Keep Ahead of the Herd in 2011

Keep Ahead of the Herd in 2011
Learn to Survive and Thrive with Knowledge of Socionomics and the Elliott Wave Principle
December 31, 2010

By Elliott Wave International

Have you ever noticed that much of the time, the forecasts for what’s going to happen next are quite often just more of what happened last? There’s no real insight, just “expect more of the same.”

That’s not how we view the world here at Elliott Wave International, where instead we study patterns of positive and negative mood to predict changes in the stock market, current events and other trends.

Pop culture trends are more than just "interesting" -- analysis of social mood trends is part and parcel of Elliott Wave International's technical approach, helping us anticipate changes that most people never see coming.

Prechter's groundbreaking paper, "Pop Culture and the Stock Market," first published in 1985, lays out the foundation for his contrarian analysis:

1) Popular art, fashion and mores are a reflection of the dominant public mood.

2) Because the stock market changes direction in step with these expressions of mood, it is probably another coincident register of the dominant public mood and changes in it
.
3) Because a substantial change in mood in a positive or negative direction foreshadows the character of what are generally considered to be historically important events, mood changes must be considered as possibly, if not probably, being the basic cause of ensuing events.

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large.

It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood.

The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise.

The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing 'negative' mood on balance, and an advance indicates an increasing 'positive' mood on balance.

The positive and negative events and trends of any given year paint a picture of society's mood as a whole. Haven’t we seen enough conventional forecasting fail miserably (remember the 2007-2009 debacle?) to consider an alternative method?

This new year, resolve to look at the world in a different light, and learn to anticipate changes that will keep you ahead of the herd with an understanding of socionomics and the Elliott Wave Principle.

As we enter 2011, we are happy to offer Prechter's "Popular Culture and the Stock Market" essay for FREE with your Club EWI sign-up. There is no obligation.

When you join Club EWI to access the "Pop Culture" essay, you can also access dozens of other free resources to help you understand how the Elliott Wave Principle and socionomic insight can help your investment strategies.

Keep Ahead of the Herd in 2011

Keep Ahead of the Herd in 2011
Learn to Survive and Thrive with Knowledge of Socionomics and the Elliott Wave Principle
December 31, 2010

By Elliott Wave International

Have you ever noticed that much of the time, the forecasts for what’s going to happen next are quite often just more of what happened last? There’s no real insight, just “expect more of the same.”

That’s not how we view the world here at Elliott Wave International, where instead we study patterns of positive and negative mood to predict changes in the stock market, current events and other trends.

Pop culture trends are more than just "interesting" -- analysis of social mood trends is part and parcel of Elliott Wave International's technical approach, helping us anticipate changes that most people never see coming.

Prechter's groundbreaking paper, "Pop Culture and the Stock Market," first published in 1985, lays out the foundation for his contrarian analysis:

1) Popular art, fashion and mores are a reflection of the dominant public mood.

2) Because the stock market changes direction in step with these expressions of mood, it is probably another coincident register of the dominant public mood and changes in it
.
3) Because a substantial change in mood in a positive or negative direction foreshadows the character of what are generally considered to be historically important events, mood changes must be considered as possibly, if not probably, being the basic cause of ensuing events.

Both a study of the stock market and a study of trends in popular attitudes support the conclusion that the movement of aggregate stock prices is a direct recording of mood and mood change within the investment community, and by extension, within the society at large.

It is clear that extremes in popular cultural trends coincide with extremes in stock prices, since they peak and trough coincidentally in their reflection of the popular mood.

The stock market is the best place to study mood change because it is the only field of mass behavior where specific, detailed, and voluminous numerical data exists. It was only with such data that R.N. Elliott was able to discover the Wave Principle, which reveals that mass mood changes are natural, rhythmic and precise.

The stock market is literally a drawing of how the scales of mass mood are tipping. A decline indicates an increasing 'negative' mood on balance, and an advance indicates an increasing 'positive' mood on balance.

The positive and negative events and trends of any given year paint a picture of society's mood as a whole. Haven’t we seen enough conventional forecasting fail miserably (remember the 2007-2009 debacle?) to consider an alternative method?

This new year, resolve to look at the world in a different light, and learn to anticipate changes that will keep you ahead of the herd with an understanding of socionomics and the Elliott Wave Principle.

As we enter 2011, we are happy to offer Prechter's "Popular Culture and the Stock Market" essay for FREE with your Club EWI sign-up. There is no obligation.

When you join Club EWI to access the "Pop Culture" essay, you can also access dozens of other free resources to help you understand how the Elliott Wave Principle and socionomic insight can help your investment strategies.

What Really Moves the Markets

What Really Moves the Markets: News? The Fed? The Real Answers Will Surprise You
Elliott Wave International's free 118-page Independent Investor eBook explains why financial markets are NOT a matter of action and reaction
December 29, 2010

By Elliott Wave International

"There is no group more subjective than conventional analysts, who look at the same 'fundamental' news event a war, interest rates, P/E ratio, GDP, economic policy, the Fed’s monetary policy, you name it and come up with countless opposing conclusions. They generally don’t even bother to study the data." -- EWI president Robert Prechter, March 2004 Elliott Wave Theorist.

If you watch financial news, you probably share Bob Prechter's sentiment. How many times have you seen analysts attribute an S&P 500 rally to "good news from China," for example -- only to focus on a different, supposedly bearish, news story later the same day if the rally fizzles out?

You need objective tools to make objective forecasts. So, we put together a unique resource for you: a free 118-page Independent Investor eBook, where you see dozens of examples and charts that show what really creates market trends.

