a FIRE (Financials, Insurance, Real Estate) economy that just doubled down its bet at the roulette wheel.

FIRE economies don't produce anything real. They manufacture false wealth and skim from the nation's coffers. The consumer is dead. A new world-wide frugalness is slowly taking hold of the social order. There is no stopping this. There is no enticing the masses to change what their free will tells them they must do.

Governments will be under siege to stop the spending madness. Fear of the unknown (collapsed financial system as we know it) is way worse then a Great Depression II that has an intact and familiar financial system (the dollar).

I think people understand they can take their medicine for the good of the system as long as the system no longer is fucking them from every which angle. So the bankers, and connected cronies and Congressmen must be put out to pasture first and indeed a bunch need to go to jail.

But we know that won't happen and I can tell you social mood will erupt as a result. Its what Prechter has foreseen. And he is likely to be right.

I am not saying to follow Prechter off a cliff if thats where things are headed but do your own due diligence. But give Prechter some credit. Criticise him with well thought out reasoning but mindless bashing you can take to the Yahoo boards...

In the end your investment decisions are your own. Take responsibility for them.

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