Question Of The Week - 8/26/2009

To understand the answer to this question requires a complex understanding of wave theory and its limitations. Most followers of Elliott Wave (EW) assume the theory is capable of explaining - in real time - all market action at all times. Unfortunately, that simply is not true. The world thought Newton had everything figured out until Einstein came along. Even though R.N. Elliott's Wave principle was the most revolutionary and comprehensive theory of its time, it had flaws, namely the absence of logic and self-confirmation (traits NEoWave brings to the table). But, even with the great advances NEoWave delivers, there are still "holes" in the theory. For that reason, there are times when EW and NEoWave analysts simply can't predict what will occur next.

For example, during the early stages of a correction (i.e., during wave-A), predictability will be high and both EW and NEoWave analysts can appear to have an almost supernatural ability to predict the future. This occurred for me during wave-A of the current bear market starting at 2000's high through mid 2003. Once wave-B got underway, day-to-day, week-to-week and even month-to-month predictability dropped noticeably, which always occurs during B-waves. The larger the B-wave, the longer the period of uncertainty. At best, during B-waves, one can hope to get market direction correct, but predicting future price action in detail is extremely risky and likely to produce embarrassment.

As wave-B ended in late 2007, structural clarity increased once again. By January 2008, as wave-C got underway, predictability returned and the ability to make specific forecasts was possible for the next 12+ months (i.e., during the first 25% of wave-C). With the first year of wave-C now history, and as the S&P moves closer to the center of an even larger correction, predictability has dropped to its lowest level since the start of the bear market September 2000. We can say with near certainty that wave-C will be a four year correction (i.e., it will last until 2012), but we can't say what type of correction it will be (i.e., whether a Flat, Triangle or complex Correction). For that reason we won't be able to predict exactly how the S&P will unfold the next few years. There will be brief periods, at major market turns within wave-C, when I'll be able to project future price action, but trading (based on wave theory) will be difficult until at least early 2010.

In early 2000, based on my knowledge that wave structure would become increasingly more difficult to decipher as the 20 year correction progressed, I began work on a completely new way of thinking about, dealing with and trading markets. I knew substantial portions of time would exist during that 20 year period where I would not be able to predict what was going to happen next, or that forecasting errors (and embarrassment, like what I experienced recently when I stated June 11, 2009 would be the high of the year) would become more common. As a result, a completely new way of looking at and dealing with markets, with a focus on trading technology and risk management, would be necessary to survive the next 20 years. That was the beginning of what has evolved into NEELY RIVER THEORY - a now crucial part of all NEoWave Trading updates.

There is always the possibility an analyst will make a mistake or miss an important concept when doing wave analysis. That does not change the basic fact that wave theory does not have all the answers at all times. It is for that foundational reason I missed more than half of the March 2009-to-present rally in the stock market. It simply was NOT predictable and could not be counted on. That statement is correct whether other EW analysts took the chance and stayed bullish on the market from March's low. Logically speaking, and from a certainty and safety standpoint, only 1/3 to 1/2 of the March-to-present rally could be depended on. The rest of the rally did not ruin or negate wave theory (structure could be adjusted to allow for it), but the rally could not be expected with certainty at the time the pattern was developing.