All investors -- including experienced professionals -- must simultaneously grapple with two enemies: 1) Imperfect knowledge, and 2) Their own emotions. So what do the vast majority do?
They unconsciously look to other investors for clues:
"Wall Street certainly shares aspects of a crowd, and there is abundant evidence that herding behavior exists among stock market participants.... Most people get virtually all of their ideas about financial markets from other people, through newspapers, television, tipsters and analysts, without checking a thing. They think, 'Who am I to check? These other people are supposed to be experts.'... This dependence is nearly universal, even among long-term investors.... Outwardly, they appear rational. Inside, their unconscious is in control....The unconscious says: You have too little basis upon which to exercise reason; your only alternative is to assume that the herd knows where it’s going."
The Wave Principle of Human Social Behavior, p. 153
Thus when the herd is bullish and buys, stocks go up. When the collective psychology is "bearish" and the herd sells, stocks go down.
So: when it comes to recent stock market declines, the real "Eraser" is a bearish collective psychology among the investing herd.
Alas, most investors are simply not aware of this larger psychology. They believe news or outside events drive market prices. But let's examine this assumption. If it were true, market prices would unfold in a pattern much like what you see on the chart below:
We know this is not how price patterns appear. Why not? Because "events" like those in the chart do not drive stock market trends -- contrary to common belief.
Economists have searched high and low for the "events" which supposedly triggered everything from the 1929 Crash to the 1987 Crash to the "Flash crash" this past April.
Yet they still can't reach a consensus on what caused these and other major market moves, because they investigate almost everything except the true cause.
"Economists of all stripes have tried to come up with an explanation for the 1987 crash. Yet in a 1991 paper, four years after the fact, William Brock studied economists’ commentaries and concluded, 'In my opinion, no satisfactory explanation has been found [for] the most recent crash…Black Monday, October 19, 1987.'
"What about the most devastating event of the 20th century, the Great Depression and the collapse in stock prices that led to it? The Winter 1999 issue of the Federal Reserve Bank of Minneapolis’ Quarterly Review observed, 'Economists and policymakers are still studying and debating what caused this catastrophic economic event.'"
Elliott Wave Theorist, March 2010
So we return to the explanation that really does explain -- herding and collective mood -- and the investor behavior that flows from them.
The Elliott Wave Principle measures the trends in collective psychology. Moreover, decades of observation reveals that these trends (or waves) unfold in repeating patterns.
That's the key to probabilistic market forecasting.
So what does the Elliott Wave Principle reveal about today's market?