Here's a quick excerpt. For details on how to read the entire Independent Investor eBook online now, free, look below.

---

Independent Investor eBook
Chapter 1: What Really Moves the Markets? (excerpt)

Action and Reaction

In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” ... But is it true?

Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold?

Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.

Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it.

Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades...Gold’s bear market produced more than a 90% loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation!

How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong. ...

Cause and Effect

Suppose the devil were to offer you historic news a day in advance. ... His first offer: “The president will be assassinated tomorrow.” You can’t believe it. You and only you know it’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money? ...

[...continued in the free 118-page Independent Investor eBook]

---

Read the rest of the eye-opening report online now, free! All you need is a free Club EWI profile. Here's what else you'll learn:

• The Problem With “Efficient Market Hypothesis”
• How To Invest During a Long-Term Bear Market
• What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
• Why "Buy and Hold" Doesn’t Work Now
• How To Be One of the Few the Government Hasn’t Fooled
• How Gold, Silver and T-Bonds Will Behave in a Bear Market
• MUCH MORE

Keep reading this 118-page Independent Investor eBook now, free -- all you need is a free Club EWI profile.

What Really Moves the Markets

What Really Moves the Markets: News? The Fed? The Real Answers Will Surprise You
Elliott Wave International's free 118-page Independent Investor eBook explains why financial markets are NOT a matter of action and reaction
December 29, 2010

By Elliott Wave International

"There is no group more subjective than conventional analysts, who look at the same 'fundamental' news event a war, interest rates, P/E ratio, GDP, economic policy, the Fed’s monetary policy, you name it and come up with countless opposing conclusions. They generally don’t even bother to study the data." -- EWI president Robert Prechter, March 2004 Elliott Wave Theorist.

If you watch financial news, you probably share Bob Prechter's sentiment. How many times have you seen analysts attribute an S&P 500 rally to "good news from China," for example -- only to focus on a different, supposedly bearish, news story later the same day if the rally fizzles out?

You need objective tools to make objective forecasts. So, we put together a unique resource for you: a free 118-page Independent Investor eBook, where you see dozens of examples and charts that show what really creates market trends.

Here's a quick excerpt. For details on how to read the entire Independent Investor eBook online now, free, look below.

---

Independent Investor eBook
Chapter 1: What Really Moves the Markets? (excerpt)

Action and Reaction

In the world of physics, action is followed by reaction. Most financial analysts, economists, historians, sociologists and futurists believe that society works the same way. They typically say, “Because so-and-so has happened, such-and-such will follow.” ... But is it true?

Suppose you knew for certain that inflation would triple the money supply over the next 20 years. What would you predict for the price of gold?

Most analysts and investors are certain that inflation makes gold go up in price. They view financial pricing as simple action and reaction, as in physics. They reason that a rising money supply reduces the value of each purchasing unit, so the price of gold, which is an alternative to money, will reflect that change, increment for increment.

Figure 4 shows a time when the money supply tripled yet gold lost over half its value. In other words, gold not only failed to reflect the amount of inflation that occurred but also failed even to go in the same direction. It failed the prediction from physics by a whopping factor of six, thereby unequivocally invalidating it.

Investors who feared inflation in January 1980 were right, yet they lost dollar value for two decades...Gold’s bear market produced more than a 90% loss in terms of gold’s average purchasing power of goods, services, homes and corporate shares despite persistent inflation!

How is such an outcome possible? Easy: Financial markets are not a matter of action and reaction. The physics model of financial markets is wrong. ...

Cause and Effect

Suppose the devil were to offer you historic news a day in advance. ... His first offer: “The president will be assassinated tomorrow.” You can’t believe it. You and only you know it’s going to happen. The devil transports you back to November 22, 1963. You short the market. Do you make money? ...

[...continued in the free 118-page Independent Investor eBook]

---

Read the rest of the eye-opening report online now, free! All you need is a free Club EWI profile. Here's what else you'll learn:

• The Problem With “Efficient Market Hypothesis”
• How To Invest During a Long-Term Bear Market
• What’s The Best Investment During Recessions: Gold, Stocks or T-Notes?
• Why "Buy and Hold" Doesn’t Work Now
• How To Be One of the Few the Government Hasn’t Fooled
• How Gold, Silver and T-Bonds Will Behave in a Bear Market
• MUCH MORE

Keep reading this 118-page Independent Investor eBook now, free -- all you need is a free Club EWI profile.

Parachutes vs. Pillows: Why Diversification Doesn't Work

Parachutes vs. Pillows: Why Diversification Doesn't Work
Prechter and Kendall's "All the Same Market" Analysis Shows how Diversification Can't Protect You from Correlated Risk
December 22, 2010

By Elliott Wave International

A dear friend of mine wants to celebrate an important health milestone by going skydiving with friends. She feels happy and healthy and excited. She wants to do something very thrilling to celebrate.

I'm going to help my friend celebrate, by way of something very mundane: I intend to photograph the event from the ground. Of course I'm excited to be there, and I understand my friend's motivation -- it's just that I am not a thrill seeker (especially when it comes to heights)!

Similarly, I don't take big risks with my investments. I'm sure it's a thrill to make a million, but the risk of losing all my capital is too terrifying for me to stomach.

When I started to research my investment choices, the idea of "portfolio diversification" made a lot of sense to me. All of the "experts" said it's the key to reducing risk. It seemed safe in the same way that ropes and pulleys could really help a novice enjoy rock climbing or the trapeze.

