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Q&A With Prechter: Technical vs. Fundamental Analysis at Trader’s Narrative

This is a guest post by EWI.

As the major stock markets turned down in late 2007 and then started to rally in March 2009, many people who believed in fundamental analysis have begun to question its validity.

Famed technical analyst and Elliott wave expert Robert Prechter has long called for the bear market we are now in the midst of. (He views the rally of 2009 to be a bear-market rally not the beginning of a new bull market.) But over the years, his methods of technical analysis have been criticized. Here are his most succinct arguments as to why wave analysis outdoes competing forms of analysis.

Learn the Wave Principle and Other Forms of Technical Analysis
Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions.
Learn more and download your free copy here.

Excerpted from Prechter’s Perspective, re-issued 2004

Question: Suppose everyone agreed, “The Wave Principle is not always right, but it really is the answer”?
Robert Prechter: Well, let me begin my answer with a quote from a national financial magazine dated October 1977. “Over the last few years, the Wave Principle has gathered too much of a following and, therefore, it has less value today. Almost invariably, you can write off a technique when it gets too much of a following.” How does this statement look in light of the decade that followed it? “Elliott” had one of its greatest successes. Like the Energizer Bunny, it keeps going and going. And I believe its next success will be its biggest ever. The Principle itself is undoubtedly on an upward spiral of acceptance: three steps forward and two steps back.

Now let’s suppose that a large number of educated people accepted the Wave Principle, which is not an impossible idea for, say, a thousand years from now. There would still be room for differences of opinion on the market and the future. And there are countless other factors. Even people who practice the craft don’t necessarily take action when they get a signal. Unconscious doubt and worry often foil people’s actions. Very few traders have the emotional strength to turn even good analysis into profits.

Q: The Wave Principle is intrinsically contrarian. Does it have some built-in defense against becoming the consensus?
RP: I think so. The Wave Principle is a description of natural human behavior. This is what human beings are; this is part of their nature — how they behave. In order for markets to continue to go through these stages, a part of human nature must be to believe that such theories of mass psychology are incapable of being true — that is, something not worth examining. They must be primed to accept bullish arguments at tops and bearish arguments at bottoms. That means they have to be ever open to bogus theories of market behavior. How else will they create the patterns that fear, greed and hope produce?

Q: How big is the pool of analysts who rely on the Wave Principle?
RP: I think there are quite a few people who are proficient in applying Elliott to past and present markets, say, perhaps 1% of all technical analysts, which is a pretty good number of people, I suppose. A lot of those are my subscribers, and they learned it through studying the Theorist. However, as far as the number of people proficient at applying the Wave Principle for forecasting market turns, which is significantly more difficult than applying it in real time, I think there are very few.

Q: This has been the basis of some criticism. To quote one critic, “relying on arcane methods does have one advantage. Interpreting the linear squiggles is left in the hands of the major heir to Elliott’s work.” How do you respond to those who contend that the complexity of the theory is a cover that allows you to retain the Wave Principle as your personal theory?
RP: With regard to any supposed self-serving secrecy, not only did I co-author a book on how to apply the Wave Principle, as well as reprint Elliott’s writings against protest from practitioners, but also I continually go into great — some might say excruciating — detail in each issue of The Elliott Wave Theorist explaining exactly what I think the market has done and will do, and why I think it. If there is any market letter that has educated potential competitors, it is mine. The reason is that the study of markets is more important to me than exclusivity, secrecy or power.

Q: Another common approach critics take when they try to dismiss Elliott as bunk is to refer to you as a mystic or a numerologist.
RP: A mystic believe in things for which there is no evidence, only desire. I do not consider myself to be a mystic at all. My approach is objective. The empirical basis of Elliott’s discovery speaks to that fact. So do the results of the trading competition [Editor’s note: Bob Prechter won the Trading Championship in options in 1984 with a stunning 444% gain. The next closest competitor showed an 84% gain.] Not once during any month since the independent rating services have been following market timers has a timer using a numerological approach such as “Gann” analysis ever placed in the top 10 rankings. Just as would be expected, such methods don’t work!

The true mystics are those who believe, for instance, that current economic performance is a basis upon which to predict stock market prices. There is no evidence for it. They just feel comfortable with the idea, so they espouse it.

