Some people think the chartist approach to
investing is no more than voodoo. But there are plenty of successful
investors out there who have made their money from this approach. Elliot
Wave is one of the leading exponents of the chartist approach and here Tom
Denham, editor of Elliot Wave International’s European Financial Forecast
tells us why it could be that the bear run of the first half of this decade
never actually ended – and that the FTSE 100 could return to the lows we saw
three years ago.

“Not only has the FTSE 100 turned bearish in the short term, I think it
will be in decline for several years. In my note to subscribers of EWI’s
European Financial Forecast published 26 May, I wrote: “For the past two
months I have observed how the rally of European stocks was getting old in
‘market years’ by my seat-of-the-pants calculations.” Well, ‘Mr. Market’
died in May. Most European stock indexes lost about 10 percent in a little
over a week. The only question left for debate is how important a top the
May peaks represent.

I went on to say, “It is very likely that European stock indexes have
just posted multi-year peaks. At this early stage, markets are behaving as
if the long-term bear market from 2000 has reasserted itself.” So, how best
to react? The highest priority of investors should be to preserve their
capital.

I think the FTSE 100 will decline for several years, because price
declined in five waves from the all-time high in December 1999 and rallied
in three waves from March 2003 to the recent peak. This five-wave,
three-wave pattern is important because the Elliott Wave Principle observes
that, after an initial five-wave decline, another five-wave decline usually
follows a three-wave rally. Therefore, the recent three-wave rally actually
suggests that the FTSE 100 is likely to decline persistently until it slides
under the March 2003 low at 3277 to form a long-term bottom.

I could be wrong, but then nobody has a crystal ball when it comes to
financial markets. However, the market is sending a very consistent message
now – The trend is down. Here are some reminders to support that assertion:
the FTSE-100 is down 10 percent, the Japanese Nikkei 18 percent, and the
India BSE Sensex Index is down a stunning 27 percent.

Hot hedge fund money has already turned from long to short, but most
investors still anticipate that advances will resume any day now. Most
investors anticipate rising prices for months after an important top, just
as they fear ongoing declines for a long time after an important bottom. The
unpleasant consequence of this backward-looking approach is that few people
sell near tops or buy near bottoms. The average investor waits until well
past optimum exit and entry points to take action. Don’t be average; sell
into rallies now. At the next low, you’ll be glad you sold as soon as you
did.”

Tom Denham is a technical market analyst and editor of the European
Financial Forecast at Elliott Wave International www.elliotwave.com Elliot Wave International

© Investment & Business News 2013