But then I came across this gem of investing wisdom, written in terms that I understood on a visceral level:

Recommending diversification so that novices can reduce risk is like recommending that novice skydivers strap a pillow to their backsides to "reduce risk." Wouldn't it be more helpful to advise them to avoid skydiving until they have learned all about it? Novices should not be investing; they should be saving, which means acting to protect their principal, not to generate a return when they don't know how.

The Elliott Wave Theorist (April 29, 1994)

I can appreciate the metaphor.

What fascinates me even more is how this contrary view of diversification is magnified when you consider how markets can correlate.

In Conquer the Crash, Robert Prechter and Pete Kendall first put forth their "All the Same Market" hypothesis, stating that in the Great Asset Mania and its bear market aftermath, all markets "move up and down more or less together…as liquidity expands and contracts."

Consider, for instance, the tried and increasingly debilitating strategy of diversification. With the market smash extending across every investment front but cash, one might think that this concept would at least be challenged by now. But it remains a virtually uncontested truism among market advisors and their followers.

The Elliott Wave Financial Forecast (Oct 31, 2008)

The first edition of Conquer the Crash published in 2002; since then, our analysts have produced a multitude of chart-based evidence to demonstrate the coordinated trends across diverse financial markets.

Ready to turn in your pillow?

Anyone interested in making informed financial decisions can benefit from our newly available "Death to Diversification" eBook, which explains more about how you can avoid the false security of a diversified portfolio.

As a Club EWI member, we are proud to offer you this new FREE e-book: You can see for yourself the kind of analysis our subscribers have received and used for over 30 years.

Click here to login or sign up for instant access.

Parachutes vs. Pillows: Why Diversification Doesn't Work

Parachutes vs. Pillows: Why Diversification Doesn't Work
Prechter and Kendall's "All the Same Market" Analysis Shows how Diversification Can't Protect You from Correlated Risk
December 22, 2010

By Elliott Wave International

A dear friend of mine wants to celebrate an important health milestone by going skydiving with friends. She feels happy and healthy and excited. She wants to do something very thrilling to celebrate.

I'm going to help my friend celebrate, by way of something very mundane: I intend to photograph the event from the ground. Of course I'm excited to be there, and I understand my friend's motivation -- it's just that I am not a thrill seeker (especially when it comes to heights)!

Similarly, I don't take big risks with my investments. I'm sure it's a thrill to make a million, but the risk of losing all my capital is too terrifying for me to stomach.

When I started to research my investment choices, the idea of "portfolio diversification" made a lot of sense to me. All of the "experts" said it's the key to reducing risk. It seemed safe in the same way that ropes and pulleys could really help a novice enjoy rock climbing or the trapeze.

But then I came across this gem of investing wisdom, written in terms that I understood on a visceral level:

Recommending diversification so that novices can reduce risk is like recommending that novice skydivers strap a pillow to their backsides to "reduce risk." Wouldn't it be more helpful to advise them to avoid skydiving until they have learned all about it? Novices should not be investing; they should be saving, which means acting to protect their principal, not to generate a return when they don't know how.

The Elliott Wave Theorist (April 29, 1994)

I can appreciate the metaphor.

What fascinates me even more is how this contrary view of diversification is magnified when you consider how markets can correlate.

In Conquer the Crash, Robert Prechter and Pete Kendall first put forth their "All the Same Market" hypothesis, stating that in the Great Asset Mania and its bear market aftermath, all markets "move up and down more or less together…as liquidity expands and contracts."

Consider, for instance, the tried and increasingly debilitating strategy of diversification. With the market smash extending across every investment front but cash, one might think that this concept would at least be challenged by now. But it remains a virtually uncontested truism among market advisors and their followers.

The Elliott Wave Financial Forecast (Oct 31, 2008)

The first edition of Conquer the Crash published in 2002; since then, our analysts have produced a multitude of chart-based evidence to demonstrate the coordinated trends across diverse financial markets.

Ready to turn in your pillow?

Anyone interested in making informed financial decisions can benefit from our newly available "Death to Diversification" eBook, which explains more about how you can avoid the false security of a diversified portfolio.

As a Club EWI member, we are proud to offer you this new FREE e-book: You can see for yourself the kind of analysis our subscribers have received and used for over 30 years.

Click here to login or sign up for instant access.

Un t'chat forex pour les traders débutants sur le marché des devises

Apprendre le forex, débuter le forex, un conseil sur un broker du forex, besoin d'une analyse sur le marché des changes, un expert vous répond sur www.forex-formation.com

Trop seul pour trader, rendez vous sur notre t'chat du forex.

Lisez les témoignages des débutants qui ont suivis notre formation sur le forex

**********************


Il y a plus d'un mois, j'ai rajouté un T'chat forex et ce qui est incroyable, c'est que depuis trois semaines, de nombreuses personnes sont arrivés que je ne connaissais pas. La magie d'internet faisant, nous nous retrouvons à presque quinze, chaque jour, à échanger des idées de trades.

Ce qui est amusant c'est que le T'chat des traders ressemble à un "troupeau de moutons", mais dans le bon sens. 80% des gens qui le composent, sont de vrais débutants sur le forex. Ils ont peu de bases de trading en général, mais au fur à mesure que je les interroge, ils me disent tous qu'ils apprennent énormément.

Évidement certain sont un peu perdu et ne comprennent pas notre langage de trader. Mais au fur à mesure, ils se mettent à comprendre et même à participer.

A mesure que les trades sont annoncés, ils se mettent à suivre les avis et ils commencent à s'amuser en achetant et en vendant.

