Robert Prechter, advocate of Elliott Wave Theory, advises to cover Short Positions

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By Sarah Jones – Bloomberg

Feb. 24 (Bloomberg) — Elliott Wave International Inc.’s Robert Prechter, who advised shorting U.S. stocks three months before the bear market began, said investors should end that bet after the Standard & Poor’s 500 Index tumbled to a 12-year low.

He warned of a “sharp and scary” for anyone still wagering on a retreat, according to this month’s “Elliott Wave Theorist.” Short selling is the sale of borrowed stock in the hope of profiting by buying the securities later at a lower price and returning them to the shareholder.

“This is an environment of escalating financial chaos,” wrote Prechter, famous for cautioning that stocks would crash two weeks before the Black Monday retreat in 1987. “Our main job is to keep the money we have. If we exit now, we will do that.”

The 60-year-old former rock-and-roll drummer is an advocate of the wave principle, a theory developed by accountant Ralph Nelson Elliott during the Great Depression. Elliott concluded that market swings, or waves, follow a predictable, five-stage structure of three steps forward, two steps back.

In addition, the waves share a variety of features: Wave two never falls below the starting level of wave one; wave three is never the shortest; waves one and five tend to be of equal length; and wave sizes are often related by a series of numbers known as the Fibonacci sequence, wherein each number is based on the sum of the two previous ones.

‘Aggressive Speculators’

The S&P 500 has sunk 52 percent since its October 2007 record as financial firms worldwide posted $1.11 trillion in credit-related losses and the U.S., Europe and Japan fell into the first simultaneous recessions since World War II. In July 2007, Prechter advised shorting U.S. stocks, saying “aggressive speculators should return to a fully leveraged short position.” He has now reversed that call.

Prechter’s recommendation follows the advice of JPMorgan Chase & Co.’s U.S. equity strategist Thomas Lee, who today issued a “trading buy” recommendation on the S&P 500. The index fell to 743.33 yesterday. Lee set a “short-term” forecast of 800.

“The market is compressed,” Prechter said in the note published yesterday. “When it finds a bottom and rallies, it will be sharp and scary for anyone who is short. I would rather be early than late.”

He has written or edited 13 books, including “Elliott Wave Principle: Key to Market Behavior” in 1978 and “Conquer the Crash” in 2002. His 1995 book “At the Crest of the Tidal Wave: A Forecast for the Great Bear Market,” was published five years before the Internet bubble burst, driving a 49 percent retreat in the S&P 500 through October 2002. Still, investors who followed his advice missed out on the index more than doubling.

To contact the reporter on this story: Sarah Jones in London atjones35@bloomberg.net.

Last Updated: February 24, 2009 12:02 EST

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