Elliott Wave Critique?

15 posts / 0 new
Last post
switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Elliott Wave Critique?

I've been reading and listening to a lot of Precther lately and I've been impressed by his analysis of the market.  I recently listened to Jim Puplava interview Precthter as part of a "Great Inflation/Deflation Debate" series, and I found Precther's arguments for deflation - and his rebuttals of the inflationist arguments - to be very convincing.

I've also been reading Precther's book on Elliott Wave Theory and some of his online material on Socionomics.  I find both of these hypotheses / theories to be fascinating.  That said, I have both a respect for and natural distrust of mechanical models which attempt to explain reality.  Models appeal to our desire to make sense of the chaotic nature of the universe.  And in many cases, they can help do that.  But the problems occur when the map is mistaken for the territory itself, so to speak. 

I recently came across this critique of the EWT.  I would like to read others that address EWT's shortcomings.  Please let me know if you are aware of any that are worth reading.

Of course even if EWT is an imperfect theory, that doesn't mean Prechter isn't right about the next few years.  Many of his arguments for deflation are based upon current economic realities that transcend EWT analysis.  In other words, you don't need to believe in EWT to think deflation will persist over the next few years.

goes211's picture
goes211
Status: Diamond Member (Offline)
Joined: Aug 18 2008
Posts: 1114
Re: Elliott Wave Critique?

I would also love to hear some other opinions.  Prictcher's book "Conquer the Crash" is now on my todo list but I don't know when I will get around to it.

I was recently talking with a foreign colleague and he was a big believer of EWT.  Some of the EWT observations I found were very interesting but I just could not get over the feeling that it was far too much like astrology for my tastes.  I realize that technical analysis has a large # of proponents, and that the market certainly often does not trade on fundamentals, but my general instinct tells me that the fundamentals should eventually work like a mean reversion.  The timing may be unpredictable but over a long enough time horizon, I feel fundamentals should win out.

One prediction he made to me was that oil was destined to trade for $10 in the future.  This seemed totally impossible to me but I will reserve judgement until I know more.

 

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: Elliott Wave Critique?

One of the areas I clearly disagree with Prechter on is energy/environment.  He made a comment in the interview I listened to which I thought was ridiculous.  He was talking about how government screws everything up, and as an example said any regulating body that can take a resource that covers 2/3 of the Earth (water) and make it scarce is clearly incompetent.  He made similar comments about oil, the implication being that the price of oil is solely determined by political and economic factors and not by geological ones.

Thus it's difficult for me to get behind him completely, because I completely disagree with his interpretation of energy and natural resource issues.

I am also having trouble understanding the fundamental principles of socionomics.  He claims that endogenous mood drives social events, not the other way around.  That's an intriguing hypothesis.  But what - if not social events and circumstances - drives endogenous moods?  I haven't read much about socionomics or the core philosophy / psychology behind this point of view, so perhaps I'm missing something.  But is Prechter really trying to argue that endogenous mood changes completely independently of life's events? 

That sounds like the argument that depression is caused by a chemical imbalance in the brain that has nothing to do with one's life circumstances. That idea has been thoroughly discredited in the scientific community, and was understood to be false by most people long before the scientists figured it out.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: Elliott Wave Critique?

switters,

I've only been introduced to EWT this year.  I read Conquer the Crash, and have subscribed to Prechter's website for about 2 months now.  I must say that your description above is pretty much exactly how I feel.  The theory appears to have its merits, and Prechter has been on fire this year with his calls.  I do not however, bother trying to understand wave analysis.  After a few "wave B of C down of countertrand 1" comments, I'm ready to run for the hills or have a drink.  It's his conclusions that I read and subscribe for and while I tend to think there may be a lot of substance to EWT, I also believe it has its limits. 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Elliott Wave Critique?

