Elliott wave analysis and validation, a technical tool followed by experienced professionals, is calling for a big turn in the stock markets and a resumption of the bear market trend that has been with us since 2000-01, and intensified since 2007-08. Elliott wave analysis, as regular readers of this site would recall, forecasts that primary trends move in waves of "three steps forward, punctuated by two steps back". In a similar flow, they are expecting that the stock market bounce since early 2009 is about to run out of steam and lead to the next leg down of the bear market. Exactly when this turn might occur is what our friends over at Elliott Wave International are busily trying to figure out and validate.

We prefer following Elliott Waves as one more tool in understanding the stock market, and we like the work of Elliott Wave International because they understand the essence of Elliott Waves - and that is, it is a social mood prediction methodology. Stock markets, in varying degrees, tend to reflect that social mood rather broadly - mainly because they are largely free in nature (not controlled), and reflect the economy broadly, and is an oscillator between the two human extremes of greed and fear - and thus make for an excellent social mood gauging device. On the flip side of course, any gauging instrument of something as broad as the social mood is likely to have its limitations - and so does the stock market. It is however a very useful tool nevertheless, and periodically, the uncanny precision of its predictions are staggering.

The Elliott Wave International indicates that a secular bear market started back in 2000-01 that market the end of a Major Bull market dating back to World War II. The first decline around 2000-2002 was the first leg down of this Major Bear market, and 2007-2009 was the start of the next leg down. They however believe that this next leg down is not yet over in spite of the intensity of the decline so far. In this regard thus, they are expecting the next down wave to start imminently.

Our own thinking is that there is still too much fear in the air and the memory of the decline in late 2008 is fresh in everyone's minds. Thus while any type of correction is possible, it is not clear that a sustained decline will be visited anytime soon. However, Elliott Waves sometimes do their most devastating work when one least expects it - so it is better to be forewarned and prepared.

Happy investing!