Elliott Wave Theory, Pros and Cons

[ParkTwain]

There hasn't been any discussion at the $$MM$$ board regarding the status of EW theory, which is inherently controversial, as promulgated by Robert Prechter. For instance, see the entry at Wikipedia: http://en.wikipedia.org/wiki/Elliott_Wave_Theory

I admit that I have done no in-depth reading about EW, preferring to see market behavior as the product of as few identifiable, necessary forces as possible (a la Occam's Razor). So re: EW, I'm from Missouri: please show me. I can also say that I have been prejudiced somewhat against EW by my reading of Victor Neiderhoffer's writings (http://www.dailyspeculations.com/), himself a Ph.D. statistician and (sometimes successful, sometimes not) hedge fund director and also a critic of "trend following" trading schools.

It would be a service to this board for there to be posted some source references, arguments, reviews of relevant books and technical papers, actual data, etc. that can help the various board members navigate the ideas surrounding EW.

[ParkTwain]

Here is the text of a posting I made on the Bradley Siderograph thread (DSteckler). I have removed that text from that posting.

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EW apologist Bob Prechter doesn't look too good according to my current read "Pit Bull" by Martin Schwartz (published by Harper Perennial Editions 1999). See the chapter "Sitting Down by the Lake, Waiting for the Tidal Wave."

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Bob's the classic example of somebody who's sure he's right and the market's wrong. His theories are brilliant, he's smart enough to win the Nobel Prize in Economics, and I hope he does someday, but the market doesn't care. Bob himself has now publicly conceded that he's been wrong for so long, he's lost confidence in his ability to pick the top, and until he decides that it's easier and more profitable to go with the flow, he'll remain sitting down by the lake, waiting for the tidal wave.
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Here is one reader's review (March 13, 2005) of Bob Prechter's book "Conquer the Crash":

http://www.amazon.com/gp/cdp/member-reviews/A3CDJ2DVD5MZ3C/104-0600956-1591914?_encoding=UTF8&display=public&page=4

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This book contains some useful historical information and some insights into the mass psychology of booms, bubbles, and busts.

Prechter should have left it at that. Instead, he offers up predictions. Big mistake. This guy bases his forecasts on Fibonacci numbers and so-called Elliott "wave counts." He labels all market patterns so that they fit the preordained Elliott Wave 5-up, 3-down pattern. If you see more or fewer waves than he does in any given market move, you just don't understand that there can only be 5 waves to the top of a bull market. He's imposing his theory on the market, but surprisingly enough, the market doesn't care. It does whatever it wants, in however many waves it wants, and Bob has been very frustrated at the market's aberrant behavior lately. He got lucky early in his career, but it seems he's been fairly consistently getting the market wrong since missing the '87 crash.

Any superstitution can "seem" to work if you only look at its happenstance apparent accuracies and disregard its abundant failures. Keep looking for certain numbers of waves and Fibonacci ratios and you'll find what you're looking for. Pick any set of numbers or patterns or wave counts, and you'll find those too. The market doesn't care about any of those things, though. It's nothing more than an aggregation of billlions of individual choices, which are influenced by an infinite number of factors none of us can ever understand fully. University studies of various investing methods have found that Elliott Wave, like most, is no better than random stock selection.

If Prechter had chosen the random method, he and his followers would at least have a good chance of keeping pace with the market. Unfortunately, he has been getting everything from the Dow, to oil (he thought it was going to $10), to gold (he didn't think it could break $400), to deflation (the "deflation" scare ended shortly after this book came out) WRONG in the past couple of years. He apparently STILL believes that the Dow will go to 400 (not 4,000 but FOUR HUNDRED) because his charts tell him it should (they've been telling him that since about 1990, actually). Prechter doesn't understand demographics or economics or markets or the monetary system, all of which render "Dow 400" among the goofiest of forecasting absurdities -- unless you believe a giant asteroid will hit and wipe out two thirds of the population (I don't think Prechter is counting on that).

Our debt-heavy economy may have a significant crisis soon, perhaps by the end of the decade. It will most likely be spurred on by inflation and rising interest rates. But it's not happening now and it's not happening in the way this author has been prematurely forecasting for over a decade.

This book came out near the bottom of the 2000-2002 stock bear market, just in time for a reader to short stocks as they began a new bull market. How typical. While promoting the book, Prechter said it was "definite" that stocks would "crash" in 2003. He said that 2003 would be "the best year yet" for bears (short sellers). Late into 2003, when it was clear that the market had proven him wrong, Prechter declared on a radio show that by the end of 2004, the Dow would "certainly" fall below 5,000. Wrong again! Since his Fibonacci turn dates and Elliott wave counts fail to portend the future, maybe next he'll tell us he's found the secret code to the stock market from the text count of Nostradamus' writings.

