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At first, it was just another reason to think Robert Prechter was a crank. After all, he had stumbled into a Wall Street job after a stint with a rock band, and he peddled an offbeat brand of investment advice from the basement of his house on Lake Lanier. But then one excellent call followed another, and Prechter gained a large following and plenty of ink. Fortune, Newsweek and the Wall Street Journal hailed him as a guru. Through it all, he stuck to a prediction he had made way back in 1983, one that seemed less outlandish with every passing day. The bull market, he said, wouldn't end until the Dow Jones average of blue-chip stocks hit 3686, quadrupling its value.
That faith remained unshaken as recently as October, when Prechter made some calls that seem odd in hindsight. True, at the beginning of the month he told clients to sell all stocks, but only as an interim stop on the way to the grail of 3686. On Friday, Oct. 16, he even mailed a note to his subscribers suggesting that a Dow at 2300 might indicate a good time to buy.
The rest is history. The market crashed the following Monday, taking the Dow average down in a 508-point free-fall. And Bob Prechter, the 38-year-old Ivy Leaguer who had parlayed an obscure stock market theory into an international reputation, missed it. Only in hindsight would he judge that a Dow at 3686 is now "a low probability," and that the Dow is probably headed downhill to a low of 400 instead. The reasons make up a story of the stock market crash, and of how Prechter became a part of the market psychology that his theories try to explain. It is also a story as old as the stock market itself, of the making and unmaking of a guru.
As for the guru himself, he is philosophical, even pleased about this lapse. "It's probably a good thing that I didn't call the crash anyway," he says. "A lot of people would have said, 'If you'd kept your mouth shut, it never would have happened.'"
On Black Monday, as the rest of Wall Street sat in stunned disbelief, Prechter was almost footloose. He ducked...