Q&A With Robert Prechter: Why Technical Analysis Beats Out Fundamental Analysis

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.