Two Signs That Deflation is Far From Over

A key economic index turns south

The federal government defines the Producer Price Index (PPI) as “the average change over time in the selling prices received by domestic producers for their output.” With help from the Federal Reserve’s massive inflationary policies, the PPI has climbed even as the economy began to fall in 2008-09. All the while, the financial media persisted with stories of an economic recovery. EWI analysts offer an independent perspective.

The New York Times declares, “Economic Gloom Starting to Lift.”

Corporate America, however, is not so sure. This chart of producer prices [wave labels removed] probably illustrates why. After years of largely uninterrupted growth, the Producer Price Index appears to be on the cusp of a critical reversal that should turn into a steady decline in wholesale prices.

The Elliott Wave Financial Forecast, December, 2012

The latest Financial Forecast published Dec. 7, and the latest evidence reinforces the message of the chart’s title. The PPI elevator has already descended to a lower floor.

The Labor Department said its seasonally adjusted producer price index slipped 0.8 percent last month, the second straight decline.

November’s drop in wholesale prices was the sharpest since May.

Reuters, Dec. 13

The Producer Price Index decline is happening in tandem with a notable reversal in consumer sentiment.

The Thomson Reuters/University of Michigan’s preliminary reading of the overall index on consumer sentiment plunged to 74.5 in early December, the lowest level since August.

It was far below November’s figure of 82.7.

Reuters, Dec. 7

The Federal Reserve’s machinations — which includes the Dec. 12 announcement of $45-billion in monthly Treasury bond purchases — will not stave off a developing deflationary trend.

In the second edition of Conquer the Crash (p. 114), Robert Prechter describes what generally happens, depending on the position of the Elliott waves, near the end of the Kondratieff cycle.

Near the end of the cycle, the rates of change in business activity and inflation slip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.

Can the Fed stop deflation? Should you rely on the government to protect you? Get the answers you need now — free! See below for full details.


8 Chapters of Robert Prechter’s Conquer the Crash — FREEThis free, 42-page report can help you prepare for your financial future. You’ll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more.Get Your FREE 8-Lesson “Conquer the Crash Collection” Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Two Signs That Deflation is Far From Over. 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.

Bollinger Band Basics

Senior Analyst Jeffrey Kennedy shows you how these volatility indicators support pattern recognition

As a technical trader, are you able to view financial market fluctuations clearly and reliably?

At Elliott Wave International, we hold that the Elliott Wave Principle is the most effective tool for analysis. Yet the Wave Principle works well with other technical tools. If you are ready to trade with Elliott, our educational subscription editor Jeffrey Kennedy can teach you how to integrate ancillary technical indicators — such as Bollinger bands — to build high-confidence setups in the markets you trade.

Bollinger bands identify periods of increased and decreased market volatility. Learn about the significance of these fluctuations in this video about Bank of America Corp. (BAC) taken from Jeffrey’s Elliott Wave Junctures service:

Here are Jeffrey’s notes from the lesson:

Bollinger bands form a two-period standard deviation channel based on a 20-period simple moving average. This channel will contain 95% of all price action with the moving average acting as a center line, which often provides support and resistance. The width of the Bollinger bands increases and decreases with market volatility.

Narrow Bollinger bands coincide with low market volatility, which often leads to big price moves. Option traders like this because option prices are low at this time. Conversely, wide bands imply that market volatility is high, which translates into expensive options.

The recent narrowing of the Bollinger bands in BAC signals decreasing volatility. Since periods of low volatility precede periods of high volatility, look for a big move in the days to come.


Learn to Apply Some of the Most Powerful Technical Methods to Your TradingGet more lessons like this in a FREE 10-lesson video series from Elliott Wave International. Analyst Jeffrey Kennedy will show you how to incorporate technical methods into your trading to help you spot high-confidence trade setups. You’ll learn the methods the professional traders use, like Elliott waves, MACD, RSI, candlestick patterns, Fibonacci and more!Access your free lessons now >>

This article was syndicated by Elliott Wave International and was originally published under the headline [Video] Bollinger Band Basics. 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.