Ils se prennent au jeu et finalement, certain me demandent une formation car ils veulent en savoir plus sur les signaux d'achats, de ventes, les stoploss ou encore les indicateurs techniques du forex que j'emploie comme le macd, par exemple.

C'est, je pense, ce qui est intéressant, rencontrer des gens intelligents qui se prennent au jeu. La plupart ont des idées bien précises avant de me commander une formation au forex. Mais très vite, je les recadre sur le plaisir et pas forcément sur l'aspect "gagner de l'argent".

Tous réussissent assez bien et certain, après ma formation on vraiment de belles satisfactions. Le trading devient alors un plaisir ou on ne se prend pas la tête, ou on trade aux heures les plus performantes.

Ainsi, on laisse de côté, tout le mauvais côté du forex avec le stress et les angoisses, pour ne garder que la partie plaisir et même le rêve de pouvoir en vivre.....et de gagner sur le forex.

Learn Elliott Wave Analysis

Learn Elliott Wave Analysis -- Free
Often, basics is all you need to know.
March 5, 2010

By Editorial Staff

Understand the basics of the subject matter, break it down to its smallest parts -- and you've laid a good foundation for proper application of... well, anything, really. That's what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter's classic "Elliott Wave Principle -- Key to Market Behavior." Here's an excerpt:

Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. ...the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.

These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.

As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.

The following discussions relate to an underlying bull market... These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

1) First waves -- ...about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced. ...

Read the rest of this 10-lesson Basic Elliott Wave Tutorial online now, free! Here's what you'll learn:

• What the basic Elliott wave progression looks like
• Difference between impulsive and corrective waves
• How to estimate the length of waves
• How Fibonacci numbers fit into wave analysis
• Practical application tips for the method
• More

Keep reading this free tutorial today.

Learn Elliott Wave Analysis

Learn Elliott Wave Analysis -- Free
Often, basics is all you need to know.
March 5, 2010

By Editorial Staff

Understand the basics of the subject matter, break it down to its smallest parts -- and you've laid a good foundation for proper application of... well, anything, really. That's what we had in mind when we put together our free 10-lesson online Basic Elliott Wave Tutorial, based largely on Robert Prechter's classic "Elliott Wave Principle -- Key to Market Behavior." Here's an excerpt:

Successful market timing depends upon learning the patterns of crowd behavior. By anticipating the crowd, you can avoid becoming a part of it. ...the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. In markets, progress ultimately takes the form of five waves of a specific structure.

The personality of each wave in the Elliott sequence is an integral part of the reflection of the mass psychology it embodies. The progression of mass emotions from pessimism to optimism and back again tends to follow a similar path each time around, producing similar circumstances at corresponding points in the wave structure.

These properties not only forewarn the analyst about what to expect in the next sequence but at times can help determine one's present location in the progression of waves, when for other reasons the count is unclear or open to differing interpretations.

As waves are in the process of unfolding, there are times when several different wave counts are perfectly admissible under all known Elliott rules. It is at these junctures that knowledge of wave personality can be invaluable. If the analyst recognizes the character of a single wave, he can often correctly interpret the complexities of the larger pattern.

The following discussions relate to an underlying bull market... These observations apply in reverse when the actionary waves are downward and the reactionary waves are upward.

1) First waves -- ...about half of first waves are part of the "basing" process and thus tend to be heavily corrected by wave two. In contrast to the bear market rallies within the previous decline, however, this first wave rise is technically more constructive, often displaying a subtle increase in volume and breadth. Plenty of short selling is in evidence as the majority has finally become convinced that the overall trend is down. Investors have finally gotten "one more rally to sell on," and they take advantage of it. The other half of first waves rise from either large bases formed by the previous correction, as in 1949, from downside failures, as in 1962, or from extreme compression, as in both 1962 and 1974. From such beginnings, first waves are dynamic and only moderately retraced. ...

Read the rest of this 10-lesson Basic Elliott Wave Tutorial online now, free! Here's what you'll learn:

• What the basic Elliott wave progression looks like
• Difference between impulsive and corrective waves
• How to estimate the length of waves
• How Fibonacci numbers fit into wave analysis
• Practical application tips for the method
• More

Keep reading this free tutorial today.

Simple Tools for Competent Traders

Simple Tools for Competent Trades
Improve your Financial Decision-Making Skills with Guidance from EWI Chief Commodity Analyst Jeffrey Kennedy.
December 2, 2010

By Elliott Wave International

Improve your Financial Decision-Making Skills with Guidance from EWI Chief Commodity Analyst Jeffrey Kennedy.

As a high school freshman, I had a friend over to do math homework after school. It was cold in the room, so I stood on my chair and jumped up and down to try and bat open a closed heating vent.

My dad walked in and commented on the geometry problem we were working on, as I continued to struggle, unsuccessfully, to open the vent. Then, he handed me a ruler from the table and said:

"Simple tools are what separate us from the animals."

Without another word, he left us to finish our homework. Sadly, I don't remember any of the geometric formulas that I was trying to master on that winter's day. But you can bet that I have never failed to reach for a simple, practical tool since.

Here at Elliott Wave International, our technical analysts provide you with simple, practical tools that can help your analysis and trading.

EWI Senior Analyst Jeffrey Kennedy has spent years using and mastering — among many other technical trading tools — several well-known moving average techniques. In the process, he has even developed his own personal moving average method that he calls the "Stoplight System."

For a limited time, the first two chapters of "How You Can Find High-Probability Trading Opportunities Using Moving Averages" are available FREE when you join Club EWI.

