Question of the Week: 3/26/2008
Does inflation effect Elliot Wave/NEoWave development and should I "fix" it by plotting in constant dollars or just forget about it and plot in current dollars?
A market's historical price record is the result of of thousands or millions of traders interacting based on known and anticipated information at the time. If you alter that information you run the risk of inadvertently "filtering out" potentially critical behavior. When inflation exists, "markets" and people know it and respond accordingly. Whatever impact it has on wave structure is important and should not be ignored or altered.
Keep in mind, inflation is not an unexpected, natural, external force (such as hurricanes or earthquakes), but a man-made phenomenon caused by human decisions. As a result, even inflation becomes part of the human experience and "rhythm of life" that wave theory quantifies and categorizes. As a result, when following any market, I never attempt to alter the original transactional data for any reason.
Finally, don't forget all markets progress on a percentage (not arithmetic) basis, so the best wave structure and channeling will be accomplished on a logarithmic (or semi-log) scale. By its very nature, logarithmic plotting dampens a market's arithmetic progress, thereby automatically suppressing the effects of inflation if or when it occurs.
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