By Vadim Pokhlebkin

The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook.

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Of the many forward looking market indicators we at EWI employ, one of the most interesting tools (and least discussed in the financial media) is the DJIA priced in gold — “the real money,” as EWI’s president Robert Prechter calls it.

We’ve been tracking the Dow/Gold ratio for many years and it has serves our subscribers well. It’s not a short-term timing tool, yet in the longer term, as our January 6 Short Term Update put it, “the nominal Dow eventually plays catch up to what is transpiring in the Dow/Gold ratio.”

Here’s a good example. Remember when the nominal DJIA hit its all-time high? October 2007, just above 14,000. At that time, most investors expected new highs still to come. But our Elliott Wave Financial Forecast warned five months prior, in May 2007:

One key reason [for a coming top in the DJIA] is the undeniable bear market status of the Dow Jones Industrial Average in terms of gold, the Real Dow…

Notice, by contrast, the relative strength of the Real Dow versus the nominal Dow, the index in terms of dollars, from 1980 to 1982. By August 1982 when the Dow denominated in dollars bottomed, the Real Dow was rising strongly from its 1980 low… The nominal Dow soon played catch-up, and they both rallied more or less in sync until 1999.

Now, instead of soaring the Real Dow is crashing relative to the nominal Dow. In fact, it’s barely off its low of May 2006. This dichotomy reveals the weakness that underlies the financial markets’ push higher. When mood turns and credit inflation reverses, the ensuing drop in the nominal value of the market should be dramatic.

“Dramatic drop” did indeed follow: Between October 2007 and March 2009, the DJIA lost 53%, high to low.

For more information, download Robert Prechter’s free Independent Investor eBook. The 118-page resource teaches investors to think independently by challenging conventional financial market assumptions.

Vadim Pokhlebkin joined Robert Prechter’s Elliott Wave International in 1998. A Moscow, Russia, native, Vadim has a Bachelor’s in Business from Bryan College, where he got his first introduction to the ideas of free market and investors’ irrational collective behavior. Vadim’s articles focus on the application of the Wave Principle in real-time market trading, as well as on dispersing investment myths through understanding of what really drives people’s collective investment decisions.

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By Nico Isaac

In the realm of market psychology, there’s a big difference between optimism and extreme optimism. The first is seeing the glass half full. The second is seeing the glass half full deep in the heart of a bone-dry desert. In finance, it’s what we call “Buying the Dip” mentality — when all outcomes, even losses, are cause for celebration.

We are there now.

To wit: With a new year upon us, the mainstream has already come up with a fresh tagline to define the next 360-or so days. It even rhymes: The Bull Runs Again In 2010. This projection is in no way “in spite of” the fact that the U.S. stock market just finished its first decade of negative returns since the Great Depression; it’s because of that fact.

See, according to the mainstream experts, this “Lost Decade” of abysmal stock performance (in which the Dow ended 9% in the red, the S&P 500 - 24%, and the NASDAQ Composite - 44%) is the very foundation on which a new bull market will apparently be born. One economic scholar recently coined the phenomenon the “Slingshot Effect” — the more severe the downturn, the faster the recovery. (Associated Press)

Adding to the upbeat chorus are these recent news items:

“The horrible decade has wiped out all the excesses of the previous two decades and put us back on track for more normal returns.” (USA Today) — AND — “It may be the best of all possible worlds.” (Business News)

Back in the late 1990s, when the “unstoppable” NASDAQ began to experience regular days of double-digit drops, it was “Buy-the-Dip.” Now, it’s “buy the entire lost decade.” And, as the Dec.31, 2009 Elliott Wave Financial Forecast Short Term Update reveals — current sentiment readings “continue to show that stock market bears have packed up and moved to Florida for the winter.”

The Dec. 31 Short Term Update also reveals two mind-blowing charts of the S&P 500 versus Investor Intelligence Advisors Survey Percentage of Bears — AND, the S&P 500 versus the percentage of “Fully Committed” bullish advisors since 2000. The current reading is the lowest bearish percentage in 22 years.

Take one look at the evidence, and you’ll see that a defining pattern emerges: Low levels of bearishness have consistently coincided with one kind of market move. Combine this picture with the other measures of investor sentiment like momentum, volume and Elliott wave structure, and the evidence tilts overwhelmingly in favor of an unforgettable year.

puts 2010 into perspective like no other. The Most Important Investment Report You’ll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

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