The Legendary technical investor Robert Prechter is

awaiting a depression-like shock in the U.S.

Heres an edited version of the interview, in which Prechter gives his outlook for the
U.S. stock market, the general theory of Elliott Wave analysis and his new projects.

Avi Gilburt: Youve said that, once the stock market tops, you expect a major bear
market and economic contraction to take hold. What is your general timing for this to
occur?

Robert Prechter: The true top for stocks in terms of real money (gold) occurred way
back in 1999. Overall prosperity has waned subtly since then. Primary wave five in
nominal terms started in March 2009, and wave B up in the Dow/gold ratio started in
2011. Their tops should be nearly coincident.

Gilburt: What do you foresee will set off this event?

Prechter: Triggers are a popular notion, borrowed from the physical sciences. But I
dont think there are any such things in financial markets. Waves of social mood
create trends in the stock market, and economic and political events lag behind
them. Because people do not perceive their moods, tops and bottoms in markets
sneak right past them. At the top, people will love the market, and events and
conditions will provide them with ample bases for rationalizing being heavily
invested.

Gilburt: Youve said we will be mired in a depression-type event. How long could
that last?

Prechter: I dont know. All I can say for sure is that the degree of the corrective wave
will be larger than that which created the malaise of the 1930s and 1940s.

Gilburt: How are conditions going to change from what we have now?

Prechter: The increasingly positive trend in social mood over the past eight years
has been manifesting in rising stock and property prices, expanding credit, buoyant
pop music, lots of animated fairy tales and adventure movies, suppression of
scandals, an improving economy and despite much opinion fairly moderate
politics. This trend isnt quite over yet.

In the next wave of negative mood, we should see the opposite: declining stock and
property prices, contracting debt, angry and somber music, more intense horror
movies, eruption of scandals, a contracting economy and political upheaval. Thats
been the pattern of history.

Its all relative, though, and its never a permanent condition. Just as people give up
on the future, its brightness will return. The financial contraction during the negative
mood trend of 2006-2011 was the second worst in 150 years. Yet, thanks to the
return of positive mood, many people have already forgotten about it. Investors again
embrace stocks, ETFs, real estate, mortgage debt, auto-loan debt and all kinds of
risky investments that they swore off just a few years ago.

Safe havens

Gilburt: Where do you suggest people hide during this event for financial safety,
and why?

Prechter: Short-term notes of the least unstable governments, held in the safest
manner possible. The plan is to trade those investments for stocks, property and
precious metals near the bottom. You can be calm and avoid suffering financially if
youre prepared. The trick to maintaining personal prosperity is to avoid popular
investments at the turns. Its not easy to do, but at a minimum, you need a fractal
perspective on social trends as opposed to a linear one.

Algorithmic trading

Gilburt: With the advent and proliferation of computer-executed trading, what effect
have they had on Elliott Wave analysis, other than the speed at which trading is
done?

Prechter: Virtually none. People build their errors of thinking into their programs.

Stock market changes

Gilburt: How have markets changed, if at all, in the decades you have been
analyzing Elliott waves.

Prechter: Markets have changed in superficial ways but not in any essential way.
They still trace out Elliott waves. But that doesnt mean it has been easy. Wave V
from 1974 has been unusually large in both price and time relative to waves I and III.
The closest thing to it in the record is the 1932-1937 rise, in which wave five lasted
15 times as long as wave one. Also, from 1987 to 2007, pullbacks were shallow and
skewed upward in the Dow DJIA, -0.15% and S&P 500 SPX, -0.30% which threw
me off.

Some analysts credit the Feds inflating for these market attributes. But even as the
Fed was expanding the money supply at a record rate, the 2007-2009 drop in the
Dow was deeper than one would have expected for wave C of a Primary-degree flat.
So, that causal argument is spurious. Here in 2017, even the Dow/PPI is at an all-
time high. I chalk it all up to Grand-Supercycle-degree optimism. Thats why we have
record credit expansion, too, along with cooperation among members of the Federal
Reserve Board and political support for the Fed. All that will change when mood
turns negative.

Modifying the original theory

Gilburt: I have seen many analysts attempt to modify Ralph Nelson Elliotts original
structure, but none with any degree of success. If there were any aspect of Elliotts
structure to be its weakest link, where would you see the potential for such
modification to find success in the future?

Prechter: Youre right. I have seen two attempts by others to change Elliotts
fundamental observations, and I have not adopted either of them, because I dont
see them dominating prices.

I have suggested three variations on forms: the leading diagonal (in which the odd-
numbered waves can subdivide into five), the expanding diagonal and the skewed
triangle. I remain skeptical about the legitimacy of all three of these forms. I suspect
the patterns I described are more likely artifacts of imperfect mood recording than
legitimate formations.

On the other hand, over the years I and my colleagues have made a number of
valuable observations about wave forms that Elliott never noticed. Some have
become well-known, others not. They are:

1. Wave three is most often the extended wave.

2. Peak acceleration occurs at the structural center of each wave, i.e. in wave 3 of 3
of 3.

3. In the stock market, fifth waves are always weaker than third waves.

4. B waves of contracting triangles often reach a new price extreme.

5. Even so, E waves of triangles in the wave four position always end within the
territory of the preceding third wave.

6. Double flats are somewhere between rare and non-existent; Ive seen flat-X-
triangle serve as double three.

7. The barrier triangle is a more useful idea than the idea of independent ascending
and descending triangles.
8. Zigzags often adhere to channels.

9. In zigzags, A waves tend to be steeper than C waves.

10. In flats, C waves tend to be steeper than A waves.

Useful indicators

Gilburt: While we use various technical indicators to support or show the weakness
in any wave count, my favorite has been the MACD. Do you have any favorites that
have been most useful to you over the years?

Prechter: Nearly all momentum indicators provide the same basic information.
There are hundreds of them, because they are easy to construct, especially with
computers. I dont chart rates of change anymore because I can tell what they look
like just by looking at prices. But momentum analysis is not simple. In the stock
market, slowing momentum nearly always precedes reversals, but slowing
momentum does not mean a reversal must follow. The 1985 and 1989-1994 periods
are classic examples. In each case, the market slowed its rise looking terminal
from a momentum standpoint and then accelerated. In the first case, I knew wave
3 of 3 was dead ahead, so I was really bullish. The second one threw me off. The
most consistently useful momentum indicator is breadth. If I had to rely on only one
momentum indicator, that would be it.

Markets as fractals

Gilburt: Do you have any specific time frames in charts that, in your experience,
have provided the most insight into a specific market or commodity?

Prechter: No. Markets are fractals. Nothing quantitative is meaningful or useful.

Gilburt: There is a debate among various schools of thought as to what is more

important price or time. Whats your perspective?

Prechter: What matters most is form. Form involves both price and time, although
arguably price is the more definitive component.

Improving accuracy

Gilburt: I am sure you have seen a lot of time-cycle analysis in your career. In my
experience, I have not really seen any that have been better than 50/50. I am just
wondering why you think we are unable to develop the same accuracy percentages
in timing models as we do in pricing models using Elliott Wave?
Prechter: I think the reason for your observation is that cycles are not the essence
of markets. They are artifacts of the fractal form. They appear for a while and then
disappear. Usually by the time someone recognizes a cycle and bets on it, it is
poised to vanish. As you say, the success rate is about 50/50, so I dont rely on them
anymore.

I think Fibonacci ratios between the prices and durations of related waves are
meaningful. I wrote a book about Fibonacci relationships called Beautiful Pictures.

Reaction to socionomic theory

Gilburt: I have personally noted how I view socionomics as the ground-breaking

work that will eventually lead market analysis into the future. But I also understand
how old habits are hard to break, and most still desperately cling to the old
Newtonian-based exogenous-causation theories of market analysis. What sort of
reception has the socionomic theory been receiving from the world of academia?

Prechter: It has had wisps of success. We have had several academic papers
published, and another was accepted by a journal [recently]. A ranking member of
the Academy of Behavioral Finance and Economics commented to me that the term
socionomics was becoming part of the lexicon, which was encouraging to hear.
Several professors at mid-level universities are including it in their courses, and
several top professors have been kind enough to provide a good word for the book.
But most economists dont know socionomics exists, and most of them would
dismiss it if they did. Socionomic theory explains why such a reaction is, generally
speaking, imperative: People are built better to participate in waves of social mood
than to analyze them. So its very hard to get the word out. People like you, who do
pure market analysis, have been the quickest to get it.

Education and resources

Gilburt: As new studies into the socionomic aspects of financial markets are
performed all the time, are there any other resources for us to follow to gain
continuing insight into this perspective?

Prechter: The Socionomics Institute puts out tons of interesting material. The
website is full of studies, articles, events and videos. People who like this field
should become a member.

Gilburt: What are your top three arguments to present to those who do not believe
in socionomics but still hold fast to the old exogenous-causation theories?

Prechter: It took 800 pages in The Socionomic Theory of Finance to present

arguments. But I can make three brief statements:
1. Events and conditions that are often labeled fundamentals have no predictability
with respect to the behavior of financial markets, so they cannot be causal. (See
chapters 1, 2 and 22.)

2. Financial markets differ in numerous fundamental ways from economic markets,

implying that their behaviors spring from different causes. The key difference is that
in economic markets the context is one of relative certainty with respect to ones own
personal values, which allows for rational decision-making, whereas in financial
markets the context is one of pervasive uncertainty with respect to others future
actions, which prompts people to herd. (See chapters 12 and 13.)

3. Postulating unconscious waves of social mood as a hidden variable explains a

persistently compatible relationship among myriad social actions, from popular
musical tastes to changes in the economy to political actions to womens fashions to
trends in the stock market. (See chapters 8 and 10.)

The future

Gilburt: Are you involved in any other projects?

Prechter: Ive got two compendiums due out in book form in late spring:
Socionomic Studies of Society and Culture which will have our best work
relating socionomic causality to trends in movies, music, TV, cars, skyscrapers, roller
coasters and other fun stuff and Socionomic Causality in Politics, which may not
be as fun, but its important.

Another project we have going is computerizing Elliott Wave analysis. Its a complex
task, but we know what were doing, and were getting it right.

On the business side, I have cut back. Im down to about two speeches a year and
pretty much retired from doing media. Im still involved in macro business matters,
but I have a great team handling the rest. I do the occasional Q&A, so allow me to
say thanks for the opportunity.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author
of ElliottWaveTrader.net, a live Trading Room featuring intraday market analysis on
U.S. indices, stocks, precious metals, energy, forex, and more, along with an
interactive member-analyst forum and detailed library of Elliott Wave education.