Q & A with Bob Prechter

"Q & A" with Bob Prechter, perhaps the world's foremost expert on Elliott Wave technical analysis posted 05/15/2000 Elliott Wave International (EWI), founded in 1979 by Robert R. Prechter Jr., is one of the world's largest providers of market research and technical analysis. Its staff of full-time analysts provides global market analysis via electronic on-line services to institutional investors 24 hours a day. EWI also provides educational services that include periodic conferences, workshops, video tapes, special reports and books. For more information, please visit their Web site at http://www.elliottwave.com.

Hello, Bob, thank you for spending some time with us. As a 15+ year subscriber to your services, I'm very familiar with the Elliott Wave Principle, but I wouldn’t mind a refresher course. I think our readers would also like some input on where the market is right now.
	OK. let's go for it.
Let’s talk about the Wave Principle first. Various researchers have made the case that markets unfold in patterns, but no one has yet suggested a reason for them. Can you summarize why markets move in patterns?
	Here’s the way I see it. Many people desire to belong to and be accepted by the group. Many people also have a tendency to let others think for them in fields they find intellectually difficult. These traits serve to make their unconscious minds dominate their conscious minds, especially in emotionally charged social settings. When the market panics, for instance, most investors are not panicking individually in isolation, but in response to the panic of others. The same is true of their buying, but that is a slower process and therefore less obvious. When the unconscious mind dominates, it does not do so randomly (as that would mean no thought at all), but in patterns peculiar to it. Those patterns show up in price movement and reflect the Wave Principle. I presented a lot of evidence for this conclusion in my latest book The Wave Principle of Human Social Behavior.
What do you advise people to do who want to learn to use the Wave Principle?
	The first thing to do is to start watching market plots closely. Label and channel the real-time movements according to the Wave Principle. You’ll gain confidence immediately if the market is in a major impulse rather than a correction. That is when I was fortunate enough to begin, so I saw what was happening quickly. Corrections are more varied and difficult. Yet even corrections usually contain impulse waves, so you should observe plenty of them before long.
How can people get the big picture?
	You should obtain data as far back as possible. The more information you have, the better. The perspective provided can be invaluable. The approaching juncture in the stock market is an example. The expected change in trend is of very large degree, a fact that would not be understood without three centuries of back data.
Should an analyst rely on other market indicators when coming to an analytical conclusion about the market?
	No approach, including Elliott, provides an assured scenario. However, Elliott analysis does provide a list of possible outcomes in order of their probability, which is a lot. Still, you must accept that sometimes a lower probability count will turn out correct; that’s what "lower probability" means. Sentiment and momentum readings, along with other guidelines of wave behavior, can help you weigh the possible outcomes properly. Our Elliott Wave Principle book describes how psychology, speed of price change and breadth behave at certain times in the structure, which is useful to know when you’re trying to identify the market’s position in that structure. To avoid the biggest mistake that people (including me) make, never label the market simply because of the way indicators look. They can look that way for a long time.
The Wave Principle reflects all degrees of trend at once. Can a wave count at Subminuette degree affect your Primary degree count?
	Each degree is relevant to patterns one or two degrees higher. Here’s an example. Suppose I think the market should be rising in a third wave, but on the smaller degree, the rise to a new high is choppy, while breadth is poor and the rate of change slow. I would revise the count to label the advance as wave B of a flat correction for wave two. A Subminuette degree event could affect my opinion at Primary degree, but only as a component of patterns building up to Intermediate degree. Every decision point ultimately comes down to some threshold at the smallest degree.
Under the Wave Principle, what is the most important thing to watch other than price?
	Volume. Generally increasing volume on a fifth wave, for instance, means that the wave will extend. Light volume in a supposed third wave means it’s not a third wave. Both of these situations present invaluable information. Remember, it’s happening at all degrees, so there is a lot of information to assess.
O.K., let’s switch to the current state of the stock market. You were so bullish for many years. Are you comfortable with your grim long-term forecast of a Grand Supercycle degree reversal?
	Well, I don’t put the words "grim" and "forecast" together. What is coming is just reality. It will be grim to the unprepared and life-enhancing to those properly positioned. You could say the forecast for the bull market I made in 1982 was grim to short sellers. The point of the forecast is to make what is coming a profitable experience, or at minimum a safe one, for you as an individual.
Can you summarize your long-term outlook for stocks and bonds, the dollar, gold, inflation and economic growth?
	I think the rise in U.S. stocks is in a terminal phase and faces a historic trend change. Most stock markets worldwide are likely to follow suit. Major stock declines have always led to recessions or depressions, and this time should be no different. Social unrest will follow in many areas of the world. The bond market is not a haven, as it topped out in 1998. The quality of investment debt overall is the lowest in human history, and bond investors will have to pay for an error in judgment. I am bullish from time to time on gold and silver in the near term, but their bear market is not quite over yet. Over the next ten years, the biggest risk we face is deflation. Economists are cheering the low inflation rate, but the long-term trend in the rate of inflation is akin to where it was in 1929, so it is not good news. Later in the deflationary process, precious metals will be the single best investment. We are watching carefully to be able to identify that time.
Where will the Dow be when the decline is over, and when do you think that will happen?
	Every financial mania in history has been followed by a collapse that takes prices to below where they were when the uptrend began, which in the current case is Dow is 777 in 1982. I do not know when it will bottom because we will be dealing with a major corrective process that could last a century. It will be a great fourth wave, balancing the second wave, a bear market that lasted from 1720 to 1784. The first major low should occur in 2003-2004. I outlined the entire scenario in my book At the Crest of the Tidal Wave, but it is too speculative to detail here.