switters, the major critique of EW is that you can find a wave pattern for any market data post hoc.  That's true.  That doesn't mean it's an irrelevant theory though.  All "fundamental" news is post hoc.  All other technical systems can be fit post hoc.  The critique in the link you posted is too abstruse to be relevant in my view for market forecasting/trading.  It seems like it's just a chaos mathematician trying to one-up the primitive analysis Elliott used back in his day.  No doubt he's entirely correct, but it doesn't effect how I use EW to help understand what's coming.  It's not designed to be a perfect fit, perfect predictor, predicting each and every wave and sub-wave.  Hochberg tries to do that in his short-term report, but he pretty much says "this is the count I see, but it could be completely wrong" in each of his reports (they just had to reverse a major call on gold/silver's short-term move because of this).  

goes wrote:

I realize that technical analysis has a large # of proponents, and that the market certainly often does not trade on fundamentals, but my general instinct tells me that the fundamentals should eventually work like a mean reversion.  The timing may be unpredictable but over a long enough time horizon, I feel fundamentals should win out.

I find this topic interesting, so I'm engaging for mental stimulation, not to argue/attack.  Why do insiders tend to sell when markets top out based on "fundamentals" in the media?  What do you do now with all the "fundamentals" experts?  The preeminent fundamentals experts are the equity analysts on Wall St...they've just revealed that they shouldn't have those jobs.  If everything reverts to the mean, what timeframe should you use for the mean? If extreme long-term, the mean will be zero...in the end we're all dead. If extreme short-term it's the current price.  If medium-term and we're in an inflationary cycle, it's price + (X% * # yrs).  If we're in a fake tech bubble where the new fundamental is that "operating loss = P/E of 300+" especially if Jim Cramer is selling it, then the mean is price^50.  If the world's financiers drive systemic risk into the company and don't get the government to steal from taxpayers to save it, the mean is zero.  As fascism continues to intrude upon capitalism, the mean of small companies goes to zero and big company prices can hold up as long as deflation doesn't kick in.  If in debt collapse and deflation the mean reverts to price / 5...etc...etc...etc...etc.

EW captures all those types of moves that fundamentals miss.  All technical indicators can help with those moves whereas fundamentals leave people hostage to CNBC to figure out why things went bad.  Most fundamentals ignore the monetary world...it assumes money is money...it assumes prices are prices...really really bad assumptions.  

Assumptions of a clean fundamental underneath the market is precisely the type of unrealistic assumption made by economists that destroyed our economy (rational actors, risk is irrelevant since markets clear, debt = wealth, power is distributed normally across all actors in the system, there are no outliers in market data and it's all distributed normally, markets are efficient, etc).

 

 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Elliott Wave Critique?
switters wrote:

But what - if not social events and circumstances - drives endogenous moods?  I haven't read much about socionomics or the core philosophy / psychology behind this point of view, so perhaps I'm missing something.  But is Prechter really trying to argue that endogenous mood changes completely independently of life's events?

Note embedded in your first question is sort of an infinite loop.  In suggesting that social events drive mood, are you ignoring that social events are driven by mood?

Answer to the first question is nobody knows yet, but the answer isn't needed to accomplish EW's goal of understanding the markets.  The hypothesis I agree with is that it's driven by larger natural cycles within the natural world...humans are just one tiny species on a massive burning blob called earth which very clearly has natural cycles, which itself is a tiny speck in a solar system that has its own cycles, which is just a tiny speck within a galaxy, etc, etc.  It's the ultimate hubris for humans to think our brains can reduce everything to rational understanding and master this fractally organized universe.  I'd rather just acknowledge the cycle exists and use EW to get a sense of where we are in the cycle.

To the second question, no.  Prechter argues precisely the opposite.  His argument is that life's events drive our mood.  But what we perceive of as "life's events" is extremely limited.  Natural cycles in the universe are part of life's events and they're way more powerful than manmade events.  

 

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: Elliott Wave Critique?

Strabes,

Thanks for that explanation.  I completely agree that we (humans) are inexorably intertwined with both micro and macro cycles that are beyond our cognitive ability to understand or even perceive.  From this perspective, causality in any direction becomes difficult to establish because of the circular - not linear - nature of time and space.

