Here are some valuable resources covering the Elliott Wave Principle and the present global financial crisis that continues to unfold, and how you can protect yourself.

Making Preparations and Taking Action in Today's Deflationary Environment
December 12, 2008

Editor’s Note: The following article is adapted from Robert Prechter’s 2002 best-selling book, Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression.

In addition to this article, visit Elliott Wave International to download the free 15-page report about how to protect yourself, you wealth and your family in this environment. It contains details about what you should do with your pension plan, valuable tips for business owners, insights on handling loans and debt and important warnings against trusting the government to protect you.

By Robert Prechter, CMT

The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn’t reduce the supply of your money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn’t ruin you.
Many investment advisors speak as if making money by investing is easy. It’s not. What’s easy is losing money, which is exactly what most investors do. They might make money for a while, but they lose eventually. Just keeping what you have over a lifetime of investing can be an achievement. That’s what this my book, Conquer the Crash, is designed to help you do, in perhaps the single most difficult financial environment that exists.

Protecting your liquid wealth against a deflationary crash and depression is pretty easy once you know what to do. Protecting your other assets and ensuring your livelihood can be serious challenges. Knowing how to proceed used to be the most difficult part of your task because almost no one writes about the issue. My book remedies that situation.

Preparing To Take the Right Actions

In a crash and depression, we will see stocks going down 90 percent and more, mutual funds collapsing, massive layoffs, high unemployment, corporate and municipal bankruptcies, bank and insurance company failures and ultimately financial and political crises. The average person, who has no inkling of the risks in the financial system, will be shocked that such things could happen, despite the fact that they have happened repeatedly throughout history.

Being unprepared will leave you vulnerable to a major disruption in your life. Being prepared will allow you to make exceptional profits both in the crash and in the ensuing recovery. For now, you should focus on making sure that you do not become a zombie-eyed victim of the depression.

Taking the Right Actions

Countless advisors have touted “stocks only,” “gold only,” “diversification,” a “balanced portfolio” and other end-all solutions to the problem of attending to your investments. These approaches are usually delusions. As I try to make clear in Conquer the Crash, no investment strategy will provide stability forever. You will have to be nimble enough to see major trends coming and make changes accordingly.

The main goal of investing in a crash environment is safety. When deflation looms, almost every investment category becomes associated with immense risks. Most investors have no idea of these risks and will think you are a fool for taking precautions.
Many readers will object to taking certain prudent actions because of the presumed cost. For example: “I can’t take a profit; I’ll have to pay taxes!” My reply is, if you don’t want to pay taxes, well, you’ll get your wish; your profit will turn into a loss, and you won’t have to pay any taxes. Or they say, “I can’t sell my stocks for cash; interest rates are only 2 percent!” My reply is, if you can’t abide a 2 percent annual gain, well, you’ll get your wish there, too; you’ll have a 30 percent annual loss instead. Others say, “I can’t cash out my retirement plan; there’s a penalty!” I reply, take your money out before there is none to get. Then there is the venerable, “I can’t sell now; I’d be taking a loss!” I say no, you are recovering some capital that you can put to better use. My advice always is, make the right move, and the costs will take care of themselves.

If you are preoccupied with pedestrian concerns or blithely going along with mainstream opinions, you need to wake up now, while there is still time, and actively take charge of your personal finances. First you must make your capital, your person and your family safe. Then you can explore options for making money during the crash and especially after it’s over.
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For more information, Prechter has made five full chapters from his book available for free download.
• What to do with your pension plan
• How to identify a safe haven (a safe place for your family)
• What should you do if you run a business
• Calling in loans and paying off debt
• Should you rely on the government to protect you?

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

 The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

• Disbelief – that markets are patterned and largely predictable by technical analysis alone
• Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
• And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices. 

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure to the right shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

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• What Happens During a Credit Implosion?
• How Do I Ride Out this Crisis?
• What If You Can’t Sell Your House?
• Buy & Hold or Sell & Fold?

The Primary Precondition of Deflation

The following was adapted from Bob Prechter’s 2002 New York Times and Amazon best seller, Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
(f) Credit is credit, whether non-self-liquidating or self-liquidating.
(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan – for business start-up or expansion, for example – generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income. Contrary to nearly ubiquitous belief, such lending is almost always counter-productive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy. Advocates claim that such loans "stimulate production," but they ignore the cost of the required debt service, which burdens production. They also ignore the subtle deterioration in the quality of spending choices due to the shift of buying power from people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.

For more on deflation, including the following topics, see Elliott Wave International’s free guide to deflation, inflation, money, credit and debt. There, you can also download two free chapters from Conquer the Crash.

Learn more about these six important topics:

1. What is Deflation and When Does it Occur?
2. Price Effects of Inflation and Deflation
3. The Primary Precondition of Deflation
4. What Triggers the Change to Deflation?
5. Why Deflationary Crashes and Depressions Go Together
6. Financial Values Can Disappear in Deflation

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.