In these excerpts, Jeffrey will teach you about:

• Defining the Moving Average and Its Components
• The Dual Moving Average Cross-Over System
• Moving Average Price Channel System
• Combining the Crossover and Price Channel Techniques
• The Most Popular Moving Averages

Like any good mentor, Jeffrey's insights are meant to help you become more successful and highly evolved in your endeavors.

Here is one of the charts showing how moving averages are similar to the Wave Principle in signaling buying opportunities:

This chart of Corning shows how each time the market moves into the price channel (marked by the short vertical lines), it signals a buying opportunity. When Corning's price breaks through the price channel (indicated by the short diagonal line), the trend has turned to the downside. So, we have a clear uptrend followed by a clear downtrend.

Remember, "Simple tools are what separate us from the animals."

We have extended our special offer -- for a limited time, the first two chapters of "How You Can Find High-Probability Trading Opportunities Using Moving Averages" are available FREE -- through December 6th. Sign up for a free Club EWI membership and gain instant access to the excerpt by clicking here!

Simple Tools for Competent Traders

Simple Tools for Competent Trades
Improve your Financial Decision-Making Skills with Guidance from EWI Chief Commodity Analyst Jeffrey Kennedy.
December 2, 2010

By Elliott Wave International

Improve your Financial Decision-Making Skills with Guidance from EWI Chief Commodity Analyst Jeffrey Kennedy.

As a high school freshman, I had a friend over to do math homework after school. It was cold in the room, so I stood on my chair and jumped up and down to try and bat open a closed heating vent.

My dad walked in and commented on the geometry problem we were working on, as I continued to struggle, unsuccessfully, to open the vent. Then, he handed me a ruler from the table and said:

"Simple tools are what separate us from the animals."

Without another word, he left us to finish our homework. Sadly, I don't remember any of the geometric formulas that I was trying to master on that winter's day. But you can bet that I have never failed to reach for a simple, practical tool since.

Here at Elliott Wave International, our technical analysts provide you with simple, practical tools that can help your analysis and trading.

EWI Senior Analyst Jeffrey Kennedy has spent years using and mastering — among many other technical trading tools — several well-known moving average techniques. In the process, he has even developed his own personal moving average method that he calls the "Stoplight System."

For a limited time, the first two chapters of "How You Can Find High-Probability Trading Opportunities Using Moving Averages" are available FREE when you join Club EWI.

In these excerpts, Jeffrey will teach you about:

• Defining the Moving Average and Its Components
• The Dual Moving Average Cross-Over System
• Moving Average Price Channel System
• Combining the Crossover and Price Channel Techniques
• The Most Popular Moving Averages

Like any good mentor, Jeffrey's insights are meant to help you become more successful and highly evolved in your endeavors.

Here is one of the charts showing how moving averages are similar to the Wave Principle in signaling buying opportunities:

This chart of Corning shows how each time the market moves into the price channel (marked by the short vertical lines), it signals a buying opportunity. When Corning's price breaks through the price channel (indicated by the short diagonal line), the trend has turned to the downside. So, we have a clear uptrend followed by a clear downtrend.

Remember, "Simple tools are what separate us from the animals."

We have extended our special offer -- for a limited time, the first two chapters of "How You Can Find High-Probability Trading Opportunities Using Moving Averages" are available FREE -- through December 6th. Sign up for a free Club EWI membership and gain instant access to the excerpt by clicking here!

Don't Miss Out!

Due to strong demand, Robert Prechter’s Elliott Wave International (EWI) has extended the time you can get your FREE Moving Averages eBook until December 6!

The 10-page eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages by EWI Senior Analyst Jeffrey Kennedy, has rapidly become one of their most popular trading resources with thousands of downloads.

Download it now and you will see why.

Learn how Moving Averages, one of the most widely-used methods of technical analysis, can benefit your trading with this quick, 10-page lesson.

Download Your Free eBook Now.

(Don't miss out. This report will not be available after December 6.)

Don't Miss Out!

Due to strong demand, Robert Prechter’s Elliott Wave International (EWI) has extended the time you can get your FREE Moving Averages eBook until December 6!

The 10-page eBook, How You Can Find High-Probability Trading Opportunities Using Moving Averages by EWI Senior Analyst Jeffrey Kennedy, has rapidly become one of their most popular trading resources with thousands of downloads.

Download it now and you will see why.

Learn how Moving Averages, one of the most widely-used methods of technical analysis, can benefit your trading with this quick, 10-page lesson.

Download Your Free eBook Now.

(Don't miss out. This report will not be available after December 6.)

United STRAITS of America: The Muni Bond Crisis Is Here

I am always an advocate of maintaining a grasp of the big picture. It is why I find the following article interesting....

United STRAITS of America: The Muni Bond Crisis Is Here
Elliott wave subscribers were prepared for municipal bonds troubles months in advance
November 24, 2010

By Elliott Wave International

This November, the whole world tuned in as the greater part of the U.S.A.'s 50 states turned red -- and no, I don't mean the political shift to a republican majority during the November 2 mid-term elections. I mean "in the red" -- as in, financially fercockt, overdrawn, up to their eyeballs in debt.

Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer "Greek-like deficits," alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing "rent-a-cop" trend of firing city workers and then hiring outside contractors to fill those positions.

Next is the fact that the municipal bond market has been melting like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of '08.

In the words of a recent LA Times article "It's a cold, cold world in the municipal bond market right now."

And for those who never saw the muni bond crisis coming, it's a lot colder.