It sounds like what you're saying is that EWT doesn't attempt to identify causality as much as it simply acknowledges that the cycles do exist and have predictive value in the market.  Is that correct?  From my very limited reading and listening to Prechter, it sounded like he was reversing the causality as it is normally understood, i.e. that endogenous mood affects events and not the other way around.  That made no sense to me because of course events affect mood (and yes, natural cycles affect events and mood both - causality working in all directions).

I'd like to understand the EWT/Precther theory on this better than I do now.  Is there another resource aside from his book that you'd suggest?

piazzi's picture
piazzi
Status: Member (Offline)
Joined: Sep 7 2009
Posts: 1
Re: Elliott Wave Critique?

All analysis are probabilistic models based on statistical data. All models are prone to failure. The art of the analyst is not in 100% accuracy of forecasts, but in ahead-of-time identification of possible fault points as well as in-time realization of undue stress on the model.

Only prophets and liars truly know the futurte.

I am an Elliottician, I study macro economics with an Austrian bias, and I do not believe in prophets.

This is my first post, great community

piazzi

markettime.blogspot.com

 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Elliott Wave Critique?

hi switters, yes it's correct that EWT just acknowledges the cycles exist and they try to identify the cycles via the wave pattern for forecasting purposes.

I should've been more precise when I said Prechter argues "precisely the opposite" that events cause mood.  when it comes to human news/market events, he indeed argues that they do not drive the collective mood.  rather the other way around...endogenous mood causes the news/market events we see (there are lots of data and he has lots of examples to illustrate this point).  what I meant to say is that his theory does acknowledge the endogenous mood comes from something (larger "events" or cycles)...biological cycles, geological forces, solar, universal, spiritual, whatever.  he generally doesn't try to answer that question.

other resources can be found on his website...www.elliottwave.com.  instead of books, I've generally gotten the most insight into this issue by reading his monthly Elliott Wave Theorist where, in addition to market analysis, he covers some current and past events through the lens of socionomics.  for example, long before the election he was saying whoever got elected would go down in history as the most unpopular president in history because they would be elected near the beginning of the fiercest cycle of social mood decline in 200 years.  when he was talking about that, Guiliani and Hillary were the media picks.  fascinating to me that it didn't matter who it was.  and fascinating to consider that presidents don't drive things, they're largely irrelevant, they go up or down based on social mood, and therefore markets.  so Hoover wasn't unpopular because of what he did...he was simply elected at the beginning of the downturn.  FDR wasn't superman...he just got elected near the bottom of the cycle so he was able to ride it up.

 

plantguy90's picture
plantguy90
Status: Gold Member (Offline)
Joined: Jan 27 2009
Posts: 271
Re: Elliott Wave Critique?

All I know is that RP has been pushing his newsletters as long as I have had an interest in finance.   One would think if he put his money where his mouth is, he would be happy and wealthy beyond his wildest dreams and retired.  However I still toil, having never followed his teachings, and so does he, still hawking his newsletters.   

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Socionomics and the Collective Self-Image.
switters wrote:

I am also having trouble understanding the fundamental principles of socionomics.  He claims that endogenous mood drives social events, not the other way around.  That's an intriguing hypothesis.  But what - if not social events and circumstances - drives endogenous moods?

Switters,

I think the answer to this question is self-image, or the collective self-image in the societal context. How you perceive yourself has a significant effect on how you perceive exogenous events. The classic glass is half-empty or half- full parable attests to the accuracy of this observation. As a society, we have a collective self-image, we use this image as a context to discern events in a manner that confirms our self-image.

Pretcher's socionomic theory tracks changes in the collective self-image, and uses this information to project how society will perceive and react to future news and events. As the markets are the primary real-world manifestation of this endogenous processing at all levels of society, Pretcher utilizes market analysis as the foundation of his socionomic theory. 

Personally, I think his work is the most mature of all modern methods of market analysis. His modeling incorporates and organizes more information than most systems. Because of this, I give his viewpoints a little more weight than most.

