Renowned Elliot Wave analyst Robert Prechter is once again calling for a significant correction in the stock markets in the near future. Prechter is perhaps the foremost of the technicians that apply Elliot Wave theory, and is the President of Elliot Wave International and the executive director of the Socionomics Institute.
It should be noted that Robert Prechter has projected a major correction in this six-year-plus bull run for stock on several other occasions in the last few years, and has been wrong every time. ValueWalk reported on one of Prechter’s first bear calls back in July of 2010.
Is Robert Prechter right? Why this time might be different
Ellot Wave theory says that markets move up in five waves and down in three waves. Robert Prechter’s current analysis of where the stock market is positioned within its wave structure leads him to say the market is currently in a “precarious position.”
First, he points to sentiment indicators that have shown extreme optimism for over two years now. This is seen as a contrarian signal because it means those looking to buy have already done so, and there are fewer motivated buyers if the market starts slipping.
Secondly, Robert Prechter highlights several momentum indicators pointing to a “dramatic lessening” in the count of stocks and indexes that have participating in the stock market rally in the last few months.
When the DJIA reached a record closing high on February 27th of this year, there were 172 NYSE stocks that hit new 52-week highs, and 31 stocks that hit 52-week lows. Then when the Dow rose to its current record on May 19, the number of new highs had dropped off to 118, and new lows moved up to 38.
Third, Robert Prechter also says the lack of confirmation from the Transportation Index is also a bad sign.he He highlights that the DJIA has reached six record-high closes so far this year, but the Dow Jones Transportation Average has not managed a new record high since Dec. 29th of last year, and closed at a seven-month low on May 29. The Dow Theory of market analysis says the Dow transports must confirm the movement of the Dow industrials for a market trend to have staying power.
Finally. Robert Prechter also notes the market’s rise since 2009 is now 6.25 years into a 7.25-year cycle, that has been operational since 1980.
“If the cycle is still operating, the stock market is at high risk of a sharp collapse,” Prechter commented. “Near term, we’re prepared to see the Dow make one more high. But it doesn’t have to happen.”
However, even if Prechter is right this time one might note… so is a broken clock twice a day.