By Itself - Impossible to Predict

Below is the three-monthly candle chart of the stock of AAPL, shown for a specific purpose. Look the chart over and you'll note a few things. It just so happens that the three months aligns with the business quarter but that is not really intended to be relevant to the discussion. Also, have a look at the PPO (or Percent Price Oscillator) shown below the chart. It made a peak in 2008 and has been lower since, but that is just an observation.

AAPL - 3 Months - Log Channel

The major point of the chart is this. From an Elliott Wave perspective this chart's price movements from the equivalent of $0.11 in Oct 1997 to a high price near $183.00 were likely impossible to predict with specificity. I realize this stock price accounts for splits, etc. But the reason this chart was impossible to predict in advance was that it is so out of proportion (2.618? No. More! 4.326? No. More! 6.867? No. More!..etc.) that it does not fit usual Elliott Wave Criteria. Otherwise, you would have bought it at $0.11 and never let go of it - maybe there are a few out there in this position. If so, congratulations! But even if they did buy it for a low price, it is likely for fundamental rationale than for Elliott Wave reasons. Some might say, "Well I just like APPL. I like their products. I like their innovation. I like their AppleVerse, etc. etc." And I will grant you they are one of the most innovative powerhouses in the stock market. (And their innovation doesn't only apply to their products & services, it applies to their financial engineering as well, i.e. off-shoring of profits, stock-buy-backs, and the like.)

But they didn't buy or sell it because they "found a wave three at 1.618, or 2.618", etc. And, there certainly is nothing on the chart that looks like a side-ways fourth wave correction yet. And any Elliott analyst calling a top in AAPL would have been burned over & over again until the individual looked downright silly or maybe even mad.

Something similar happened with some of the meme stocks over the last couple of years. GameStop was a stock that was rocketed to non-proportional incredible new heights as the social media investors tried to burn the hedge-fund shorts by ganging up to force the stock price higher & higher. Some of those stocks have come back to earth. AAPL has not yet.

Well, you see, Ralph Nelson Elliott knew this much! 

Elliott knew there were innovative companies (like Edison's light company, and Ford's motor company) and these stocks could move way out of proportion to others - like a dodgy old railroad stock or some utility company's stock.

And that is - in part - what Elliott's theory is about. He reasoned that one must use an "average" of quite a few stock prices to smooth out the best common economic condition of all of the stocks. Thus, he tried to limit the impact that the spike highs and lows of individual stocks had on an average by including a wide variety of stocks. And, by including a lot of stocks he got a wider representation of the votes (or volume) assigned to the average.

Yes, Elliott thought that people expressed themselves (as if voting) and that those expressions were included in the price of each stock and the volume made in the transactions. And what Elliott was trying to directly judge was the human sentiment or expression of what we now call fear or greed in the trading and investing community. And so, he used a widely available average as his potential sentiment indicator. And this average would also be kept track of in the back of people's mind as they made their hourly, daily, weekly monthly or annual market judgements.

And that is just my point. Many casual or even professional wave analysts try to predict the market average by 1) looking at a few stocks, or 2) looking at a ratio of one type of stocks to another. I contend that the more of that they do, the more time they are wasting. They largely just show the past. They don't predict the form of the wave to come. Look at them all you like; to me they are a waste of time.

Elliott said the emotions had to be judged in aggregate; that's why he used an average. And I think Glenn Neely is right, too. You make or lose money based solely on the price of the risk asset being bought, sold or traded. Nothing else! And those observations have "profound" implications.

When will APPL turn and make a wave lower (maybe to contact the lower channel line)? It will do so when the "big" investors in APPL decide that the stock price is too rich at this level for the business's prospects, and they begin to sell it. It won't turn lower before that. They will know. They have the best information on the company's day-to-day operations. They will see conditions in the company as they make their investor visits to the worksites, talk directly to employees, watch the company's flow-of-funds and other measures that signal company health or a setback.

When will the DOW turn lower? It will do so only when the Smart Money realizes it is riskier to hold on to stocks than to move into cash, bonds, real estate or some other form of investment. Typically, for them to do that, they must have people they can sell on volume to. You know - Ma & Pa - who are usually unaware of what the Smart Money knows.

Make no mistake: the Smart Money also knows that for each billion dollars the U.S. Federal Reserve delivers back to the market in the form of mortgage-backed-securities or T-Bills, etc., they know HOW it will affect their large accounts - because they know how they are positioned in the market. And so, the Smart Money will buy or sell accordingly. Meanwhile, you & I can have little-to-none of this inside information. We can't see their accounts. We can't directly see their buying or selling. Only they and their brokers can.

Yet, the Federal Reserve has said they are selling. They said they are rolling off their balance sheet. Do you not believe them? Have a look at the weekly M2 Money supply figures. The money supply is decreasing. This is a first. When did it start decreasing? Well, the first week of January. When did the stock market start declining? Well, the first week of January. Interesting coincidence, isn't it? Or is it? So, did the FED stop selling? Did they? Try to keep that in mind. To me, the interest rate is a secondary factor - not the primary factor.

Oh, back to APPL about the only way I can count the first series of waves is as an expanding leading diagonal from 1981 to 2000. Try it. You'll find the measurements are right. If you do so, it makes a maximally sized first wave that can then have some degree proportion to the larger straight-up wave from 2003. (Here is a LINK to review that idea.)

What? An expanding diagonal led off a stock's price movements??!! Isn't it possible that an expanding diagonal downward might be responsible for leading off a slightly larger bear market than we have had so far in a stock average?

Yes! Let's all hope it doesn't resolve downward like APPL's stock resolved upward. But even though an average's price is maybe more predictable than a particular stock, we must all admit APPL's price rise was not predicted by anyone I know of. Certainly, no one said "for sure" in 1997 how high it's price might reach by 2022. At least I never heard it.

This is the second post this weekend, and if you have not read the first one yet, you may wish to.

Have an excellent rest of the weekend.

TraderJoe