Here Is Why Technical Analysis Beats Fundamental Analysis

Tehnical vs Fundamental Analysis

As major stock markets crashed in late 2007 before starting a rally in the month of March 2009, a lot of people who had believed in fundamental analysis began to questions its validity.

Elliott wave expert and famed technical analyst Robert Prechter has for a long time called the bear market we are currently in. In his view, the 2009 rally was a bear-market rally and not the start of a new, revamped bull market. However, as the years have passed, his technical analysis methods have been criticized by many. Here is a look at some of his arguments on why wave analysis outshines other forms of competing analysis.

Taken from Prechter’s Perspective; which was re-issued in 2004

Question: Let’s say everyone agreed with the fact that the Wave Principle isn’t always right, but it actually is the answer?

Robert Prechter: Let me start by quoting an excerpt from an October 1977 National Financial Magazine. This is what it said: “In the last few years, the Wave Principle has gathered garnered a lot of following, and therefore, is of little value today. As it goes with most things, people tend to easily write off a new technique when it gathers a lot of attention or a large following.” Considering what followed in the next decade, how does this statement stand? Look at Elliott, it enjoyed its greatest success during this period. Just like the Energizer Bunny, Elliott’s Wave just keeps going and going. And I am convinced that its next success will even be bigger. The principle, in itself, is without a doubt on a path of acceptance that only seems to spiral upwards: It’s three steps forward, two steps back.

Now, let us just say that a very large number of people who are educated went ahead and accepted the Wave Principle, and this is not impossible, there still would be room for a difference of opinion in the market and the future. At the same time, there are many more factors to be considered. Even individuals who practice this craft do not necessarily have to take any action when they get signals. Worry and unconscious doubt often frustrate people’s actions. There are very few traders who possess the emotional strength to profit from a good analysis.  Tehnical vs Fundamental Analysis

Question: The Wave Principle is in essence intrinsically contrarian. Do you believe it has some built-in defense mechanism against becoming the consensus?

Robert Prechter: I believe so. The Wave is basically a description of the natural behaviorism of humans. This is what we human beings are; it is part of our nature – how we behave. For markets to continue going through these stages, a part of our nature has to believe that mass psychology theories are completely incapable of being true – and this is something that is not worth examining. We have to be primed to believe in bullish arguments at most and bearish arguments at least. As such, we have to be ever open to bogus market behavior theories. How else do we create the patterns fear, hope and greed produce?

Question: How big do you believe the pool of analysts relying on the Wave Principle is?

Robert Pertcher: I believe that there are few people who are capable of applying Elliott to both past and present markets. And I believe it’s about 1% of all technical analysts; and this quite a good number, I suppose. A majority of these analysts are my subscribers, and they all learned it by studying the Theorist. But looking at the number of people who are adept at applying the Wave Principle to forecast market turns, which is rather hard to do that applying the principle in real time, I believe they are very few.

Question: According to critic, “relying on obscure methods does have an advantage. Interpreting linear blemishes is left in the power of the major heir to Elliott’s work.” Well, how do you respond to people who claim that the complexity of this theory is a cover which allows you to keep the Wave Principle as your very own personal theory?

Robert Pertcher: In regards to any purported self-serving secrecy, I not only co-authored a book on how to use/apply the Wave Principle, and reprinted Elliott’s writing amidst protests from Practitioners, I also continually go into excruciating and great detail in each of The Elliott Wave Theorist issue explaining exactly what I believe the market has done, will probably do, and why I believe it will do. If there’s any market letter that’s educated prospective competitors, it’s mine. And the reason is because the studying the markets is more crucial to me than secrecy, exclusivity or power.

Question: Another rather common approach most critics take when trying to dismiss Elliott’s Wave Principle as a bunk is referring to you as a numerologist or mystic. What do you have to say about this?

Robert Pertcher: Mystics believe in things that have no evidence, only a desire or hope. I don’t consider myself a mystic. My approach is rather objective. The pragmatic basis of Elliott’s discovery actually speaks to that fact. And so do Trading Competition results. According to the editor, Bob Pretcher won the 1984 Trading Championship with an astonishing 444% gain. His closest competitor only having an 84% gain. Not even once during any of the months independent rating services who’ve been following market timers has any timer using numerological approaches like “Gann” analysis ever reached the top 10 spots. As you would expect, such methods as these never work.

True mystics are those people who believe, for example, that current economic performances are based on predicting stock market prices. There’s no evidence for this. They simply feel comfortable with such an idea, and so espouse it.

Question: Are you saying that the challenge to validity is entirely on the other side?

Robert Pertcher: You are darn right, it is. Look, I no longer am at the point where I feel like I need to justify the objectivity of this principle. I believe that the results do that. It’s quite simple; technical analysis is wholly rational, and it has proved so itself. If you were to go back and look at the record of Elliott’s Wave Principle writers over the past decades, you would find that the principle has a pretty good track record of successful forecasting that’s well beyond any random result of chance. If this is possible, then certainly the ball in on the other guy’s side of the court. It is up to him or her to show that this is pure luck or something. At the same time, the only challenge to any theory is coming up with a better theory; and I have not encountered one yet or seen a worthy contender.

Question: You do not feel as though you have been effectively confronted by any fundamental approach?

Robert Pertcher: Honestly, no. However, I think that there is a place for the fundamental analysis of individual companies. Nonetheless, I am convinced that one can make a very good argument proving that fundamental analysis applied to market timing is more or less like trying to read the entrails of a goat or goats. As a matter of fact, I presented such an analysis in the Wave Principle of Human Social Behavior. If you feel like the ideas I have presented here are controversial, then consider reading chapter 19 of the book.

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