Aren’t there some stock markets, in Asia, for instance, that you believe are closer to a bottom than a top?
	They are staging partial recoveries within a bear market. The full retracement of the Nikkei’s mania has yet to be completed.
You have anticipated these events for quite some time, at a huge opportunity cost. Where did your calculations go wrong?
	It has been frustrating. In 1982 and 1983, I described the coming mania, which would be "like 1929, 1968 and 1973 combined...indicators will give sell signal after sell signal, and the market will just keep on going." It was an insight only "Elliott" could provide. Unfortunately, I thought we would reach that point in no more than 8 years, which is actually on the long side for most of history’s manias. But so far, it has lasted 18 years! If I weren’t such an optimist, I would think that this means the top is even bigger than Grand Supercycle. By the way, I would add that the idea of "opportunity cost" is valid only if someone gets out at a higher level. Most people won’t. The gunslingers who have ignored historic overvaluation to "make money" in the past decade will not get out for the down move. Their financial dreams will dissolve. Would you rather be that person, or the one who cashed out early and avoided getting caught up in the mania?
What about the notion of "lower probability?" Do you think the fact that your predictions have not happened yet might mean that you have misinterpreted even the long-term the wave count?
	The Wave Principle allows plenty of alternate interpretations, but market conditions and patterns such as those in place today have clear implications, and those implications will be borne out. It is only a matter of when, not if.
Investors’ exuberance, irrational or otherwise, for buying stocks is being sustained partly by a belief that traditional notions about company valuations and economic cycles no longer apply. "This time it’s different," the bulls cry. Why are they necessarily wrong?
	"Necessarily" is a good word because the widespread acceptance of the idea that economic cycles are dead answers the question of why we have economic cycles. People’s beliefs about trends are not scientific but emotional. When markets have gyrated, they believe in cycles. When they go down for a long time, they believe in doomsday. When they go up for a long time, they believe that cycles are dead and the only possible direction is up. If people were different in terms of being intellectually independent and commonly expecting trend change, then financial markets would be far more stable.
If the society and its leaders are careful, can we avoid the bear market?
	Being "careful" now cannot avert the coming social change. People have been uncareful for a long time, and their actions will have consequences. Still, individuals can take steps to insure the safety of their own capital and later, their personal safety as well.
What would you say to a cynic who finds it odd that your work would coincide with the greatest shift in the course of human progress in 200 years and concludes that the only thing this opinion really demonstrates is the need for market analysts to feel as though they’re living at a critical moment in history?
	It’s a sophisticated point about human nature. I have made the point myself, in other contexts, such as in discussing "end of the world" people. When Y2K was supposed to mark the end of civilization, I said to ignore it. Whether it’s earthquakes, pole shifts, giant meteors, Armageddon, overpopulation, the ozone layer, or whatever, many people seem to be able to justify believing passionately that the world is about to end a few months from now. But the stock market always falls a long way before social strife erupts, so I was quite sure that Y2K would be a non-event. Now, back to the Elliott wave outlook. If the cynic doesn’t bother to look at the patterns and has no historical context, then his perspective makes mine look psychologically self-serving. However, if he were to read all the Elliott wave material from R.N. Elliott through Charles Collins, Hamilton Bolton, A.J. Frost and myself, he would understand that our reading of the long-term wave pattern has been consistent for sixty years, anticipating the juncture that we now face. It has been anything but an "end of the world" stance. We’ve been mostly bullish, in fact, super-bullish, except for 1966-1974, which was the wave IV correction, and in the past decade as we await the end of wave (V) of a two-century uptrend. Finally, I would say, "Watch what happens."
Does the fact that pollution, overpopulation, AIDS and tin-pot dictators are still with us mean that things could get a whole lot better before the top?
	There is always a mix of good and bad in the worldwide social picture. The question is, what is the balance? Today, on average, there is less pollution (due to the collapse of European Communism), more widespread peace, more high-paying jobs and fewer tin-pot dictatorships than ever before. And those points merely scratch the surface. People don’t realize they are living in a Golden Age until it’s over. Whatever one might view as negatives now will appear as nothing at the bottom of the next depression.
You sound like you are counting on many investors holding on all the way through a bear market. Would it be right to guess that you think this will happen because so many people invest through funds?
	No. It’s ALWAYS been true. But there is one aspect of the mutual fund craze that is worth a comment. After the 1987 crash, investors found that they could not stand the pain of taking the blame for their own losses. So they abdicated responsibility by handing over funds to managers. Now, ironically, they can stand a much larger loss psychologically because IT WON’T BE THEIR FAULT. They can rail at the apparent stupidity of managers instead of their own naivete. Ultimately, all novices sell at lower prices; in fact, they usually sell near the bottom. Many sell shortly after the final bottom, thinking they have gotten a rally to sell on.
Are there currently any significant Fibonacci relationships in the stock market that might indicate a reversal is at hand?
	Over the years, I have anticipated a number of long-term Fibonacci relationships in the DJIA. Some, like the 1987 high, coincided with market reversals. Those in the 1990s have not (except briefly), as the Dow has continued to rise. However, in a historically overvalued market that is staggering under ever-compounding technical indications of an approaching reversal, I think we have to stay focused on the single most important question, which is when and where that reversal will take place. I do have some charts that I’ve been keeping an eye on. Want to see them?
Thanks Bob, it's been a pleasure and I've appreciated and enjoyed reading your works over the last 15 years.
	Thank you!
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