Some Ramblings on Elliott Wave (Part 2)

In a previous post I began summarizing a trader monologue from a few years back. He continued:

“One of the best-known Elliott Wave practitioners is Robert Prechter. Go here to see who has the worst track record of the entire bunch. 23% accuracy! He was right: just early…

The [lack of] evidence doesn’t stop the faithful, however. When the market pulls back, they jump out of the woodwork: ‘AHA! SEE, I TOLD YOU THE MARKET WAS GOING TO PULL BACK! JUST LIKE THE ELLIOTT WAVES PREDICTED.’

I have a prediction. The market is going to go down for a while and then it is going to go up… and then it’s going to go down. AHA!

I consider Elliott Wave theory as a religion. Despite rational thinking and evidence to the contrary, ‘you gotta have faith’ to believe. When an Elliottician arrives at a conclusion using irrational thought, it’s impossible to use rational thought to talk them out of it.

In order for Elliott Wave to work there has to be a behavior that is governed by some set of rules. Elliott believed that traders would exhibit certain behaviors due to psychology. This may have been true in the 1940s but the markets and rules have changed. The advent of electronic trading has brought about thousands of trading methodologies that could never have been conceived by Elliott.

If someone could explain to me WHY IT WORKS, then I might believe it. Scientists understand “why it works” in nature. “Human psychology” is not a plausible reason when things like the uptick rule, circuit breakers, high-frequency trading, black box trading, short squeezes, and delta-neutral portfolios exist in the market.

I do think there is something going on. Certain stocks will rise to certain levels and tend to fall to certain levels. You can look at a chart and understand what I am saying.

People want to believe there is something out there that holds the key to the universe: the Holy Grail, if you will. This may exist but it’s not the Elliott Wave…”