Q: So you say that the challenge to validity is on the other side?
RP: You’re darn right, it is. I am no longer at the point where I feel that I have to justify the objectivity of the Wave Principle. I think the results have done that. Technical analysis is entirely rational and has proved itself. If someone goes back and looks at the record of Elliott wave writers over the decades, he will find a track record of forecasting success that is well beyond a random result of chance. If you can do that, the ball is in the other guy’s court. It’s up to him to show that this is luck or something. What’s more, the only challenge to a theory is a better theory, and I haven’t seen a contender yet.

Q: You don’t feel that you have been effectively challenged by any fundamental approaches?
RP: I think there’s a place for fundamental analysis of individual companies, but I am firmly convinced that you can make a very rational argument showing that fundamental analysis applied to overall market timing is like reading the entrails of goats. In fact, I presented such a critique in The Wave Principle of Human Social Behavior. If you think my ideas as presented here are controversial, just read Chapter 19 of that book.

Learn the Wave Principle and Other Forms of Technical Analysis
Elliott Wave International has just released The Ultimate Technical Analysis Handbook. This FREE 50-page ebook is dedicated solely to teaching reformed fundamentals followers to incorporate technical analysis into their own investing decisions.
Learn more and download your free copy here.

Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

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8 Responses to “Q&A With Prechter: Technical vs. Fundamental Analysis”  

  1. 1 who cares

    prechter sucks, why do you give a crap about him?

    “Newsletter tracker Mark Hulbert has been documenting Prechter’s investment trading predictions and picks since 1985 so he now has a nearly 25 year long track record which can tell us whether you should trade on his predictions or not.

    Here’s how Prechter’s trading advice has done from 1/1/85 through 5/31/09 versus the broad U.S. stock market average (Wilshire 5000 index) according to Hulbert’s analysis:

    Annualized Return:

    Wilshire 5000 Index 9.7 percent
    Prechter’s Trading Advice -15.4 percent

    Total Return:

    Wilshire 5000 Index 857.1 percent
    Prechter’s Trading Advice - 98.3 percent

    The underperformance of Prechter’s newsletter is nothing short of astonishing and stunning! On an annualized basis, Prechter has underperformed the broad U.S. stock market Wilshire 5000 index by a whopping 25 percent per year! Here’s what Hulbert’s analysis shows would have happened to $100,000 invested according to Prechter’s investing trading advice versus the Wilshire 5000 U.S. stock market index:

    $100,000 Invested (1/1/85-5/31/09):

    Wilshire 5000 Index $957,100
    Prechter’s Trading Advice $1,700 “

  2. 2 Babak

    maybe because he caught the +50% move off the spring lows? watch the video

  3. 3 who cares

    ok i take it all back then

    what a genius!

  4. 4 RideTheWave

    who cares,

    just citing Hulbert does not mean you are right. Please provide actually link or documentation from Hulbert.

    EW has its up and down. Those who has trained and went thru lots of painful experience :) will learn that EW is just as good of many other trading methods.

    there are many methodologies out there, everyone has to find your own.

  5. 5 wayne

    I read Prechter’s first book some 20 years ago. It was my impression that EW left a great deal to the interpreter’s imagination.

    I am of the opinion that successful newsletter writing is as much about marketing as it is about substance. To generate a large newsletter following, it is very beneficial to have a unique angle from which to position your comments that distinguishes you from the crowd. Similar to writing a hit song, you need a hook that catches the audiences imagination. If you research Robert, you will see that he has a degree in Psychology.

  6. 6 Mike

    One does not need EW. EWavers are wrong all the time. If something does not work the way they say it would….they just excuse it by saying on instead of that cound it was really this count,,etc. This makes it of questionable value. Why beat your brains in trying to guess what is going on.

  7. 7 Vin

    Key is USD. I don’t understand why Prechter thinks dollar will strengthen when the printing presses are planned to run overtime for forseeable future.

  8. 8 JD

    In the late 90s, there were talks about one day every Chinese and East Indians will have PC, TV, etc and that would mean a boom to US tech companies. Well the Nasdaq went from 5000 to 1100 in the following decades while China now has 200 millions consuming middle class citizen. Bears bears bears can only be right on for so long, eventually logic will prevail. Who will be right, the chart reader of this upcoming tsunami of consumerism.

    Reference to Hulbert definitely make sense here. Thank you for the quotes. Before internet, you almost had to take what you read or saw for granted, thanks to comments like these to bring to light the mass media ‘’ brumbergg'’ BS.

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