Since at least 2008, the mainstream experts extolled munis for their "safe haven resistance to recession." And while muni bond woes are only now making headlines, one of the few sources that foresaw the depth and degree of the crisis coming ahead of time was Elliott Wave International's team of analysts. Here's an excerpt from the April 2008 Elliott Wave Financial Forecast (EWFF):

“One of the most vulnerable sectors of the debt markets is the municipal bond market. Instead of being a source of state and local funding, many residents will become a cost. Default could hit at any moment after times get difficult… Yields on tax-exempt municipal bonds are above yields on US Treasuries for the first time in as long as anyone can remember, another sign of how limited the supply of quality bonds will become.”

EWI continued to warn subscribers ever since:

February 2009 EWFF: Special section “Out of the Frying Pan and into Munis” showed the continued rise in muni yields ABOVE Treasury yields and cautioned against the idea that tax-exempt debt was a “safe bet.”

September 2010 Elliott Wave Theorist: "The Next Disaster: The public has withdrawn some money from stock mutual funds... But most investors ... are shunning treasuries for high-yield money market funds and bond funds, which hold less-than-pristine corporate and municipal debt."

And now, in the just-published November 19 Elliott Wave Theorist, EWI president Robert Prechter captures the full extent of the unfolding muni crisis via the following chart:

Read more about Robert Prechter's warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.

This article was syndicated by Elliott Wave International and was originally published under the headline United STRAITS of America: The Muni Bond Crisis Is Here. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

United STRAITS of America: The Muni Bond Crisis Is Here

I am always an advocate of maintaining a grasp of the big picture. It is why I find the following article interesting....

United STRAITS of America: The Muni Bond Crisis Is Here
Elliott wave subscribers were prepared for municipal bonds troubles months in advance
November 24, 2010

By Elliott Wave International

This November, the whole world tuned in as the greater part of the U.S.A.'s 50 states turned red -- and no, I don't mean the political shift to a republican majority during the November 2 mid-term elections. I mean "in the red" -- as in, financially fercockt, overdrawn, up to their eyeballs in debt.

Here are the latest stats: California, Florida, Illinois, and New Jersey now suffer "Greek-like deficits," alongside draconian budget cuts, job furloughs, suspensions of city services, and the growing "rent-a-cop" trend of firing city workers and then hiring outside contractors to fill those positions.

Next is the fact that the municipal bond market has been melting like a snow cone in the Sahara desert. According to recent data, 35 muni bond issues totaling $1.5 billion have defaulted since January 2010, three times the average annualized rate going back to 1983. Also, in the week ending November 19, investors withdrew a record $3.1 billion from mutual and exchange-traded funds specializing in municipal debt, triggering the largest one-day rise in yields since the panic of '08.

In the words of a recent LA Times article "It's a cold, cold world in the municipal bond market right now."

And for those who never saw the muni bond crisis coming, it's a lot colder.

Since at least 2008, the mainstream experts extolled munis for their "safe haven resistance to recession." And while muni bond woes are only now making headlines, one of the few sources that foresaw the depth and degree of the crisis coming ahead of time was Elliott Wave International's team of analysts. Here's an excerpt from the April 2008 Elliott Wave Financial Forecast (EWFF):

“One of the most vulnerable sectors of the debt markets is the municipal bond market. Instead of being a source of state and local funding, many residents will become a cost. Default could hit at any moment after times get difficult… Yields on tax-exempt municipal bonds are above yields on US Treasuries for the first time in as long as anyone can remember, another sign of how limited the supply of quality bonds will become.”

EWI continued to warn subscribers ever since:

February 2009 EWFF: Special section “Out of the Frying Pan and into Munis” showed the continued rise in muni yields ABOVE Treasury yields and cautioned against the idea that tax-exempt debt was a “safe bet.”

September 2010 Elliott Wave Theorist: "The Next Disaster: The public has withdrawn some money from stock mutual funds... But most investors ... are shunning treasuries for high-yield money market funds and bond funds, which hold less-than-pristine corporate and municipal debt."

And now, in the just-published November 19 Elliott Wave Theorist, EWI president Robert Prechter captures the full extent of the unfolding muni crisis via the following chart:

Read more about Robert Prechter's warnings for holders of municipals and other bonds in his free report: The Next Major Disaster Developing for Bond Holders. Access your free 10-page report now.

This article was syndicated by Elliott Wave International and was originally published under the headline United STRAITS of America: The Muni Bond Crisis Is Here. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Robert Prechter Explains The Fed, Part III

As promised, I've just posted Part III of the three-part series "Robert Prechter Explains The Fed."

Robert Prechter Explains The Fed, Part III

The world's foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve
November 24, 2010

By Elliott Wave International

This is Part III, the final part of our series "Robert Prechter Explains The Fed." (Here are Part I and Part II.)

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

How the Federal Reserve Has Encouraged the Growth of Credit

Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.

It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money.

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in “easy money.”

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

The Net Effect of Monetization

Although the Fed has almost wholly withdrawn from the role of holding book-entry reserves for banks, it has not retired its holdings of Treasury bonds. Because the Fed is legally bound to back its notes (greenback currency) with government securities, today almost all of the Fed’s Treasury bond assets are held as reserves against a nearly equal dollar value of Federal Reserve notes in circulation around the world. Thus, the net result of the Fed’s 89 years of money inflating is that the Fed has turned $600 billion worth of U.S. Treasury and foreign obligations into Federal Reserve notes.

Today the Fed’s production of currency is passive, in response to orders from domestic and foreign banks, which in turn respond to demand from the public. Under current policy, banks must pay for that currency with any remaining reserve balances. If they don’t have any, they borrow to cover the cost and pay back that loan as they collect interest on their own loans. Thus, as things stand, the Fed no longer considers itself in the business of “printing money” for the government. Rather, it facilitates the expansion of credit to satisfy the lending policies of government and banks.