Another good interview with him is with Eric King

Something I found fascinating in this interview was the study with emotionally-impaired individuals and their outperformance of control groups in an investing exercise. As emotion is the primary method in which our self-image is expressed and maintained, the fact that emotionally impaired individuals more accurately perceived market events is no surprise.

 

strabes's picture
strabes
Status: Diamond Member (Offline)
Joined: Feb 7 2009
Posts: 1032
Re: Elliott Wave Critique?

plantguy, Bill Gates is still selling software, Buffett is still toiling over 10K's, Ellison still produces databases, and Rothschilds and Rockefellers are still f'ing with the world.  The notion that people retire and do nothing but, I guess, sip margaritas in a tropical restaurant once they have enough money is not supported by the evidence.  That's only a phenomenon in the middle class who spend most of their waking lives doing stuff they don't care about in order to earn income.

 

 

Derek Potter's picture
Derek Potter
Status: Member (Offline)
Joined: Dec 19 2010
Posts: 1
Re: Elliott Wave Critique?

I suspect that Gates and co do not retire because their empire has become a game and because they can delegate most of the work to others and because, unlikely as it may seem, they find a new kind of joy in giving much of their wealth away.

I do not know Pretcher's personal finances but his name is associated with writing books and selling magasines, not with making fabulous profits from charts. So the question remains: if it works, why do people bother to work? Perhaps authorship is more profitable than technical trading.

wfhyslop's picture
wfhyslop
Status: Bronze Member (Offline)
Joined: Sep 3 2008
Posts: 46
Re: Elliott Wave Critique?

I have read Conquer the Crash and been a subscriber to his site and newsletters for well over a year now.  While EWT certainly is not perfect - particularly in the short term - it has proven remarkably accurate at showing major trend changes over time - in many and diverse marketsIt can also be predictive of market turns in the medium term.  .He calls the bottom in March 2009 days before it happended when there was only 5% bull. sRight now he (or EWT) is predicting a major downtrend in most markets other than the US dollar. Of course he has been calling the top for a few months now and it has not happened - but if you look at the charts - it is only a matter time - the trend is definitely down.  

The essence of EWT and socionomics is based on social herding behaviour - and seems to me to be a much better model than any "fundamentals" argument. It does take some time to get your head around his theories - but they are actually quite intuitive once you understand them.  I have some concerns with his dismissal of peak oil, but he did make a comment once that the long term price projection of oil is zero - the same as the current price of whale oil - which it replaced. So I assume he believes that the coming major deflation/depression will suppress oil demand to such low levels it will give time for alternatives to be put in place.

For anyone interested in EWT I would recommend subscribing to elliottwave.com for a month ($30) - you can get discounts on his books and access to back issues. Prechter gives very little away for free - which I like as a subscriber.  It is refreshing to see a discussion of EWT and indirectly deflation on this thread.  I have been an intermittent subscriber to this CM site since I find the people here have already made a decision that we face inflation in our future and all discussions have this assumption as an underlying basis. In my view this is very dangerous - you may be planning for the wrong future.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2385
Re: Elliott Wave Critique?

wfhyslop said, "and seems to me to be a much better model than any "fundamentals" " 

Ummmm.... someday, the fundamentals are going to catch up and assert their ugly selves... that is what is coiling tighter and tright now... in a normal market, I am sure that there are relevant cycles to model based on "herding behavior" or inventory cycles... or maybe sunspots for that matter.  As Ricards says, we are on a sugar high right now that is, "artificial, induced, and temporary".

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/12/19_SPEC...

Prechter predicts deflation...  I believe he will proven very wrong.  I believe any model that may have worked in the past is completely meanlingless in the current environment, where markets are not free, the FED is in a tight box of it's own construction (listen to Rickards) and we are heading toward a cliff of unsustainable debt.      

If you want to model... at least model based on a period of history that seems to ryhme a little better with our current situation;

 http://jessescrossroadscafe.blogspot.com/2010/12/when-money-dies-nightmare-of-weimar.html

 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments