Elliot Wave Theory

Once again I’m going to have a little fun with a guy who claims to be a technical analyst that uses the Elliott Wave Theory. And yes, it’s easy for me to be a back seat driver but this does illustrate the same type of problems that I repeatedly talk about with these “gurus”.

The Elliott Wave Theory is really far out stuff that attempts to put human behavior into up and down cycles or waves. Each cycle has 5 waves of different dimensions and durations. It got a lot of attention in 1987 when a fellow named Robert Prechter used it to call that year’s crash. Of course, like what usually happens to these gurus, Prechter has done nothing since. He is still in business somehow, but my take is if there are enough of these guys constantly making calls, someone will eventually be right. The problem then is that people will believe and follow them after their famous call, not understanding that the call was pure luck.


Anyway, “Avi” made a call on gold last weekend. GLD is the ETF (exchange traded fund), which moves with the price of gold). The GLD was at 153 at the time. If you haven’t been following gold, it has been quite weak for some time – it hit 1900 (GLD was at 185) in August 2011 - and hasn’t moved up consistently since on any of the news that most would claim to be positive for the metal–Greece, Cyprus, Korea, the employment numbers etc.  Here’s what Avi says – I think, since it’s hard to interpret ... gold is going lower in the long term but in the next few weeks it should rally to at least 158 unless it turns down and moves to 142. Those short will “have their heads handed to them”. He continues, “but ultimately I’m not totally convinced that we have seen the true bottom in the metals. While it is still possible that I am wrong, which is why I believe that we are low enough to be suggesting to investors to start building a long term position down in this region. I still believe that lower levels can be seen before the next rally.”

WOW!!! My head is spinning. Which way do I go? Long or short, up or down, sideways? The good news for Avi is that whatever gold does, he’s called it. The interesting thing for me is who pays a guy for this stuff?

His near term favorite call seems to be – unless it doesn’t happen – that GLD is going to 158 from 153 and shorts will have their head handed to them - unless it goes to 142. First of all, I don’t consider a 3% move against you to be having your head handed to you. And, since when you decipher all his musings, it’s either going up 3% or down 5% – he’s not totally sure – it sounds better to me to bet on the side of the larger move – down 5%.

Avi is a lawyer and accountant by training, but does provide Elliott Wave analysis to institutional clients – again who pays for stuff like he writes? Can I do that? He does point out in his bio that he called the top and bottom in Apple before it topped out last year, the top in gold within 2 dollars in 2011, the bottom in the S&P in October 2011(within 4 points) and November 2011(within 75 cents) – these last two seem awfully close time-wise, plus there was the ensuing decline into Thanksgiving and the rally following Thanksgiving. These are all way too specific and too much horn tooting for me to truly believe. He obviously makes a lot of calls and doesn’t include the ones he making incorrectly.

Like this GLD call: GLD did nothing but go straight down since last weekend, counter to his favored prediction – but he did say “unless”.

Then there’s another technical guy who said he wasn’t interested in shorting gold until it fell below a trend line at 149. This morning it’s down 30 (Gold at 1531) and GLD is at 148. So he enters now, after a huge down move already happened over the last few weeks? I don’t get guys like this, sticking religiously to something they were taught instead of using common sense. Gold has obviously been very weak for quite some time. What was this guy looking at? I guess he thinks that a breakdown to 149 confirms lower prices, and now he’s more sure. I contend that now he assumes more risk because he’s short from a lower price. Now, you don’t have to become involved with any of this stuff—just don’t play. But to pile on after a large move already has happened just increases your risk. Enough for now.