If banks and the Treasury were to become strapped for cash in a monetary crisis, policies could change. The unencumbered production of banknotes could become deliberate Fed or government policy, as we have seen happen in other countries throughout history. At this point, there is no indication that the Fed has entertained any such policy. Nevertheless, Chapters 13 and 22 address this possibility.

Do you want to really understand the Fed? Then keep reading this free eBook, "Understanding the Fed", as soon as you become a free member of Club EWI.

Robert Prechter Explains The Fed, Part III

As promised, I've just posted Part III of the three-part series "Robert Prechter Explains The Fed."

Robert Prechter Explains The Fed, Part III

The world's foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve
November 24, 2010

By Elliott Wave International

This is Part III, the final part of our series "Robert Prechter Explains The Fed." (Here are Part I and Part II.)

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

How the Federal Reserve Has Encouraged the Growth of Credit

Congress authorized the Fed not only to create money for the government but also to “smooth out” the economy by manipulating credit (which also happens to be a re-election tool for incumbents). Politics being what they are, this manipulation has been almost exclusively in the direction of making credit easy to obtain. The Fed used to make more credit available to the banking system by monetizing federal debt, that is, by creating money. Under the structure of our “fractional reserve” system, banks were authorized to employ that new money as “reserves” against which they could make new loans. Thus, new money meant new credit.

It meant a lot of new credit because banks were allowed by regulation to lend out 90 percent of their deposits, which meant that banks had to keep 10 percent of deposits on hand (“in reserve”) to cover withdrawals. When the Fed increased a bank’s reserves, that bank could lend 90 percent of those new dollars. Those dollars, in turn, would make their way to other banks as new deposits. Those other banks could lend 90 percent of those deposits, and so on. The expansion of reserves and deposits throughout the banking system this way is called the “multiplier effect.” This process expanded the supply of credit well beyond the supply of money.

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in “easy money.”

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

The Net Effect of Monetization

Although the Fed has almost wholly withdrawn from the role of holding book-entry reserves for banks, it has not retired its holdings of Treasury bonds. Because the Fed is legally bound to back its notes (greenback currency) with government securities, today almost all of the Fed’s Treasury bond assets are held as reserves against a nearly equal dollar value of Federal Reserve notes in circulation around the world. Thus, the net result of the Fed’s 89 years of money inflating is that the Fed has turned $600 billion worth of U.S. Treasury and foreign obligations into Federal Reserve notes.

Today the Fed’s production of currency is passive, in response to orders from domestic and foreign banks, which in turn respond to demand from the public. Under current policy, banks must pay for that currency with any remaining reserve balances. If they don’t have any, they borrow to cover the cost and pay back that loan as they collect interest on their own loans. Thus, as things stand, the Fed no longer considers itself in the business of “printing money” for the government. Rather, it facilitates the expansion of credit to satisfy the lending policies of government and banks.

If banks and the Treasury were to become strapped for cash in a monetary crisis, policies could change. The unencumbered production of banknotes could become deliberate Fed or government policy, as we have seen happen in other countries throughout history. At this point, there is no indication that the Fed has entertained any such policy. Nevertheless, Chapters 13 and 22 address this possibility.

Do you want to really understand the Fed? Then keep reading this free eBook, "Understanding the Fed", as soon as you become a free member of Club EWI.

Discover the Dynamics of Using Moving Averages

Discover the Dynamics of Using Moving Averages
How to Spot High-Probability Trading Opportunities
November 23, 2010

By Elliott Wave International

The "moving average" is a technical indicator which has stood the test of time. Nearly 25 years ago, Robert Prechter described this indicator in his famous essay, "What a Trader Really Needs to be Successful." What he said then remains true today:

"...a simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use."

Indeed, "objectively defined rules" are vital to the successful use of moving averages. And as you might imagine, advanced rules and guidelines work to the benefit of more advanced technicians.

What is a moving average? As EWI's Jeffrey Kennedy puts it, "A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down."

Jeffrey also says, "One way to think of a moving average is that it's an automated trend line."

A 15-year veteran of technical analysis, Jeffrey wrote "How You Can Find High-Probability Trading Opportunities Using Moving Averages."
[Descriptions of the following charts are summaries from that eBook]:

Let's begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.

For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).

Let's look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.

In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.

Jeffrey's 33-page eBook also reveals a useful tool to help you avoid "whipsaws."

You can read the first two chapters for FREE for a limited time, once you become a Club EWI member.

The first two chapters reveal:

• The Dual Moving Average Cross-Over System
• Moving Average Price Channel System
• Combining the Crossover and Price Channel Techniques

Jeffrey's insights are all about making you a better trader. Remember, the first two eBook chapters are FREE through November 30. So take advantage of this limited time offer by clicking here!

Discover the Dynamics of Using Moving Averages

Discover the Dynamics of Using Moving Averages
How to Spot High-Probability Trading Opportunities
November 23, 2010

By Elliott Wave International

The "moving average" is a technical indicator which has stood the test of time. Nearly 25 years ago, Robert Prechter described this indicator in his famous essay, "What a Trader Really Needs to be Successful." What he said then remains true today:

"...a simple 10-day moving average of the daily advance-decline net, probably the first indicator a stock market technician learns, can be used as a trading tool, if objectively defined rules are created for its use."

Indeed, "objectively defined rules" are vital to the successful use of moving averages. And as you might imagine, advanced rules and guidelines work to the benefit of more advanced technicians.

