Q&A With Elliot Wave Expert, Robert Prechter

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.

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.

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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.

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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.

How Online FX Trading Works

Online FX trading, trading also known as forex, currency trading, or foreign exchange, is a speculative form of investment trading. A Means of making money by trading on the almost constant fluctuations in currency prices. If you are interested in trading currency online, it is very simple these days and can be done on your own computer from your home or office.

If you are not sure how you could make money from currency price changes, it is very simple to explain. You probably already know that different countries use different currencies and these have a value that changes. For example you may hear about the dollar strengthening, which means that the value of the dollar is rising compared with other currencies. The value of the dollar usually rises when the American economy is strong compared with other countries.

Currency prices are constantly changing, going up or down in response to news, economic reports or market activity. This means that a forex trader can deal in currency to make a profit, just a stock trader would do. You buy when a currency is rising and sell when it is falling, in just the same way.

The difference from stock trading is that currencies do not have an absolute value but are always priced relative to another currency. When you buy or sell, you are in fact always exchanging one currency for another. This means that you will always deal in a pair of currencies, which might be the euro and the US dollar. This pair is usually written EUR/USD and it has the highest trading volume of any forex pair.

Online FX trading uses leverage and margins to increase the value of trades. This means that you only need a small balance in your trading account to control very large sums. The most common leverage used by forex brokers is 100 times. This means that $100 in your account can control a position size of $10,000, or $1000 can control $100,000. As you can imagine, when you are dealing with these kinds of figures a small percentage change in the price can come out to a big profit or loss.

Because of the risk of loss, it is important to understand how and why currency prices change and to follow a good system which will give you clear signals on when to open and close a trade. Most of these systems rely on analyzing charts and mathematical indicators which you can access from inside most broker accounts.

Alternatively you may choose to use an automated forex trading system to trade for you. These are the forex robots which have become very popular over the past few years as they have become more and more accurate. There is still room for error and it is important to understand the settings of your robot thoroughly and test it in a demo account before you start online FX trading for real.

Weaker Oil, Stronger Dollar

Metals are beginning the new trading week on a lower note reflecting weaker Oil, stronger Dollar, and in reaction to talks of the International Monetary Fund (IMF) selling Gold. Talks of the IMF selling Gold occurs like clockwork every year.

Stock an metals traders are also standing on the sidelines in advance of today’s Leading Economic indicators report. With that said we find silver 30 cents lower at $16.73. Gold is $11.00 lower at $997.00 per ounce. Palladium remains unchanged at $299.00. Platinum is $1310.00 off $10.00.

Over in the currency markets the Euro slipped 53/100ths of U.S cent to $1.4662. Energy traders are facing lower Oil this morning with the last trade at $70.53 down $1.51 per barrel. Oil gained $2.75 for the whole of last week.

In the stock market the Dow is indicating a 44 point lower open after last week’s total gain of 214 points. Traders are once again showing signs of worry regarding the extent of the stock markets run up relative to the underlying economic fundamentals. The question looming is; are we getting ahead of ourselves? While today’s Leading Economic Indicators are pointing to a rise of .7% compared to the prior reading of up .6%, traders are not so sure that the next 6 months will continue to show economic improvement.

In world matters President Obama is signaling yet another military strategy shift. In a TV interview the President voiced skepticism that more troops in Afghanistan would make a difference. Up until now the military officials expected a rubber stamp endorsement for added troops by the administration.

Today’s economic calendar:

Canadian Retail Sales

Dollar Continues to Weaken on Inflationary Worries

Markets continued to strengthen in overnight activity in the wake of Ben Bernanke’s words of assurance that the recession appears to be behind us. His assurance was later confirmed by legendary investor Warren Buffet. (hmmm)

The Dollar continues to weaken on inflationary worries with traders holding their breath in advance of this morning’s Consumer Price Index report. Currency and metals traders are still thinking about yesterday’s surprise surge in the Producer Price Index. Wall Street expects the Consumer Price Index (CPI) to clock in with a rise of .3% versus last month’s reading of 0%. Traders are whispering the rise might be higher than the estimate. Last on the Euro $1.4679 up 44/100ths of U.S cent.

As we look overseas we find Silver up another 40 cents at $17.30. Gold is $12.00 higher at $1016.00. Palladium is $296.00 up $6.00. Platinum is $10.00 higher and changing hands at $1335.00.

Over in the energy markets we find Oil trading flat to a shade lower in advance of today’s Weekly Inventories. The estimate calls for a decline of 3 million barrels, but traders are taking no chances given the recent surge in the price of Oil.

Over in the stock market the Dow ended yesterday with a gain of 56 points and appears to be headed for another opening gain of 46 points. Today’s economic calendar also contains the latest look at U.S. Industrial Production where stock traders expect to see a rise of .6% compared to last month’s rise of .5%. In world matters Chinese officials indicated that they are pushing for a quick negotiated solution to the tire trade spat with the U.S.

Today’s economic calendar:

U.S. Consumer Prices
U.S. Current Account
U.S. Industrial Production
EZ Consumer Prices
U.K. Employment

Conflicting Beige Book Report

Stocks appear to be taking a breather this morning after yesterday’s 49 point gain in the Dow Jones Industrial Average. Traders are playing close to the vest after having had time to dissect yesterday’s Fed Beige Book where we got conflicting snippets like, retail sales are flat, loan demand continues to be weak, slight improvement in residential real estate, commercial real estate is weak, but overall economic activity seems to be stabilizing.

Traders are also standing pat in advance of this morning’s economic data where the Weekly Initial Jobless Claims are estimated to clock in at 560,000 versus last week’s 570,000. The July Balance of Trade is expected to show a deficit of $27.3 billion compared to June’s $27 billion. Given the recent precipitous decline in the value of our Dollar you might expect to see the next two reports show a significant easing in the deficit. Remember a weaker Dollar makes our exports more attractive to overseas buyers.

As for the Dow it appears to be headed for a 13 point lower open. The Euro eased to $1.4522 down a third of a U.S cent. Crude appears to be defying the stronger Dollar with traders awaiting today’s Weekly Oil Inventories where the latest estimate calls for a 1.8 million barrel decline in available Oil supplies, and a 1.5 million barrel drop in Gasoline. Last trade on Crude $71.68 up 37 cents.

As for the metals we find them flat to lower with Silver trading at $16.11 off 34 cents. Gold is $4.00 lower at $985.00. Palladium is $292.00 up $2.00. Platinum is off $5.00 and changing hands at $1279.00.

In other matters; President Obama laid out his new Health Care proposal in a one hour speech last night in front of the full Congress and the nation. While most agree that he did a masterful selling job; initial reaction shows no softening along party lines.

Today’s economic calendar:

BANK OF ENGLAND Rate Decision (volatile market event)
U.S. Initial Claims
U.S. Trade Balance
BANK OF CANADA Rate Decision (volatile market event)

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