Q&A With Robert
Prechter: Why Technical Analysis Beats Out Fundamental Analysis
October 5, 2009
By Elliott Wave
International
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.
***** 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.
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.