Which Works Best — GPS or Road Map? (Part 3)

Trading with Elliott wave analysis

(Here are Part 1 and Part 2 of this article.)

Think of Investing as a Trip

Here’s my advice: View the Elliott wave Principle as your road map to the market and your investment idea as a trip.

You start the trip with a specific plan in mind, but conditions along the way may force you to alter course. Alternate counts are simply side roads that sometimes end up being the best path.

Elliott’s highly specific rules keep the number of valid interpretations to a minimum. The analyst usually considers the “preferred count” to be the one that satisfies the largest number of guidelines. The top “alternate” is the one that satisfies the next largest number of guidelines, and so on.

There are only three hard-and-fast rules with the Wave Principle:

  1. Wave two cannot retrace more than 100% of wave one.
  2. Typically wave four does not end within the price territory of wave one but may do so from time to time in highly leveraged markets.
  3. Wave three is never the shortest wave of an impulse.

Elliott’s rules give specific “make-or-break” levels for a given interpretation. In Figure 2, for example, if the move labeled (2) continues below the level of the beginning of wave (1), then the originally preferred interpretation would be instantly invalidated.

By eliminating subjectivity, the rules help you firm up your investment strategy — and reduce your risk.

“Are We There Yet?”

You’ve heard that irritating question, “Are we there yet?,” from the back seat just about a million times. Every map has a scale, and it’s the scale that helps me determine how many miles I have to travel before I reach my destination. When using the Wave Principle,Fibonacci relationships are the scale.

Many investors today know that Fibonacci ratios are used for market forecasting. But few realize that Fibonacci analysis of the markets was pioneered by R.N. Elliott. The use of Fibonacci ratios requires a valid Elliott wave interpretation as a starting point. Unfortunately, many non-Elliott analysts try to find Fibonacci proportions between market moves that are not related to each other in any way. This has made the approach appear to be far less valuable than it is.

Elliott wave analysis has two chief insights concerning Fibonacci relationships within waves. First, corrective waves tend to retrace prior impulse waves of the same degree in Fibonacci proportion. For example, wave (2) in Figure 2 retraces 38% of wave (1). That’s a common relationship. Other frequent wave relationships are 50% and 62%. Second, impulse waves of the same degree within a larger impulse sequence tend to be related to one another in Fibonacci proportion. For example, common relationships include wave three traveling 1.62 times the distance traveled by wave one of the same degree. When that occurs, wave five often tends toward equality with wave one of the same degree.

Planning the Trip

Just as I sit down and plan my trips before shoving off, I rely on wave interpretations and Fibonacci relationships to help establish investment strategies and reduce risk exposure when I analyze the markets for our clients. Investors use these same wave analysis methods to help decide where to get into a market, where to get out and at what point to give up on a strategy. The Wave Principle lets you identify the highest probability direction for the market, as you also adopt an optimum position to take advantage of it — all while protecting yourself against lower probability outcomes. You couldn’t ask more from your own GPS.

By the way, we did make it to Cades Cove on our way back across Smoky Mountain National Park. I turned off my GPS and consulted my map. The old tried and true worked like a charm.


Who is Jim Martens? Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim’s latest thoughts about FX markets and the business of trading them at his Twitter feed.


Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success”Here’s some of what you’ll learn:

  1. Which Elliott waves to trade
  2. Which Elliott waves set up your forex trade
  3. When your analysis is wrong
  4. Guidelines for projecting price targets
  5. How to evaluate an Elliott wave structure
  6. How to use the bigger picture to give you perspective on the market’s next major move

Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading.

All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Which Works Best — GPS or Road Map? (Part 3). 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.

Which Works Best — GPS or Road Map? (Part 2)

Trading with Elliott wave analysis

(Part 1 of this article is posted here.)

A Quick Road Map of Wave Analysis

For this overview of wave analysis, I have borrowed from the “Cliffs Notes” version that we provide for free to anyone interested in learning about wave analysis. It’s called Discovering How To Use the Elliott Wave Principle.

