Oh, boy, he's making use of Elliot and Pretcher? JohnnyFive, your advice on this, since you seem to be the market expert. Do these two have anything going on with them, or are they full of crap?
I wouldn't go so far as to claim to be a market expert, but I do have a bit of insight into it, so I'll have a go at this.
Although there certainly do appear to be market cycles, the error is in assuming those cycles can necessarily be predicted. There's a big difference between the concept of a market trend and being able to know exactly when a market will take off or tank. There are simply too many chaotic factors for that level of precision prediction.
Eventually something bad will happen to take the market down a few pegs, and then people tend to build it back up. This happens again and again with similar stages (market drops, gains strength over time, drops again, etc.), but thinking that this allows you to know exactly when the market will do something is a huge leap to make, and one that does not really work.
If you look at the historical charts for the various indexes, you can see how the market goes up and down, in irregular cycles. Things are discovered, industries come and go, and [rule 8] happens (such as the 9/11 attacks, that had a profound impact on the market). The idea that you can predict what will happen next can
seem plausible, but it just doesn't represent reality.
http://stockcharts.com/charts/historical/nasdaq1978.html (NASDAQ chart)
http://stockcharts.com/charts/historical/djia1900.html (Dow chart)
http://stockcharts.com/charts/historical/djia1960.html (Dow weeklies)
http://stockcharts.com/charts/historical/spx1960.html (S&P)
http://stockcharts.com/charts/historical/djia1986.html (Dow again, note the tech crash in the late 90's, and the drop after 2001)
http://stockcharts.com/charts/historical/nasdaq1986.html (NASDAQ again, 1986 - 2006)
http://stockcharts.com/charts/historical/djiagold1980.html (For fun: Gold prices)
Although the predictive methods look interesting, a look at the long time reveals there is considerable variation in the actual data. When you throw in commodities and other forms of investment (real estate, currency), it becomes even more complicated. I think the apparent predictive power of such systems largely stems from a combination of vague rules and fancy-sounding language that tends to confuse unsophisticated investors.
It ultimately comes down to what I said earlier: If there were a way to beat the market, it would fundamentally alter the market. This is not a one-sided system where you just buy stuff and nothing happens - when you trade on the market, what you do ultimately has an effect on the market itself.
Even putting magical "pick the winners" systems aside, the ability to forecast market cycles would alter them, because the prices of the investments being traded are not created in a vacuum. Any significant number of investors basing their investments on a "system" would have an actual impact on the market, automatically rendering that "system" obsolete.
It's kind of like the
Maxwell's Demon scenario. It cannot happen in real life because the measuring (or, in the case of markets, using the "system") would fundamentally alter the state of the system.
It is possible to analyze the market conditions and attempt to forecast trends, but not in some magic, surefire way. As with all risk management, you need to understand the underlying factors involved in the market at a given time, and you try to make a best guess about what might happen.
But, ultimately, you're really just assigning probabilities based on what you know from experience and research. There is no magic formula that will guarantee success at investing any more than I have a magic formula that guarantees I never write an insurance policy that loses money.
Someone here mentioned Enron, which is a good example of the kind of uncertainty that faces anyone trying to manage risk. I'd love to see a formula that can predict when the next market-mauling terrorist attack will occur. Somehow I don't think it's to be found in the moon, or the Fibbonacci sequence, or anything else.