What is a moving average? As EWI's Jeffrey Kennedy puts it, "A moving average is simply the average value of data over a specified time period, and it is used to figure out whether the price of a stock or commodity is trending up or down."

Jeffrey also says, "One way to think of a moving average is that it's an automated trend line."

A 15-year veteran of technical analysis, Jeffrey wrote "How You Can Find High-Probability Trading Opportunities Using Moving Averages."
[Descriptions of the following charts are summaries from that eBook]:

Let's begin with the most commonly-used moving averages among market technicians: the 50- and 200-day simple moving averages. These two trend lines often serve as areas of resistance or support.

For example, the chart below shows the circled areas where the 200-period SMA provided resistance in an April-to-May upward move in the DJIA (top circle on the heavy black line), and the 50-period SMA provided support (lower circle on the blue line).

Let's look at another widely used simple moving average which works equally well in commodities, currencies, and stocks: the 13-period SMA.

In the sugar chart below, prices crossed the line (marked by the short, red vertical line), and that cross led to a substantial rally. This chart also shows a whipsaw in the market, which is circled.

Jeffrey's 33-page eBook also reveals a useful tool to help you avoid "whipsaws."

You can read the first two chapters for FREE for a limited time, once you become a Club EWI member.

The first two chapters reveal:

• The Dual Moving Average Cross-Over System
• Moving Average Price Channel System
• Combining the Crossover and Price Channel Techniques

Jeffrey's insights are all about making you a better trader. Remember, the first two eBook chapters are FREE through November 30. So take advantage of this limited time offer by clicking here!

Robert Prechter Explains The Fed, Part II

Robert Prechter Explains The Fed, Part II
The world's foremost Elliott wave expert goes "behind the scenes" on the Federal Reserve

November 22, 2010
By Elliott Wave International

This is Part II of our three-part series "Robert Prechter Explains The Fed." You can read Part I here -- and come back later this week for Part III.

Money, Credit and the Federal Reserve Banking System
Conquer the Crash, Chapter 10
By Robert Prechter

... Let’s attempt to define what gives the dollar objective value. As we will see in the next section, the dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, the dollar is a promise backed by a promise to pay an identical promise. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the dollar is a promise to pay nothing. The Treasury should have no trouble keeping this promise.

In Chapter 9 [of Conquer the Crash], I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.

As you can see, defining the dollar, and therefore the terms money, credit, inflation and deflation, today is a challenge, to say the least. Despite that challenge, we can still use these terms because people’s minds have conferred meaning and value upon these ethereal concepts.

Understanding this fact, we will now proceed with a discussion of how money and credit expand in today’s financial system.

How the Federal Reserve System Manufactures Money

Over the years, the Federal Reserve Bank has transferred purchasing power from all other dollar holders primarily to the U.S. Treasury by a complex series of machinations. The U.S. Treasury borrows money by selling bonds in the open market. The Fed is said to “buy” the Treasury’s bonds from banks and other financial institutions, but in actuality, it is allowed by law simply to fabricate a new checking account for the seller in exchange for the bonds. It holds the Treasury’s bonds as assets against -- as “backing” for -- that new money. Now the seller is whole (he was just a middleman), the Fed has the bonds, and the Treasury has the new money.

This transactional train is a long route to a simple alchemy (called “monetizing” the debt) in which the Fed turns government bonds into money. The net result is as if the government had simply fabricated its own checking account, although it pays the Fed a portion of the bonds’ interest for providing the service surreptitiously. To date (1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.), the Fed has monetized about $600 billion worth of Treasury obligations. This process expands the supply of money.

In 1980, Congress gave the Fed the legal authority to monetize any agency’s debt. In other words, it can exchange the bonds of a government, bank or other institution for a checking account denominated in dollars. This mechanism gives the President, through the Treasury, a mechanism for “bailing out” debt-troubled governments, banks or other institutions that can no longer get financing anywhere else. Such decisions are made for political reasons, and the Fed can go along or refuse, at least as the relationship currently stands. Today, the Fed has about $36 billion worth of foreign debt on its books. The power to grant or refuse such largesse is unprecedented.

Each new Fed account denominated in dollars is new money, but contrary to common inference, it is not new value. The new account has value, but that value comes from a reduction in the value of all other outstanding accounts denominated in dollars. That reduction takes place as the favored institution spends the newly credited dollars, driving up the dollar-denominated demand for goods and thus their prices. All other dollar holders still hold the same number of dollars, but now there are more dollars in circulation, and each one purchases less in the way of goods and services. The old dollars lose value to the extent that the new account gains value.

The net result is a transfer of value to the receiver’s account from those of all other dollar holders. This fact is not readily obvious because the unit of account throughout the financial system does not change even though its value changes.

It is important to understand exactly what the Fed has the power to do in this context: It has legal permission to transfer wealth from dollar savers to certain debtors without the permission of the savers. The effect on the money supply is exactly the same as if the money had been counterfeited and slipped into circulation.

In the old days, governments would inflate the money supply by diluting their coins with base metal or printing notes directly. Now the same old game is much less obvious. On the other hand, there is also far more to it. This section has described the Fed’s secondary role. The Fed’s main occupation is not creating money but facilitating credit. This crucial difference will eventually bring us to why deflation is possible.

[Next: Prechter explains "how the Federal Reserve has encouraged the growth of credit."]

Come back later this week for Part III of the series "Robert Prechter Explains The Fed." Or, read more now in the free Club EWI report, "Understanding the Federal Reserve System."


Happy Trading!!