Bob Prechter couldn't call the market if it was listed in the Yellow Pages. This guy couldn't time the market if you gave him a stopwatch. He's throwing out guesses and misleading people by describing them as "definite" and "certain." He's either a liar or a true believer in his own irrational superstitions. In either case, he's not credible.

Here's all you really need to know: Buy dividend stocks. Buy short-term bonds. Buy gold. Hang on to them. Do that and you'll do better than you will trying to follow the prognostications of market gurus. Plus, you'll have a lot more time to devote to family, fun, and productive activities.
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[ParkTwain]

Books authored by Prechter that are listed at Amazon.com:

http://www.amazon.com/exec/obidos/search-handle-url/index=books&field-author-exact=Robert%20R.%20Prechter&rank=-relevance%2C%2Bavailability%2C-daterank/104-0600956-1591914

[skiracer]

Park,
Like any other indicator, system, tools, etc. that are out there you can only use them in some manner that might give you a positive edge in predicting what we are all looking for in the markets, sectors, groups, stocks the direction they are going to go over some period of time. EW can and will give you a headache because it can become so complicated with the 1 through 5 wave counts and the a,b,c sub wave counts within those larger wave counts that one can lose tract of where they are really at a given time. I think that EW coupled with Fibonnaci numbers can be a help an at times actually do work. I believe in an accept Fibonnaci ratios much more than EW theory an use those ratios everyday. I don't know why the Fib ratios seem to hit the nail on the head the way they do but there is something almost mystical about them an how reliable they are at predicting levels to look for in tops, bottoms, and reversals.
I've been reading about EW and taking a few online seminars on EW of late and have been trying to implement the theory into my own trading strategys which are short term. I can't say that I have become able to rely on the theory completely but I do see where inplementing wave count analysis does offer another working tool that can be of help in determining possible direction. It seems to work better for me with the very short term strategys an I really try to keep it to a simple 1 through 5 wave count and the abc sub wave counts very much like Spike has been doing in his posts. One thing that I have been tying into my use of the theory are the Fib ratios in the length of the waves as stated in some reading and seminars I have done recently. In doing that I find that it gives the waves a more specific structure to look for an I think that in making them adhere to a more specific form they actually do become more reliable and do work. But then again like everything else they are only a tool to apply in the best manner that works for your strategys. If stretching, bending, condensing or whatever works in anyone's own strategys and gives them an edge in predicting direction then I would say use the tool but implement it as you see fit.
I do agree with your last paragraph. I think it is good to buy dividend stocks an I bought the gold ETF, which I'm up almost 100 points since my entry, but I can't agree with your statement that, "here's all you have to know". Maybe I took it out of context or misunderstood your true meaning but I would think that would squeeze your parameters and place limitations on expanding your capabilities and horizons. Actually I read your posts and have found everything you say factual and well presented and have made several plays on stocks you have mentioned with positive results. I was surprised at that last statement.

[DSteckler]

EW books

Steve Poser came out with a good primer last year on EW. Here's the description from Amazon:

Book Description
Learn how to forecast the market with Elliott Wave Theory In Applying Elliott Wave Theory Profitably author Steven Poser shows readers how to trade using Elliott Wave Theory-a powerful technical analysis tool used to forecast the stock market-through easy-to-follow trading strategies, while offering clear explanations on how to interpret this method's numerous patterns. Step-by-step guidance breaks down the Elliott Wave Theory and provides strategies that a trader can put into action along with a complete explanation of how and why the Elliott Wave Theory works. Applying Elliott Wave Theory Profitably shows readers where to look for external clues, and how to use these to improve their trading performance. Steven W. Poser (Upper Saddle River, NJ) is President and founder of Poser Global Market Strategies Inc., an international stock, bond, and currency markets trading advisory firm. Mr. Poser publishes a daily newsletter that covers these markets from a technical and fundamental perspective. He holds a post-MBA degree in finance, as well as an MBA in economics and a BA in mathematics and computer science.

Steve no longer publishes a newsletter; he works for the NYSE now. Really nice guy, too.

[IIC]

No No No...You guys got it all wrong...The 1st wave up started in 1792 under some Buttonwood tree...The 1st wave up ended in 2000...We are now in a 300 year down wave...In the year 2300 or so the market will take off like a rocket...I'm already setting up my watch list...Doug(IIC)

[ParkTwain]

ski, that long citation was authored by another person (book reviewer at Amazon), not me.