Elliott’s road map, or basic wave pattern, consists of “impulsive waves” and “corrective waves.” An impulsive wave is composed of five subwaves and moves in the same direction as the larger trend — or the wave’s next larger size. A corrective wave is divided into three subwaves, and it moves against the trend of the next larger degree. As you can see in Figure 1, there are plenty of right and left turns — or up and down moves on a price chart.

Figure 1 reveals the general roadmap that markets follow during bull markets. Notice the building-block process. The completion of an initial impulsive wave (waves 1-5, up-down-up-down-up) sets the stage for a corrective phase (waves A-B-C, down-up-down). Combined, those waves represent the first two legs of a larger “degree” advance. In this illustration, waves 1, 2, 3, 4 and 5 together complete a larger impulsive wave, labeled as wave (1).

A five-wave rally from a significant low tells us that the movement at the next larger degree of trend is also upward. It also warns us to expect a three-wave correction — in this case, a downtrend. That correction, wave (2), is followed by waves (3), (4) and (5) to complete an impulsive sequence of the next larger degree. At that point, again, a three-wave correction of the same degree occurs.

Note that, regardless of the size of the wave, each impulsive wave peak leads to the same result — a correction.

If we isolate the corrective waves, the subwaves A and C move in the direction of the larger trend and usually unfold in an impulsive manner. Referring to Figure 1, the (A)-(B)-(C) decline that follows the (1)-to-(5) sequence illustrates this structure. Waves labeled with a B, however, are corrective waves; they move opposite to the trend of the next larger degree. In this case, they move upward against the downtrend. Notice that these corrective waves are themselves made up of three subwaves.

Reading the Wave Analysis Map

So now that you have a wave road map in hand, let’s talk about how to apply it to the actual terrain of financial markets. When I look at a price chart for the first time, my first task is to identify any completed five-wave and three-wave structures. Once I do that, then I can interpret where the market is along the pre-defined path and, from there, where it’s likely to go.

Say we’re studying a market that has reached the point shown in Figure 2. So far we’ve seen a five-wave move up, followed by a three-wave move down.

But this is not the only possible interpretation. It’s sort of like having a GPS that tells you that you’ve arrived, when you’ve actually got miles to go. In this example, it is also possible that wave (2) hasn’t ended yet; it could develop into a more complex three-wave structure before wave (3) gets under way. Another possibility is that the waves labeled (1) and (2) are actually waves (A) and (B) of a developing three-wave upward correction within a larger impulsive downtrend, as shown in the “Alternate” interpretation at the bottom of the chart. According to each of these interpretations, though, the next imminent movement is likely to be upward. That tells you more than most technical analysis systems do.

Alternate counts are an essential part of using the Wave Principle. They are neither “bad” nor “rejected” wave interpretations. Rather, they are valid interpretations that are given a lower probability while the count works itself out. If the market doesn’t follow the original preferred scenario, the top alternate usually becomes the preferred count.

I consider alternate counts to be similar to detours — just a different way for the market to get to where it’s going. How many times do you actually go from point A to point B non-stop in your travels? Admit it, you have to stop to grab a bite to eat or ask for directions once you realize you’re lost. After consulting the map, you get back on track toward your intended destination. The new path represents an alternate count.

This seeming ambiguity about a wave structure illustrates an important point about the Wave Principle that, in my opinion, is often misunderstood. The Wave Principle does not provide certainty about any one market outcome. Instead, it gives you an objective means of determining the probability of a future direction for the market. At any time, two or more valid wave interpretations usually exist. Unlike actual physical roads that exist, price movements in financial markets are always changing, and the best you can do is be somewhat confident of whether they are moving up or down. That’s the kind of confidence that the Wave Principle provides.

(Come back soon for part 3 of this series.)


Who is Jim Martens? Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.Catch up on Jim’s latest thoughts about FX markets and the business of trading them at his Twitter feed.

Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success”Here’s some of what you’ll learn:

  1. Which Elliott waves to trade
  2. Which Elliott waves set up your forex trade
  3. When your analysis is wrong
  4. Guidelines for projecting price targets
  5. How to evaluate an Elliott wave structure
  6. How to use the bigger picture to give you perspective on the market’s next major move

Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading.

All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Which Works Best — GPS or Road Map? (Part 2). 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.

Which Works Best — GPS or Road Map? (Part 1)

Trading with Elliott wave analysis

Some of the best stories about global positioning systems (GPS’s) are the weird detours they sometimes recommend to drivers. Just like some of the weird detours that financial markets can make you take when you think they would be better off going in a straight line either up or down, depending on how you’ve positioned your trades.

Not long ago, while taking a trip with my family through Great Smoky Mountains National Park on the way to Gatlinburg, Tenn., I decided to use my GPS to drive around the park’s western boundary. We wanted to visit Fontana Dam and Cades Cove to see the wildlife. We’d do the go-carts, miniature golf and rides the following day.

From Fontana Dam, my old-fashioned map made it look like it would take the better part of the day to drive around the park to Gatlinburg and then head into Cades Cove from the north. But my new GPS unit suggested that Cades Cove was less than 20 miles away. I could have kissed it — my GPS was going to save me hours of travel time! Or so I thought. Little did I know until I got there that the road my GPS suggested for the final few miles was only the remnant of an old wagon trail — and it was a one-way wagon trail, going the wrong way. I had to backtrack and take the much longer path my paper map suggested.

What’s the moral of the story? Sometimes the new-fangled gadget is not much of an improvement over what it’s designed to replace. Although my GPS unit is great when it comes to identifying the quickest and most efficient route from point A to point B, it sometimes fails to take into account some of those necessary nuances, such as whether a street is one way or whether it might be impassable at times. Every so often, the old-fashioned way of doing things is still the best way.

I believe that’s true when it comes to analyzing markets, too. The method I employ every day has been around since the 1930s, and it works as well as, if not better than, any new-fangled technical analysis method for which you must buy some expensive computer software. My method is a form of technical analysis based on the Elliott Wave Principle, which Ralph N. Elliott worked out via hundreds of hand-drawn charts, well before the dawn of charting software. If you like those GPS units that talk you through every turn, you can almost imagine Ralph’s voice explaining where to turn as you follow a market. Those directions — the road map he drew for tradable markets — have withstood the test of time.

As I found during my trip, detours are a fact of life. They are also a part of market trends. For instance, a bull market shows periods of “punctuated growth” — that is, periods of alternating growth and non-growth, or even decline. The patterns then build on themselves to form similar designs at a larger size, and then again at an even larger size.

You’ve probably heard of this idea of repeating patterns on increasing and decreasing levels of scale. This emerging science, which is called “fractal geometry,” is a branch of chaos theory. And it is precisely the model identified by R. N. Elliott more than 60 years ago.

(Stay tuned for parts 2 and 3.)


Who is Jim Martens? Jim is one of the very few forex Elliott wave instructors in the world, and a long-time editor of EWI’s Currency Specialty Service. A sought-after speaker, Jim has been successfully applying Elliott since the mid-1980s, including 2 years at the George Soros-affiliated hedge fund, Nexus Capital, Ltd.

Catch up on Jim’s latest thoughts about FX markets and the business of trading them at his Twitter feed.


Download Your Free 14-page eBook: “Trading Forex: How the Elliott Wave Principle Can Boost Your Forex Success”Here’s some of what you’ll learn:

  1. Which Elliott waves to trade
  2. Which Elliott waves set up your forex trade
  3. When your analysis is wrong
  4. Guidelines for projecting price targets
  5. How to evaluate an Elliott wave structure
  6. How to use the bigger picture to give you perspective on the market’s next major move

Jim also takes you through two real-world trading examples to reinforce what you’ve learned and apply it to your own trading.

All you need is a free Club EWI profile to download this FREE 14-page eBook now >>

This article was syndicated by Elliott Wave International and was originally published under the headline Which Works Best — GPS or Road Map? (Part 1). 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.