Online Investing: Why Technical Analysis Fundamental Analysis The Beats

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

Famed analyst Elliott wave expert and has long called for the bear market we are now in the middle. He sees the rally of 2009 by 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 outperforms competing forms of analysis.

Suppose everyone agreed, "The Wave Principle is not always right, but it really is the answer"?

Well, let me begin my answer with a quote from a national financial magazine dated October 1977. "In recent years, the Wave Principle has gathered too much of a following and, therefore, has less value today. Nearly always, you can write off a technique when you get too much of a following." How does this aspect of the claim light of the decade that followed? "Elliott" had one of his greatest hits. Like the Energizer Bunny, keeps going and going. And I believe its next success will be its largest ever. The same principle is without doubt an upward spiral of acceptance: three steps forward and two steps back.

Now, suppose that a large number of educated people accepted the Wave Principle, which is not an impossible idea, 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 do not necessarily act 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.

The Wave Principle is inherently contrary. It has a built-in defense against becoming the consensus?

I think so. The Wave principle is a description of natural human behavior. This is what humans are, that's part of their nature - how they behave. For markets to continue to pass through these stages, a part of human nature must be to believe that such theories of mass psychology are not able to be true - that is, not something that is worth examining. They must be prepared to accept bullish arguments at tops and bearish arguments at the bottom. This means that they must always be open to bogus theories of market behavior. How else can you create the patterns that fear, greed and hope produce?

How big is the pool of analysts who are on a Wave?

I think there are few people who is capable of applying Elliott to past and present markets, for example, perhaps 1% of all technical analysts, which is a pretty good number of people, I suppose. Many of these are my subscribers, and have learned through theoretical study. However, as regards the number of people experienced in applying the principle of the wave for the prediction of turns of the market, which is much more difficult to apply in real time, I believe that there are very few.

This was the basis of some criticism. To quote one critic, "relying on arcane methods has an advantage. Interpreting the linear squiggles is left in the hands of the heir to the important work of Elliott." How do you respond to those who argue that the complexity of the theory is a cover that allows to keep the Wave Principle as your personal theory?

In relation to any alleged self-serving secrecy, not only did I co-authored a book on how to apply the Wave Principle, as well as reprint Elliott writings against protest from practitioners, but also I continually go into great - some might say excruciating - detail in each issue of the Elliott Wave theory explaining exactly what I think the market has done and will do, and why I think so. If there is a 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.

Another common approach critics take when they try to dismiss Elliott as bunk is to refer to you as a mystic or a numerologist.

A mystic believe in things for which there is, the desire only evidence. I do not consider myself a mystic at all. My approach is objective. The empirical basis of Elliott's discovery speaks of this fact. Thus the results of trading competition.Market timers, not once during each month since the independent rating services have followed has a timer with a numerological approach such as analysis "Ganny" never placed in the top 10. Just as you would expect, these methods do not work!

The true mystics are those who believe, for example, that the current economic performance is a basis on which to expect the price of the stock market. There is no evidence for this. They just feel comfortable with the idea, so that they get married.

So you say that the challenge to validity is the other side?

You are damn right it is. I am no longer at the point where I feel I must justify the objectivity of the Wave Principle. I think the results they did. Technical analysis is entirely rational and has proven itself. If someone goes back and looks at the record of Elliott wave writers over the decades, will preview a track record of success that is well beyond a random result of chance. If you can do, the ball is in court the other guy. 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 have not seen even a competitor.

Do not you feel that you were actually challenged by any fundamental approaches?

I think there is a place for fundamental analysis of individual companies, but I firmly believe that you can make a very rational argument showing that fundamental analysis applied to the general market timing is like reading the entrails of goats. In fact, I presented a critique in The Wave principle of human social behavior. If you think my ideas presented here are controversial, just read chapter 19 of that book.