I don't know if you know much about electronics or linear control theory, but I like to think of Elliot in the same vein. (This may raise the ire of more than a few Ellioticians.) I view Elliot as a means of describing the behavior of a system when an external stimulus is applied. In linear control theory, if you know what the characteristic of the system is (damping ratio, pole and zero locations, etc.) you can predict the response to any stimulus. I like to think that Elliot describes how the market price mechanism responds to liquidity flow stimuli.
A very unstable electronic system responds to a step input with lots of overshoot and ringing, whereas a heavily damped one never overshoots. Elliot says that price responses will have certain characeristics, that moves in the direction of the applied stimulus will unfold in impulsive fashion. The stuff we call corrective is akin to the ringing of an underdamped linear control system.
The only catch is that there is a HUGE amount of feedback in economic systems, psychological and monetary, so drawing the dividing line between what constitutes an external stimulus and just the behavior of the system itself gets a little tricky.
Just a little food for thought...
Oh - and my central point - the liquidity input applied in preparation for Y2K was so huge that it swamped out the natural response of the system. You can shape an input that way if you apply a ramp rather than a step, and you get no ringing even from an underdamped system. If we are seeing the mirror image of that liquidity ramp applied to the system, bounces will remain brief.
That said, I'm less than fully exposed right now, just in case somebody figures out how to stem the drain.
BC |
