INTERVIEW
Recurring Impulses of Definite Pattern
Elliott Wave Experts
by Jayanthai Gopalakrishnan and Dennis Peterson
Fibonacci numbers, fractal geometry, socionomics - Ralph Nelson Elliott's
wave theory was published 64 years ago, but he explored ideas that we still
study today in physics, behavioral sciences, and, of course, investing.
How do the concepts he examined translate to the markets - and the world
- today? To find out, STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan
and Staff Writer Dennis Peterson interviewed two experts on Elliott wave
analysis, Steven Hochberg and Peter Kendall, in late August 2001.
Steven Hochberg is the co-editor of The Elliott Wave Financial
Forecast and Short Term Update, both publications of Robert Prechter's
Elliott Wave International (EWI) in Gainesville, GA. Hochberg began his
financial career with Merrill Lynch and joined EWI in 1994.
Peter Kendall is the co-editor of The Elliott Wave Financial
Forecast. He was a financial reporter and columnist before he joined
EWI in 1992.
The wave principle is all about utility. It's an extremely pragmatic
tool that is derived directly from the market itself.
- Peter Kendall (left), and Steven Hochberg (right)
How did you get started in Elliott wave analysis?
Steven Hochberg: I started out as a broker with Merrill Lynch.
I was a terrible broker, because I hated to cold call. But while I was
there I came to realize an essential truth of the market, because I was
in on the decision-making process of my clients. The main reason people
invest in the markets is to get rich. It's an emotionally based decision.
Everything else, from earnings to a company's product to the charisma of
the chief executive office (Ceo), is nothing more than a rationalization
to validate emotions. Fundamentals are not effective in moving the markets,
because they are the result of a crowd psychology that has already expressed
itself in prices. So I knew something else was out there. Right around
then, I read an article about Bob Prechter [editor of The Elliott Wave
Theorist and president of Elliott Wave International], who had recently
won the US Trading Championship. I wanted to know what this guy knew that
I didn't about the markets. And that's what drew me to Elliott wave analysis.
Peter Kendall: I started out in the business as a reporter. Back
in 1983, I went to work at a stock publication in Denver, CO, where there
were two reporters showing me the ropes. One taught me how to analyze a
balance sheet and income statement, and the other one helped steer me on
more general pieces like where the market was headed. I asked her, "Who
do you call when you want to know where the market is going?" Bob
Prechter's was one of the names she gave me.
It didn't take me long to figure out no matter how well you knew the
balance sheets, the overriding factor is the market itself. When it went
up, even companies with crummy balance sheets went with it. For me, the
market was the real story. I liked the Elliott wave principle because it
wasn't a black box. There was a textbook, The Elliott Wave Principle, and
you could follow what Bob was saying by looking it up. Plus, he was mostly
right. Then, in 1985, he did a long report on pop culture and the stock
markets, and I was really hooked. By 1992, I was still stuck on it, so
it made sense to come to Elliott Wave International.
Have you noticed a difference in the way individuals and institutional
investors perceive the market?
Hochberg: People are people, whether you want to put a label
of "retail" or "institutional" on them. Many investment
decisions on an institutional level may be made for seemingly different
reasons - for instance, to offset a certain type of risk taken in a different
sector of one's portfolio - but that decision is still governed at some
basic level by emotions. We are human beings; we can't help it.
Would you tell us about the methodology you use?
Hochberg: The Elliott wave principle is the prism through which
we view all market action. The wave principle is R.N. Elliott's discovery
that crowd psychology is patterned. It's not random or cyclical with any
sense of fixed periodicity. Instead, it moves in a three-step-forward,
two-step-back fashion, which reflects mass social mood as it moves from
pessimism to optimism and back. This pattern makes up five total waves,
which is Elliott's basic pattern. Movement in the direction of the larger
trend subdivides into five waves. Movement against the trend subdivides
into a three-wave pattern or some variation involving several three-wave
patterns.
So what is it you do?
Hochberg: We analyze the market's patterns by applying Elliott's
rules and guidelines to the particular market we are looking at. If you
can successfully determine what pattern the market is tracing out, you
can then place probabilities on what type of pattern should occur next,
which oftentimes allows you to make an objectively based trading decision.
It's important to note that Elliott is not a trading system, but a systemic
approach to trading. A trading system implies a rigid or mechanical approach
to the market. But the market isn't a physical system whereby input A mixed
with input B always gives you output C. The market is a chaotic organism
that has its own set of rules and guidelines, as reflected by the wave
principle, and it's even tied to mathematical law, albeit one that is not
of the same type found in the physical sciences.
...Continued in the November 2001 issue of Technical Analysis of
STOCKS & COMMODITIES.
Excerpted from an article originally published in the November
2001 issue of Technical Analysis of STOCKS & COMMODITIES magazine.
All rights reserved. © Copyright 2001, Technical Analysis, Inc.
